Litigation Update: LTL Management’s Chapter 11 Bankruptcy

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Sam Fendler:  Hello everyone, and welcome to this Federalist Society virtual event. My name is Same Fendler, and I'm an Assistant Director of Practice Groups with The Federalist Society. Today, we're excited to host a "Litigation Update on LTL Management's Chapter 11 Bankruptcy." Our guests today are Professor Lindsey Simon and Professor Tony Casey. And Mikal Watts will be joining us shortly. 

 

Professor Lindsey Simon just finished up the spring semester as the Robert Cotton Alston Associate Chair in Corporate Law at the University of Georgia School of Law. Professor Simon's research currently focuses on the intersection between mass torts and bankruptcy. And she has provided commentary on major bankruptcies, such as Purdue Pharma and USA Gymnastics. Before entering the academy, Professor Simon clerked for Judge Beverly Martin on the Eleventh Circuit, and practiced law with a focus on commercial litigation and corporate restructuring.

 

Professor Tony Casey is the Donald M. Ephraim Professor of Law and Economics at the University of Chicago School of Law. His research and teaching focus on bankruptcy, corporate governance, finance law, and civil procedure. Before the academy, Professor Casey clerked on the Seventh Circuit for Chief Judge Joel Flaum, and practiced at Wachtell Lipton, and Kirkland & Ellis. 

 

Mikal C. Watts is a co-founder and partner of Watts Guerra LLP. He's led his own firm, in some form or another, since 1997. His current practice focuses on personal injury, torts, liability, negligence, and other litigation matters. Mikal played a major role in nationwide settlements with Ford Motor Company and Bridgestone/Firestone Tires. Today, Mikal is involved in the effort to settle the Johnson & Johnson talcum powder case for a total of $8.9 billion.

 

If you'd like to learn more about today's speakers, their full bios can be viewed on our website fedsoc.org. After our speakers give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please place it into the Q&A function at the bottom of your Zoom window, and we'll do our best to answer as many of them as we can. Finally, I'll note that, as always, all expressions of opinion today are those of our guest speakers, and not The Federalist Society. With that, Professor Simon, thank you very much for joining us today. And the floor is yours.

 

Prof. Lindsey Simon:  Absolutely. Well, thank you so much for having us all back. It's interesting. I'm not sure that anyone expected all of this to happen so quickly, but here we are. So, there is much to update, and I imagine there will be more to come. When we last spoke, we had a Third Circuit opinion outlining a new standard, from everyone's perspective, for whether a company can file for bankruptcy if it's not insolvent. And, if not, how it can do so, and how we decide whether a Chapter 11 case is filed in good faith.

 

      The Third Circuit set a standard for financial distress that had to be somewhat soon, somewhat certain, but really left a lot of open questions, as we discussed in our prior session about when a case shows enough financial distress, and, what, really, that means for claimants. Because, again, in cases like this, the claimants are mass tort plaintiffs who, in many cases, really need this money. And so, we spent a lot of time talking about, well if a company has to produce so much financial distress to file that they end up taking money away from claimants, is that really the outcome that was intended? Is this really the standard?

 

      And, when we were looking to the future, we talked a bit about what was next, what we thought the next step would be. And we can revisit those prognostications. But I think, ultimately, two hours and some change -- just hours after the mandate issued in the Third Circuit case and that LTL was dismissed, LTL II came along. And so, the same debtor filed a second case in the exact same court. But really, some things remain the same, but a lot changed drastically. 

 

      So, just to give a little bit of background facts. We will get into some more of the specifics as we go through. But just some basic things, some fundamental things changed, even though the debtor was the same. The first thing that changed is the documents. Part of the reason the Third Circuit dismissed the case related to the funding agreements that led to LTL's lack of financial distress. In effect, they had this huge "ATM machine," as the Third Circuit called it, a $61.5 billion backstop, coming from both Johnson & Johnson and New JJCI.

 

In the new case, the deal documents were terminated. And we can talk about how that happened, and what that looks like in a bit. But, in effect, a whole new set of documents had been executed to replace the old ones. And, under these new agreements, LTL, the debtor, had significantly less financial support guaranteed. In a lot of the financial support, the headlines announced an $8.9 billion settlement. That settlement came with express conditions tied to it being done in a Chapter 11 case. So, not only did the amount change, the method by which the ability to collect it changed significantly.

 

The third thing that changed in the documents is that Johnson & Johnson itself was no longer involved in that. In fact, it's now Holdco, which is taking the shoes of New JJCI. Holdco, interestingly — or New JJCI, in the old case, Holdco, in the new case — used to house the consumer products division. That very valuable asset is no longer in Holdco. And so, not only did the limitations for how claimants could recover what LTL could get, the limitations increased, the amount of money available decreased, and the assets available within the subsidiary completely changed. So that's just the documents and the terms, some pretty important shifts that the parties are now litigating.

 

The most important thing I want to point out as we begin the discussion is that the leverage shifted. Effectively, if you listen to the hearing, it's really fascinating the way the debtor explains how LTL got where it is today, in the second case, and how their approach is completely consistent, in their words, with what the Third Circuit has asked them to do. In effect, "Third Circuit, you gave us this opinion, you set the standard. And so, we created a debtor with circumstances that fit exactly what you asked us to do. This is a perfect case for financial distress." And so, it's a very, very fascinating litigation move. Because, not only did they completely remodify their case to make it fit what the Third Circuit said, they also brought along a huge number of claimants.

 

And so, this time, they came armed with a settlement. "We have 60,000 claimants or more. We have a significant percentage. We have significant support for this deal. So, not only are we back to revisit whether we filed this case in good faith under the standard you gave us, but now, if you dismiss this case, you're getting rid of a deal that has significant support." And that approach comes through in a number of their arguments. It's a really fascinating take on a case to come to the same court to do, effectively, the same thing, after they were told they could not.

 

So, where do things stand today? Again, there's a lot more details. But the gist of it: today, the debtor first dealt with a preliminary injunction hearing. In cases like these, involving non-debtors also seeking relief from litigation, they do not get the benefit of the automatic stay. Only the debtor can get the automatic stay. But they often ask for preliminary injunctions. And, in this case, non-debtors like Johnson & Johnson would like the benefit of a preliminary injunction to mirror what the debtor is getting.

 

The argument for this is there are cases. As soon as the Third Circuit mandate lifted, cases all around the country were no longer paused. And, all of a sudden, they have all this discovery. They have jury trials within weeks. They have all of the reasons why they filed for bankruptcy. Those reasons are there again. As they would say, we're spending all this money litigating claims across the country, and we're not getting anywhere on settling it. It's not an effective way to do it. If you're going to let us use bankruptcy, we have to pause everything, because letting these cases go to trial will impact the assets of the debtor.

 

So, at this hearing, we got a sneak peek of a lot of the arguments that ultimately will come up in pending motions to dismiss the case, because part of the standard for a preliminary injunction is likelihood of success on the merits. And, ultimately, the success of the merits here is getting a case all the way through and confirming a plan. So, the parties were arguing about an injunction. But really, they were arguing about everything: the whole strategy, how things got here, what happened before the case happened, in particular, focusing on the document shifts from the previous cases' contracts to the new ones, and whether that constitutes a fraudulent transfer. All of that came through.

 

And, after an extensively long hearing, the court came back and said the following — which I thought was really interesting; I'm curious to hear Professor Casey's thoughts on this — said the preliminary injunction will be issued in favor of the non-debtor parties, only to the extent of trials. However, it’s not barring claimants who want to continue pretrial discovery and other actions. So, effectively, claimants can still continue to seek depositions, can do pre-trial matters against non-debtors. But they cannot actually hold jury trials.  So, there have been a number of motions to dismiss.

 

There are also questions about all of these new claimants, versus the existing claimants, the future claims representative. It is a supremely messy case right now. And there are a lot of different sub-fights happening, under the cloud of the broader question of, well, will this case even be a case, if the Third Circuit is asked to, again, say, "Well, is this really what we meant by financial distress? And were your actions one step too cute?  And, really, is it a bad-faith filing, even if you're in financial distress?"  And so, I'll pause there. Those are sort of my initial thoughts on all of this. 

 

As a professor, someone who sits and studies these cases, I could not think of more interesting facts to start this out. As someone who remembers that these cases are about people, I can sense the real frustration, as attorneys have clients that are nearing the end of their lives because of cases they allege resulted from the debtors' products. They're stopped once again. And they're back facing these pauses on what they thought was finally their chance to pursue their claims. So, if you take the perspective of the debtors, we're trying to get the most people money as quickly as possible, through this mechanism.

 

From the perspective of some of these claimants, "We just want, and we just got the chance, to bring our cases, to have our day in court, to have our jury case. And now this is happening again." They're once again using the system to pause everything, even if they lose. And so, again, it's completely fascinating. And it pulls on so many different threads of bankruptcy law. At the core, what does Congress allow? What does the Constitution allow? What are the limits of what the Chapter 11 process can do for mass tort cases? But really, it involves a whole lot of people, some of whom are happy for this deal, some of whom are not. So, with that, I'd love to hear from others about their thoughts.

 

Sam Fendler:  Thank you very much, Professor Simon. Professor Casey, please.

 

Prof. Tony Casey:  Thank you for having me here. And thanks for holding these events. So, Professor Simon's intro was exactly on, and covering, the topic. And, as she said at the end there, it's so fascinating from a kind of legal academic point of view, because you just see there's a lot at stake here. And it's good lawyering, I'll say. They're just playing out the different arguments in the courts. And what they're doing, in this case, is reacting to a bizarre Third Circuit opinion.

 

 I just think the Third Circuit opinion, in the first case — we talked about it before — it set out this weird standard. And the debtor, as Professor Simon suggested, kind of reacted to it and said, "All right.  Well, what do you want us to do?" And, when I was listening to the arguments in the preliminary injunction hearing, and reading the documents, in some sense, my reaction was, "Wow. There was this maze that was set out by the Third Circuit, and they found the way through it." And I'll explain what I mean by that in a little bit.

 

And, as Professor Simon said that we have predictions we can go back to, I would not have predicted we'd be here. The one thing I did predict — that I feel a little vindicated on — is that this standard will be litigated endlessly in cases. I didn't realize it would be in this exact case, two hours after it got dismissed. But we do see that it sets out a very strange maze that we don't know what it means. But I do think the debtor has done what the Third Circuit, maybe inadvertently, said it needed to do. 

 

      Before I get to that, I do want to talk about the counterpoint to being fascinating, that Professor Simon mentioned, is the people. And that's what's so hard about this case, and what makes it good lawyering on all sides. There are people everywhere in this. And you can say, "My case was about to go to trial, and now it's been stopped." But the debtor says, "Yeah, but I've got 70,000 people who want some of this $8.9 billion." And they say that. There's some dispute about who those people are, and all that. 

 

But I'm fairly certain there's a group of real people, on both sides, who have an interest in what they want: "I want my settlement to go forward now;" "I want my case to go forward now." And that makes it hard because they’re not the lawyers. And the lawyers are dealing with these groups of clients and trying to figure out what's best for them, in what is a huge negotiation over billions of dollars. And the Professor used the word earlier, "leverage." Everyone's using the leverage of the system, the way lawyers do. And it gets complicated. And then, we have to remember, there's people in the background. But the courts have to deal with the legal questions.

 

So here's what I meant by “the kind of maze.” What's fascinating to me is the Third Circuit says you have to be in financial distress. And that's what you need to file for bankruptcy. And the debtor says, "All right, fine.  We'll restructure the agreements. We'll redo the financing for the settlement, and we'll get that." And so, then, they file again. And the claimant's committee files a preliminary injunction here. They say, "Well, wait a second. That's a fraudulent transfer."

 

And, to the debtors, that's not a fraudulent transfer, for a couple of reasons. One: "We're not insolvent; we're in financial distress. So, we didn't transfer an asset that made us insolvent. That would be the constructive fraudulent transfer. And we know that there exists a place in the world where you're in financial distress and not insolvent, because the Third Circuit told us that." The Third Circuit said financial distress does not mean insolvency.

 

And then, they pointed out, "We want to settle this in order to get money into the hands of these claimants, these creditors. LTL exists. It existed before the first filing. It existed after the first filing. The fact that the Third Circuit dismissed that case didn't make LTL or the Texas divisional merger go away. And so, LTL exists. And its claimants are the creditors who have these tort claims against it." And the best way, in the debtor's view, to settle this, is to get a bankruptcy going and get to a bankruptcy settlement. And the asset was a promise to pay the liabilities that result at the end of the day.

 

But, that asset, that old funding agreement prevented them from doing the one thing that would get them to be able to pay their creditors money, which was file a bankruptcy. And it's kind of like a weird thing where someone's like, "I have this guarantee of something in the background that's keeping me from doing the thing that will benefit all of us." And so, their argument is, "How can that be a fraudulent transfer to rewrite an agreement, when that agreement is the one thing that is keeping me from getting money to my creditors in the best way possible?"  

 

Now, you can argue it's not the best way possible. But their view is, "We've always viewed in good faith that it was." And, as Professor Simon noted, "Now we've got support for that. Now we've got 70,000 claimants. And we'll tell you exactly how much it's going to be. And all we're doing is getting rid of an asset that is no longer an asset. It's a liability. It's hindering us." And you might say, "Wait a second. How could a promise of $60 billion be hindering you?" And I would have agreed with you on that, and everyone would have, before the Third Circuit said, "No. That promise is the exact reason why you can't get to a settlement."

 

And so, it just creates a really strange world where the parties -- before, it was strange when the claimants were saying, "There's too much money on the table for us.  You should dismiss this case." And then, the Third Circuit said, "You're right." So then, the debtor had to say, "Well, we've got to get rid of this asset so that we can get money to our claimants. And it's actually not an asset; it's a liability to this promise." And so, that's the place they’re at.

 

But you look at it, and you look at the arguments. And, from a very formalist view, you're like, "Well, wait, they did what the Third Circuit wants. This isn't a fraudulent transfer. This is financial distress. They're not insolvent." And it's a little strange. But that's because of the world the first opinion created, which then means, on appeal, what happens? Does the Third Circuit say, "That's not what we meant?" Does the Third Circuit say, "We were wrong the first time around?" All of those things have to play out.

 

The last thing I'll note, interestingly, about the procedure of it all is the preliminary injunction, I think, is 60 days. And so that gives, I think, the debtor time, ultimately, to prove that it has the support of claimants. And my speculation is, that's what the court is thinking is going to happen at this time, like, do you really have that support? Now, there was a possibility that the grant of the preliminary injunction would be appealed. But two things happened, I think, in the last four days, or five days. One was the claimants had asked for a writ of mandamus of the Third Circuit. That was denied. I'm not surprised that that was denied.

 

This would just seem like a strange case to do a writ of mandamus, as far as just the legal standard for that. But separately — and, I think, almost at the same time — the bankruptcy court didn't certify the case to go up for an immediate appeal, which means the debtor is going to have time — at least until the motions to dismiss get heard — to play things out. And I think what's likely happening is there's negotiations going on. And they're trying to get together even more support, perhaps. But they now have the breathing room and the time for that to play out. That wasn't as clear when the case was filed and when the preliminary injunction was granted.

 

Sam Fendler:  That's very helpful, Professor Casey. I appreciate that. I, of course, have several questions. And I'm sure our audience will, as well. But first, Professor Simon, I want to ask if you have some additional thoughts.

 

Prof. Lindsey Simon:  Absolutely. So, I want to start with, really, what Tony sort of ended with. I am a professor at my core. I love hypotheticals. And so, I heard the tale of Johnson & Johnson, or LTL, that was trying to do this thing. They created these documents. And so they had to get rid of this liability because it was the thing that was holding them back from doing what they really want to do to pay claimants. And so, I guess my question is if they would have gotten rid of this burdensome asset, and then exchanged it with the deal that had the express condition — same backstop amounts and everything — the express condition was it can only be paid if the debtor accomplishes it through a Chapter 11 plan.

 

      So, in the prior case, it was in or out of bankruptcy. That was one step too kind. So, what if, in this case, the funding were contingent upon a bankruptcy filing, but it was the same amount?  Methinks that might be enough to trigger outside-of-bankruptcy financial distress because there would be no funding but for a case. So that's one hypothetical.  And I guess the other one is if the challenge that Johnson & Johnson faced in effectuating paying everyone's claims, like they say, if that was the big challenge, and they're replacing it with these new documents, why is the number 8.9 billion instead of 12 billion or 14 billion? 

 

Clearly, it's less money. Clearly, it's different. But, what, really, people are negotiating at, over this point -- and I'm sure people on the inside could give us very specific numbers, but I pick 12. Is it really the issue that not only did they take away the deal, they took away the deal and they made it not sweet enough to get actual support from everybody to pay everybody's claims? And so those are my two questions, I guess, I'll  pose back to Tony.

 

Would either of those have satisfied the Third Circuit? When you're describing the maze, I'm just thinking of the labyrinth with  Ambro in the middle. I guess, would each of those have been enough? And if that would have satisfied the standard, then why didn't Johnson & Johnson do that, if really what they want to do is pay all claims?

 

Prof. Tony Casey:  So, the hypothetical is interesting, because if they had done that, the argument goes -- and I think it would be similar to the argument they're making now, is, "Listen, we're in financial distress when we can't settle these things" — and the reason they need to settle on bankruptcy is future claimants and holdouts — "and we can't settle these things outside of bankruptcy. We want to settle. And we want to settle for a fair amount, and get assets to claimants. But we can't do that outside of bankruptcy, so we'll do it in bankruptcy with this backstop."

 

That creates the very strange world where, in bankruptcy, you're beyond solvent, and not in financial distress. And, out of bankruptcy, you are in the most financial distress, and you have no asset available. And I don't know what the Third Circuit would do with that. That gets you part way there, for sure. Does it get you all the way there? I don't know. I don't know what's in there. Perhaps they were thinking, "Well, we don't want it to be just shy, again." And so, the spinoff was going to happen anyway. That had been planned long before.

 

So, now the real question isn't the 60 billion to 30. It's the "Why is it 8.9?" So, I think, there, they said, "Okay, so, what we'll do is we'll go in with support." And I think they had to go in with support, because otherwise it looks a little like, "Oh, it's just paperwork." And, no, here it's something different. "We get it. Before, we hadn't said exactly how high we could go. Now, we're like, 'No, we'll go to 8.9, and we've got these claimants on board.'" I gather, my guess would be they said, "All right. We're going to get the amount on the table that gets us support to get a settlement that can get a plan confirmed."

 

Another way to dismiss a case for lack of good faith — or, under 12 — is you don't have a feasible plan on the table. So, they had to have a strong argument that they had a plan they could propose. And so, I think there's negotiation that got them to 8.9.  Why it wasn't 10 or 11, I think the claimants have thrown around numbers of, like, 20 billion, so there's just something going on here where you get to a number through negotiation. My speculation is this is the number that will get a plan through.

 

      Now, you might say, "Oh, that's a problem, because that's not full payment." They'll say, "Well, it's payment that 80-some percent, or whatever percent they get to, think is full payment. And so, we're trying to get that to our creditors." Then you get to an interesting world where, do we do things by class or by individual creditor? Because there's no doubt that some creditors will get less money. Some claimants will get less money in bankruptcy than they would outside of bankruptcy. That's true in every bankruptcy. It's especially true in every mass tort bankruptcy. And, usually, we're okay with that.

 

We're saying, "All right, well, we're getting money to all the claimants quicker." But then you get to a world where it's like, "Well, what do we do about -- is it a fraudulent transfer, as to one creditor, as to the class of creditors? How do we view all of that?" And I don't think there's a clear legal answer to any of that. I do think, ultimately — and I said this before in my criticism of the Third Circuit opinion — if we're doing good faith, which is a non-statutory equitable standard, it should be the one that is consistent with, and makes sense, in the bankruptcy purpose, the purpose of bankruptcy law.

 

And so there, I think we're talking about, "All right. We're trying to get a collective settlement." So, if we're just talking about good faith, I don't see that being an argument against it. Now, there is something else that can happen. The amount can still go up in bankruptcy. And I know people say, "Oh, it's not going to go up. This is where they're at." It could. And it could because maybe there is a fraudulent transfer claim that one creditor makes.

 

All right, then what do we need to do to settle that? Maybe there's an appeal. Maybe the 60 days doesn't get them to a final settlement. There is negation going on. And you can see where it could get to 10. Who knows what it will get to. But I would guess they're still negotiating right now, because there's so much uncertainty in all of this. And there will be even more uncertainty if it goes to the Third Circuit because what panel they get, what the view is on all of it, are all still open questions.

 

Prof. Lindsey Simon:  I'll make one more follow-up comment. I know you have a comment.

 

Sam Fendler:  Please --no, no.  Please, please.

 

Prof. Lindsey Simon:  The thing that is fascinating to me — and, again, is fascinating maybe only to me, because this is what I'm studying right now — this concept of, "Well, we've got the vote. We've got the support." This case is a really good example of, well, Section 524(g) says you need a certain percentage to support. So, 75 is the threshold that, in asbestos cases, they're trying to achieve. And they claim they have it, or they will get it with this number. I guess the question is, 75 percent of what? And the answer is people who vote.

 

But now, the question is, "Well, wait a minute. There have been arguments before the court that a lot of the claimants are new claimants.  They're not even claimants that existed in the first case." And so, now, we're touching on an issue that was really  core to Boy Scouts as well, is, are these claimants really claimants? Or are they lawyers that are manufacturing the number to say -- and I don't mean, "manufacturing." They're, hopefully, real people. But the question is, do they really fit the claims pool? Have we decided? Have we drawn the line of who has a claim and who doesn't have a claim? Who's eligible to vote and who is not? Do we really know if that 75 percent threshold has been met?

 

      And so, I think we will see a lot more, as different groups of plaintiff's attorneys with different categories of claimants -- because here we have different groups of cancer patients, in this particular case. How do we decide who gets enough? Do all of these claimants get to vote? Are we going to do a claims process? My guess is no. Should we do a claims process where there's a bar date and everyone has to reply by the date? If you reply, you're in. And if you're not, you're not. I don’t know.

 

So, there's a lot of variables in how the debtor crafts this case, and the voting process, and the claims process, and all of it. And, to be clear, there's a lot of input from a lot of stakeholders on how that goes. It's not just the debtor running that show. The input directly leads to what the output is. So, anytime you see someone stand up in court and say, "Okay, well, we've got 94 percent support of this plan," that sounds great. It's a fantastic sum. But every single debtor's counsel will talk to their claims agent, partner to get to whatever that number is, and they will be the first one to tell the bankruptcy court what that percentage is.

 

I say, based on what I'm looking at right now, how did we get to that number? What was the process that led to it? And so, I think that's kind of the behind the scenes of, if this percentage is so important to decide whether a claimant is going to get what they're getting out of bankruptcy, how much are we looking at what that voting process looks like?

 

Prof. Tony Casey:  And, if I could, just one little follow-up to that. It's so interesting because when you had the arguments about this in the recent hearings, it was, you live in a bizarre world now, where the plaintiffs are like, "Look, the debtor's drumming up claims. The debtor's going out there and — "manufacturing" is the wrong word but is the word you hear — "manufacturing claims or they're pulling claims out of the woodwork."

 

And, usually, it's the other way around. And it's just all turned around, like, that's usually what the debtor is saying about the plaintiffs at the beginning of the case. Like, "These claims aren't real. Most of them aren't valid, or have problems with them." And now, it's turned around. Where did they come from? Well, it's the same way that it was before. And now, we always ask, "What do we make of all these claims?" But it's a weird turnaround, in some sense.

 

Prof. Lindsey Simon:  They're very clearly unhappy that the debtor is using their games against them.

 

Sam Fendler:  Well, this has been great already. And I hesitate to insert myself because both of you are offering so much insight, which is amazing. I will say to our audience, please, if you have questions, do enter them into the Q&A function. And we should have time to get to many of them. I wanted to ask about the funding agreement. And you both have talked, obviously, about the removal of documents, and sort of structuring from the first round to what we see now. The funding agreement, as I understand, was very key to the case, and to the Third Circuit decision that we discussed last time.

 

And, as you both mentioned, the underlying theory there is that if LTL has access to $61.5 billion, and potentially more — because I understand that Johnson & Johnson said, "Well, if it's higher than that, we can go higher than that." — they were not facing financial distress, therefore, Chapter 11 is inappropriate. With this new settlement, I'm wondering -- and maybe I'm just being obtuse about it, but is bringing the almost $9 billion settlement in, is that almost a swap for this funding agreement that is different because it is a settlement offer that is high enough to maybe be attractive? It's also not a huge ATM machine.  So, is this a direct one-for-one swap? Or are we doing something totally different? Professor Casey, let's start with you.

 

Prof. Tony Casey:  This goes to the back-and-forth Professor Simon and I had earlier that I should add to.  So first, yeah, it kind of is a direct swap. They had this agreement, and they said, "In place of that agreement, here's this new agreement." But remember, the new agreement, in some senses, the number can't be wrong, in the following sense. The number will only be paid, and come to exist, if there is a plan that confirms it, and gets the votes. And so, if the judge and the parties and everyone agrees that this is the right amount, we will pay that amount. If they don't, this bankruptcy case is over, and we go back outside of bankruptcy.

 

In that sense, the 8.9 doesn't matter. Whatever it is, it can't be the wrong number, because it's only the number if it ends up being the right number. And so, the agreement says, "If we're right that 8.9 is the amount, we will pay that. If we're wrong" — and I think everyone is committed to this now — "If we're wrong, or we don't reach a settlement in bankruptcy, there's no more bankruptcy on the table here. This is going to go into regular MDL and state court litigation. That's the only thing left, if we don't reach an agreement in bankruptcy." 

 

And part of that is to get to meet what the Third Circuit wanted. Part of that's a leverage point, because I think lots of the claimants objecting actually want to be in bankruptcy, because they want a settlement, but they want a better settlement. And so, there's a bit of bluffing going on here. And so, as I said, maybe it's 8.9, maybe it's a little more. Maybe they really want to be outside of bankruptcy, maybe they don't. And the problem is you're bluffing with thousands of different -- or hundreds of different groups. But that’s the agreement. The old agreement's gone, and it's either. "We just do this in MDL, or we go with 8.9, or we all reach an agreement in bankruptcy of some sort." That's what they have now.

 

Sam Fendler:  Professor Simon?

 

Prof. Lindsey Simon:  I agree. They clearly were intending to swap one-for-one. I think the interesting question is this argument of, "Well, how can you just swap one-for-one?" If you represent the debtor, which is how -- fraudulent transfer, you look at it from the perspective of the debtor. The argument that I struggle with — and I'll go ahead, I'll be frank about it — the argument I struggle with is that there was something suspect about the initial agreements, and they had genuine questions about their enforceability.

 

      The judge kind of heard a bit on this. And the debtor made the argument that the debtor can make on this point. I think, from their perspective, it was a problem for all sorts of reasons. But, for the debtor to say, "Okay, well, we'll just terminate it.  No problem. We'll sign this other one," that, to me, is a serious challenge that the parties are going to have to deal with. And, to be honest, fraudulent transfer, we teach this in basic bankruptcy. Fraudulent transfers happen all the time. And, ultimately, what happens to most of them? They settle.

 

      Yes, if you litigate it all the way through, maybe you get it back. But, odds are -- you talk to anyone that litigates these bread-and-butter of the first-five-year associates -- odds are good your client keeps some of the money, and you litigate it, and part of it goes back in, and you settle it. So, do I think that's necessarily going to happen here on the surface? No. But as Professor Casey pointed out, really, ideally, most everyone really wants a settlement here. I think, at this point, it's a question of who gets the money and when, and how much is enough. 

 

Now, when I say, "everyone," I mean everyone that is a claimant. I think the challenge in this case — and I don't mean to say it's a challenge, it's a feature of the system — you have parties that really are arguing on behalf of whether the law allows this to happen, independent of whether claimants get money today or don't get it today. The question is, well, this is not what bankruptcy does. This is not what bankruptcy is allowed to do. These are not cases that can be filed. If these cases are filed, the pre-bankruptcy actions violate all sorts of principles.

 

Those are the arguments that we'll see waged in the motions to dismiss. We'll see arguments even once the settlement goes forward. The United States Trustee is going to argue this position. So, whether the number increases to 10 billion, maybe 11 — I think my money's on 11 — whether or not that happens, I do believe this will get to the Third Circuit, if it gets confirmed or if the motion to dismiss gets denied or granted, either way, because someone is going continue arguing that this is not a proper use of bankruptcy. And that is something that the Third Circuit is going to have to grapple with again, like it or not.

 

Prof. Tony Casey:  And, you know --

 

Sam Fendler:  Go ahead, Professor Casey.

 

Prof. Tony Casey:  I agree with that. I would just add, this makes me think there is negotiation going on to get, not just the 75, but whatever higher number you can get to. Because if you're the debtor, where you want to be on appeal is, this is just the trustee getting in the way of a settlement, which is kind of where Purdue has ended up, and --

 

Prof. Lindsey Simon:  It's not ended yet. They still don't have it.

 

Prof. Tony Casey:  I know. Well, it's where Purdue is now and waiting on an opinion. And the debtor can say, "Look, everyone wants their money, and the trustee [inaudible 00:36:22] is getting."  And that’s a good rhetorical — it's not really a legal argument, but it's a rhetorical position to say, "We're just at the end here, and there's only someone who doesn't like the way we did it, but everyone else is on board." And that's why they want to get closer and closer to 100 percent or 99 percent. But you always have the trustee.

 

      And I'll say I agree with Professor Simon. The argument the debtor has that the agreement was questionable, and that's why this deal was fine, is a much weaker argument than the agreement was getting in the way of a value-creating settlement. And so, if you say, "Look, there's this thing that I have that will cost me millions of dollars or billions of dollars in litigation, and I can get rid of it and make that away, and everyone is benefitted," that's not a fraudulent transfer.

 

And that's the much stronger argument, is this thing just turned out to be something bad that we thought was good, because of what the Third Circuit said. That's a stronger argument than, "Oh, now we have questions of whether it's enforceable." Because I'm not sure there's anything in the Third Circuit opinion that says that, and so why that comes about. And I think the first point is much stronger.

 

Prof. Lindsey Simon:  Just one quick follow-up on that. You mentioned Purdue. The other thing is, even if the case gets through, I wonder. Yes, you have all this support. Yes, you have all these things. But guess what? You still have to get confirmation of the scope of releases. And so, to the extent, in one fight, you may escape a motion to dismiss, I don't think releases here will be given freely, even if you have overwhelming support. So, this seems like a case depending upon how Purdue comes out. But maybe some sort of opt-out would be a massive way to get a little bit less heat, to get through the process.

 

Sam Fendler:  Professor Simon, correct me if I'm wrong, but it seems like you foresee the Third Circuit hearing this again.

 

Prof. Lindsey Simon:  Oh, yeah. I don't see how they don't.

 

Sam Fendler:  Okay.

 

Prof. Lindsey Simon:  I think both parties are invested. And, clearly, Johnson & Johnson continues to be invested in this entire approach. It is bold. That's the word I can come up with. And so, I don't see them not appealing, if the court dismisses the case. And I think the United States Trustee's been very consistent in their approach to challenging these types of cases. So, if they submit a motion to dismiss on the other end, if they do survive it, I think there will be an appeal on that basis.

 

Sam Fendler:  So, I'll ask you first, then. Professor Casey, I'm curious what you think, as well. Now, this may require you cracking out a crystal ball a little bit. But you both talked about how the structuring of LTL and, kind of, the whole deal, is different. And it's almost exactly what the Third Circuit requested in the last opinion. And so, I'm curious. Is it so accurate? Is it really that close to what the Third Circuit asked for that they almost called a bluff? Is the Third Circuit going to have to accept what LTL is structured as now? Or is there some wiggle room?  What do you think?

 

Prof. Lindsey Simon:  I think, as to financial distress, I think they, by design, hit it on the nose. So, I don't think they'll lose on whether there is financial distress. I think if the sole issue on motion to dismiss for bad faith is about the financial distress, then I think there's a good chance they win, unless the Third Circuit comes back and says, "It's not really what we meant," or "That's not everything we meant." If the motion to dismiss is more broadly described, and pulls in things like the — and, again, there have been some rumblings of this, and we've got the documents — if they really go and talk about the debtor's actions while the first case was still pending, to bring about this new transaction, maybe there are other flavors of lack of good faith that the Third Circuit is willing to engage in.

 

If we had the exact same setup, but not a debtor named LTL, I think the Third Circuit would say, "Yes, this is okay. The case does have to be dismissed." But the fact that it is LTL, and they're coming right back again to the same court, having done what the court said, but also having gone pretty tightly against what the footnotes said about creativity, but unwinding the financing, I think it's a gamble. I think it's interesting.

 

But, again, even if they lose, they've gotten the benefit of the automatic stay on injunctions for all of this time, which helps their settlement leverage, even if the bankruptcy fails. So, I was thinking about this. Why would the company continue to keep paying for this? Well, of course, if it works, it's massively successful. It's the best way to go about it. And, even if they lose, they're still getting the benefit of a settlement infrastructure getting created while the bankruptcy case is pending.

 

Prof. Tony Casey:  I've been thinking about this a lot, and trying to think about the prediction of it, revising that I was completely wrong predicting what the Third Circuit would do last time. So, one path, I think, is that the same panel, or at least the panel with Judge Ambro, gets the case and says, "This is just too cute. Everyone knows this isn't what we meant, even though it's what we said," which is kind of how I read it. But I think if the panel goes that way, I think it goes en banc. And then, the first opinion actually gets ripped apart.

 

Because I think this laid out how bad -- and I say this reluctantly. People say to me, when I say that, "Isn't Judge Ambro one of the leading experts of bankruptcy in the world?" Yes, that's why it shocked me. I really respect him. But I think this opinion was really wrong. And so, I think that you could see him or the panel saying, "This is too cute." But then, I think the court would say, "Wait a second. You've now led us down this hole. We've got to pull back. And we've got to define financial distress."

 

And I can't see them going "Oh, we should have taken it en banc before, but you're out now." So, I think they'll find a way to say "This is fine. This will go forward. This is not bad faith," for the exact reason Professor Simon said. If you saw this case that wasn't two hours after the other one, it meets the requirement. So, what's missing? I don't think they'll dismiss on other grounds. I get that they could. You could go broader and say there's something else wrong with this. But I ultimately think we either hit it exactly on what you said, or the broader part says, "Yeah, this is too much of a mess."

 

Sam Fendler:  Professor Casey, I want to ask you a follow-up question, which is, last time we talked, you had this line of thought that I found interesting and thought-provoking. And, please, walk me on to exactly what you said. But it was something like there was this presupposition here that bad faith would result in bad claims. Or you said if LTL has been set up in good faith, that kind of presupposes that there's a lot of good claims. And, likewise, if it's set up in bad faith, then we're presupposing that there are a lot of bad claims. I'm wondering if you can talk a little bit more about that, and how this new setup, these new documents, the settlement, affects your line of thinking there.

 

Prof. Tony Casey:  It might make that point moot. But here's the way I was thinking before. Putting aside whether or not the rule about being in financial distress and not insolvent that the new case is trying to weave through, that's the world we live in now. The world I thought we lived in before — and this was the point I was making there — was if I had 100,000 claims against me that might be worth from zero to $200 million each, that's potentially trillions of dollars of liability. I'm in financial distress. And if I have $60 billion and the claimants are saying, "You've got to pay me at least 20 of that," I'm in financial distress.

 

That was where I was before. And I was saying that if we say, "Oh, the claims are certainly less than a billion dollars," we're assuming most of them are bad. You just can't get to that, to a billion dollars or less, if the claims are mostly good claims. And that was when we had 40,000 confirmed and we thought there was more. Now we're way higher than that. And so, the math is still the same. However, the new case doesn't have the 60 billion with the backstop. So, the new case has, as I was saying earlier, exactly whatever it is that you need to settle. Either 8.9 is the amount that we're going to pay, or it isn't. And so, you have that amount and no more.

 

So, it makes the question somewhat irrelevant of what the total amount of claims are. And this is kind of where Professor Simon was going earlier. Why is that the number? That's the number they're putting out there. And that number is now the question, not the total number. Because the total number -- I guess you'd say it must be somewhere between 8.9 and 60, under the court's reasoning. But I think it's somewhat irrelevant now. But I do think it's still a critique of the old opinion, but not where the parties are going to focus in the new case, I think.

 

Sam Fendler:  Understood. We do have a question to that end, from the audience. Assuming this is not settled, and it plays out, it says that there's about 70,000 claims now. I guess there could be more. Do we have any idea of what the total number could be, the total liability, if this just plays out in smaller cases?

 

Prof. Tony Casey:  We know it's over 70,000, because 70,000 is the support the debtor is claiming. So, you've got that, plus the non-supporting ones. We've seen most cases are zero. And a couple cases were around 200. And I think the highest award was a group of plaintiffs that got around 200 million each. And so, you're going to litigate those out forever, and settle some of them, win some of them. I have no way of predicting the rate of success. So, I think it will be in endless litigation, ultimately.

 

Sam Fendler:  Certainly. And on the question of the settlement, Professor Simon, I'm curious about this. Because I think that you have some opinions on the settlement, versus actually allowing it to play out and the claimants having their day in court. And maybe this turns into a philosophical question. But if you could speak a little bit about what you think are the merits of the settlement itself, of having the 9 billion. So that's 9 billion that these claimants can have; there is it. There's the money, versus, potential, maybe future claimants having their day in court taken away from them. I don't know. You alluded to it before that you had some opinions. And so, I would certainly like to hear them.

 

Prof. Lindsey Simon:  I have many opinions on this. I guess, ultimately, if we move past this question of "is this a bankruptcy?" because that's the most full-stop of all that we're grappling with, can a company use bankruptcy? Are they a debtor? Or are the ones around them? Did they create a debtor? And is that okay? Assuming the case goes forward, and assuming there is a plan, and assuming right now, which is, again -- people are very busy fighting about the motions to dismiss and the future claims representative and the various committees. There's all sorts of early bankruptcy movement happening.

 

But the parties that are working on a settlement right now, they're working on things like allocation. Who gets involved in this? How does the trust work? Which trusts are we going to have? How is it going to be structured? What do futures get? What do states get? Because, again, there are state issues, just like there were in other mass tort cases. How does it get split up? And then, what does the claims process look like? To me, the most important thing, assuming the number is the number, is how do claimants experience this process? Because, again, I think that there's a lot that can be said about this day-in-court ideal, how that gets lost.

 

I think there are all sorts of arguments why elements of Chapter 11 mirror that and satisfy the requirements. And while that's not what everyone wants, you can make the same arguments about what happens in MDLs or other aggregate devices. So, I will say, can bankruptcy do better? Yes. So, this is a great opportunity, especially if they're trying to avoid confirmation fights. It's a great opportunity for the debtor to put together a process that incorporates elements of day-in-court, so purposefully picking some bellwethers to be included in the claims process, purposefully looking at how NDLs structure settlements or how other cases have structured these trusts to say, "Okay, well, are we going to have individualized proof, rather than just a 'check box' form?"

 

So, there's a spectrum of parties that say, "Okay, well, this is my claim.  Here's 10 pages about what happened to me and everything. Let me tell my story." And there are some where it's just, if you fit here or here, that's it. And you get a dollar amount. It doesn't matter who you are, or what your story is. So, little things like, is there an appellate process? If you go through the settlement trust and you'd like to opt out and have your claim heard in a state court, can you do that? And what are the penalties for that?

 

So, to me, it comes down to, if this is going to be a bankruptcy, let's use it as a case to show exactly how good bankruptcies can be at nearing what people look for as justice. Are they going to get everything right? No. Is everyone going to be happy? No. But I don't think that's a bankruptcy problem. I would say, let's watch very closely how lawyers fare. Let's watch very closely how claimants encounter the system, if it continues as a bankruptcy case.

 

And, to me, there's much that we can do to help satisfy that not-monetary, but experience-based desire claimants have to feel heard. And so that's all I'll say about that. I think the answer is it's unknown. I come at this thinking this is actually a case where we could do a really good job. And we don't know yet what everything will look like. And I think, given all the scrutiny on it in the early phases, there's a whole lot of incentive for the debtor to do a good job on that.

 

Sam Fendler:  Certainly. Professor Casey, any thoughts on settling, versus MDL?

 

Prof. Tony Casey:  I agree with Professor Simon on the fairness point of we should want a process. You want the opportunity to be heard, wherever, of some sort. This has always been my defense of what Purdue had was Purdue had that. The Purdue court set up a process for people to come in and be heard. And, in some sense, I think more people were heard in a more meaningful way than would have in the MDL process, in that case. And so, we should always remember that the MDL process is not every claimant is getting a trial, and every claimant is being heard. That's just not the world we live in. It looks much different than that.

 

And so, I think those are important factors. And bankruptcy courts should be thoughtful about what they're doing, how the process is running. And I think the judge in Purdue was, and this judge would be. But, ultimately, I still think getting the process to get the money to people quickly and fairly is more important than -- if we have to choose between imperfect on one or the other, people want relief. I think that's the thing that is the most important. And that's what the system is directly supposed to be about. But that's not to say we can't make it better, in bringing in other factors as well, other considerations, such as giving people a chance to be heard. So, I think that I agree with that.

 

Sam Fendler:  Understood.  Well, we have about five minutes left. And there are a couple of audience questions that I think we can get to. The first is in regards to this restructuring of LTL and the documents, and this kind of thing. So, our attendee asks if you could comment on how we might think about these new legal structures as potentially bypassing features of the American legal system. And I think the root there is, should this belong in bankruptcy court? And we discussed that a little bit. But do either one of you think that this structure is meant to bypass American law?

 

Prof. Tony Casey:  I mean, bankruptcy is part of the American legal system. My big project of the last two years was kind of pointing out that bankruptcy always interferes with non-bankruptcy law. You cannot live in a world where that's not true. But it is not bypassing the American legal system. It's part of the American legal system. And the reason it bypasses non-bankruptcy law, and the only time it's justified in doing that, is when it's solving a problem, such as a collective action problem. And, really, it's a way to get very complicated relationships resolved.

 

And if you were an employee of United Airlines, if you were the airport that had a terminal leased by American Airlines, if you were a creditor of Chrysler, you got a different process when they filed for bankruptcy. That's just the truth of the world. But that's been true. We've had a bankruptcy code of some sort since 1898. And it certainly is in the Constitution that we can have a bankruptcy code in place. And we've had it, at various times, since the founding, again, continuously since 1898.  So, in my mind, yes, it is a way to bypass the MDL system.

 

And the question isn't whether or not that's horrible because it's bypassing the MDL system. It's just, is it justified under some value creation that the bankruptcy code is supposed to be used for? And that's the way to think about it, not A is the right path, and B is a bypass. It's, we've got A or B. And if you want to say B is not the path, you have to explain why it isn't or shouldn't be. And we've been settling mass torts for decades in bankruptcy. And so, I don't think of it as bypassing the legal system. I think it's just part of the legal system.

 

Sam Fendler:  Anything to add, Professor Simon, or did Professor Casey wrap it up?

 

Prof. Lindsey Simon:  I agree with that response. I think, at core, much of the disagreement is about whether this qualifies for path B, whether these sorts of cases should qualify. And I don't know many professors that say bankruptcy is a complete bypass. I think it's just a matter of who fits the threshold to qualify or not. We all accept it. It's our bailiwick. These cases have different rules. And they have to have different rules. That's what Congress intended. That's what's in the code. So, it always surprises people when they encounter it for the first time, but that's what it was supposed to do, because it has to. Otherwise, they wouldn't have bankruptcy.

 

Sam Fendler:  I think that's a helpful way to think about bankruptcy law, in general. We have two minutes left. And both of you have so much to offer on this matter and the passion that you both have for it, I think is really helpful for us and for our attendees. So, I would like to ask if either one of you has some final parting thoughts before we hit 1:30? Perhaps -- go ahead, Professor Casey.

 

Prof. Tony Casey:  I'll go back to steal a little bit from Professor Simon's opening about, I do think the tension of this is fascinating, and this is real. It's such an important point, and so I'm glad she brought that up. And, sometimes, you sit in your office, and you look at this. This is the greatest chess match I've ever seen. And then, you're like, but we do care. You do have to care what's going on here. And I know we mentioned Purdue a lot. And this isn't the Purdue update. But there was a filing a couple weeks ago in Purdue where I think everybody signed, and said to the court, "Hey, there's real money and real lives at stake here. Where's the opinion? And you might be trying to make it perfect, but we really want to know what the rule is."

 

And I will credit the Third Circuit as being much faster than the Second Circuit. And all of this is about getting the right system in place. And we don't want to lose sight of that. And the lawyers are doing their job. And they have to argue their sides. But, ultimately, the judge and we, when we think about it from the kind of -- commentators are trying to say, "What's the best way to resolve this?" And that goes to part of your answer. Ultimately, I think bankruptcy can be that, if it's done right. And that's really the core question in all this, is how do we do it right? Just not to lose sight of that fact, I think, is really important.

 

Sam Fendler:  Professor Simon?

 

Prof. Lindsey Simon:  The only thing I'll say -- I completely agree with everything there. The only thing I'll say is this case and Purdue Pharma are really going to shape what happens over the next five-ish, ten years. This is not just a one-off case. There are many, many companies with big names and small names, that are thinking about this and looking at this issue. This isn't just a mega mass tort case.  So, what the Third Circuit is doing, what the Second Circuit is doing, will shape what Chapter 11 looks like, one way or the other. And so, yes, it's a particularly fascinating case. But it's really also impacting the whole landscape of what Chapter 11 can offer.

 

Sam Fendler:  Absolutely.  I really appreciate the insight that both of you have offered today. And this will be a case that we keep an eye on. Maybe we can do part three a little bit down the road. But, on behalf of The Federalist Society, I want to thank both of you for sharing your time and your expertise with us. And, to our audience, I want to thank you, as well, for joining. We greatly appreciate your participation. Please check out our website fedsoc.org. Or you can follow us on all major social media platforms at FedSoc to stay up to date with announcements and upcoming webinars. Thank you all once more for joining us. And we are adjourned.