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Bankruptcy Can Be Powerful Tool in Fiercely Litigated Disputes

Parties in litigation have used bankruptcy to resolve “seemingly intractable litigation” since the U.S. Bankruptcy Code was first adopted in 1978.1 Companies regularly seek bankruptcy protection when they are confronting multimillion-dollar verdicts or settlements, waves of mass tort litigation that may not be covered by insurance, or substantial risks attendant to scandal or fraud investigations and related litigation. Sometimes they file to resolve disputes more quickly through bankruptcy; other times, the massive verdicts or settlements for which the companies are liable will render them insolvent.

Companies, and even organizations such as USA Gymnastics, the governing body for gymnastics in the United States, increasingly are being driven to bankruptcy as a result of sexual abuse scandals and liability, high-stakes tort litigation, and a growing reluctance by insurers and third-party contractual indemnitors to provide coverage for increased settlement and defense costs.

This issue of the JCR features several insightful perspectives on litigation-driven bankruptcies and other topics of interest to turnaround and restructuring professionals. The authors’ analyses and views offer much to consider, as we will likely see an increasing number of companies and firms looking to Chapter 11 as more and more industries face risky litigation.

Kirk Burkley of Bernstein-Burkley offers a sobering discussion of the U.S. opioid crisis and the impact that the staggering number of deaths and pending lawsuits, many of them brought by states and municipalities, may have on the pharmaceutical industry. As the article notes, pharmaceutical manufacturers and distributors may employ strategies similar to those used just decades ago by companies facing product liability and asbestos claims.

Alissa Brice Castañeda from Quarles & Brady LLP examines the complicated relationships and competing interests at play in Pacific Gas & Electric Company’s Chapter 11 case. The investor-owned utility filed bankruptcy in response to crippling financial liability from California’s tragic and deadly wildfires from the past couple of years. The article discusses the politics at play in this unique case and contemplates potential strategies PG&E might use to emerge from bankruptcy.

Todd Dressel of McGuireWoods LLP reminds us that although a difference in interpretation, i.e., ambiguity, may be at the heart of a litigated dispute between parties, unless a court—or in the case of the U.S. Supreme Court, a majority of justices—agree that a statute is subject to more than one interpretation, courts only have power to enforce the plain meaning of the statute.

As mentioned, the enormous costs and uncertainty associated with defending unwieldy litigation often lead to bankruptcy. Daniel Waxman of Wyatt, Tarrant & Combs LLP analyzes litigation in the context of class action litigation, whether it results in a Chapter 11 filing or arises precisely because a company files for bankruptcy. This article discusses various factors that putative classes of litigation claimants and debtors must consider when seeking or opposing class certification.

Finally, as the college admissions scandal that recently came to light continues to unfold, Lette Tipton of Conway MacKenzie Inc. ponders how nonprofit organizations such as the College Board might use the bankruptcy process to obtain a fresh start in the wake of scandal or allegations of misconduct. As the article reminds us, while not the norm, nonprofits are no strangers either to controversy or litigation.

As both plaintiffs and defendants in fiercely litigated disputes are discovering, bankruptcy is a powerful tool when used in the context of litigation. It is – and will continue to be – fascinating to see how turnaround and restructuring advisors shape the interplay between bankruptcy and traditional litigation going forward.

  1.  Troy A. McKenzie, "Toward a Bankruptcy Model for Nonclass Aggregate Litigation," 87 NYU L. Rev. 960, 999 (2012).
Jeannie Kim

Jeannie Kim

Friedman & Springwater LLP

Jeannie Kim is an attorney at Friedman & Springwater LLP in San Francisco, where she practices in the areas of bankruptcy, insolvency, and commercial transactions. She has represented secured and unsecured creditors, licensors of intellectual property, corporate debtors in possession, Chapter 11 trustees, and acquirers of distressed assets in a range of industries. A frequent speaker on business bankruptcy, Kim has been recognized by the National Asian Pacific American Bar Association, the American Bankruptcy Institute, and IWIRC as a rising star.

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