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J&J, Purdue Uproar Spurs House Panel to Move Bankruptcy Overhaul

Nov. 3, 2021, 6:40 PM

The House Judiciary Committee voted to advance a bill aimed at overhauling the corporate bankruptcy system in the wake of public outcry over the Purdue Pharma LP and Johnson & Johnson cases.

The committee approved the Nondebtor Release Prohibition Act (H.R. 4777) on a 23-17 vote Wednesday, sending the bill to the House floor. All Republicans on the committee voted against the Democrat-supported measure, with one abstention.

A companion bill (S. 2497) was introduced in the Senate by Sen. Elizabeth Warren (D-Mass.).

Rep. Jerrold Nadler (D-N.Y.) introduced H.R. 4777 just weeks before a bankruptcy judge in New York approved Purdue’s Chapter 11 plan, which released the company’s owners, the Sackler family, from all future opioid-related litigation.

The bill, which has the backing of several consumer advocacy groups, would ban similar nonconsensual nondebtor release provisions in corporate bankruptcies going forward.

“The bankruptcy system is supposed to work for everyone but in many cases it works only for the powerful and too often it works best for big corporations and the very wealthy who have not even filed for bankruptcy but have figured out how to twist the system to obtain blanket immunity for their wrongdoing,” Nadler said Wednesday.

The legislation also would prohibit the “Texas two-step,” a maneuver that allows large corporations that reincorporate in Texas to split off a subsidiary, transfer mass tort liabilities to that subsidiary, and then put the unit into bankruptcy.

Johnson & Johnson is the latest company to use the divisive merger process, addressing thousands of asbestos exposure claims through the bankruptcy of its newly created subsidiary LTL Management LLC.

“This is not what the bankruptcy law was intended to be for,” Rep. Steve Cohen (D-Tenn.) said at the markup, targeting J&J’s legal maneuvering. “They knew what they were doing and now they need to pay for it.”

H.R. 4777 also would limit to 90 days the amount of time litigation can be paused against affiliates that aren’t in bankruptcy.

Republicans on the committee maligned the bill for seeking to drastically alter the bankruptcy code in response to alleged abuses in a small handful of cases.

“At the end of the day, while parts of this bill may be well-intentioned, it will likely result in unintended consequences that could be harmful to all parties involved in many bankruptcy proceedings,” Rep. Scott Fitzgerald (R-Wis.) said.

To contact the reporter on this story: Alex Wolf in New York at awolf@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com

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