Rich companies are using a quiet tactic to block lawsuits: bankruptcy

A few months before she died in February at age 27, Hanna Wilt was living at her mom's home on the New Jersey shore.

"I'm tired and I'm very very bloated," she said. "I get fluid buildup in my belly."

It was a sunny morning, the living room filled with light that caught in Wilt's yellow hair, but she was having a tough day.

She sat in a big stuffed chair, hunched forward holding her stomach. "Essentially you starve to death, is the nature of this disease," Wilt said.

Wilt was a college athlete, a CrossFit instructor and an avid horseback rider. Then at age 22 she felt the first symptoms of an aggressive form of cancer called mesothelioma.

"It was really, really weird," Wilt recalled. "I started not being able to walk right."

Now, after years of unsuccessful treatment, she was terrified by the rapid advance of her illness. But along with the fear, Wilt also voiced outrage and frustration.

Her lawsuit against Johnson & Johnson, the company she blamed for making her sick, had been abruptly blocked a few weeks earlier.

"What I see is who can play the game best," Wilt said. "Big corporations trying to work the system in a way that they don't have to take full responsibility is nothing new."

Johnson & Johnson, which is headquartered in New Jersey, is valued at more than $400 billion. But in October 2021, the company used a controversial legal maneuver in bankruptcy court to freeze Wilt's case along with thousands of others.

The company had faced some 38,000 lawsuits claiming that trace amounts of asbestos contamination in Johnson's baby powder caused ovarian cancer and mesothelioma.

"I would use it every day, sometimes a couple times a day to be comfortable in the summer," Wilt said of J&J's talcum powder.

In her lawsuit filed in January 2020, Wilt accused company executives of knowing about the risk for decades and keeping the information from customers.

She pointed to the FDA's announcement in October 2019 that it had found asbestos in one sample of Johnson's baby powder.

"There's definitely an aspect of justice" in suing J&J and wanting her day in court to hold the company accountable, Wilt said.

"This powerful group of people, they lied and were able to potentially ruin so many people's lives."

A $400 billion company pulls the bankruptcy trigger

J&J pulled its iconic Johnson's baby powder off the shelves in the U.S. in 2020, but the company says it took that step only because bad publicity had hurt sales.

Company executives, who declined NPR's repeated requests for an interview, have long denied the product is contaminated or caused anyone's cancer.

"The overwhelming scientific evidence proves Johnson's baby powder is safe and does not cause cancer," said Allison Brown, a company attorney, in a statement J&J sent to NPR.

Normally this is the kind of dispute civil lawsuits are meant to settle. A judge or jury would look at the evidence in a case like Hanna Wilt's and decide whether J&J did anything wrong.

In recent years, Johnson & Johnson has successfully defended itself against many of these baby powder claims but has also lost on occasion.

After one baby powder trial in Oklahoma in 2018, J&J was eventually forced to pay 22 women with ovarian cancer more than $2 billion. That award survived an appeal to the U.S. Supreme Court last year.

But with most of the cases — including Wilt's — still pending, the company found a way to stop the legal process in civil court, using a complex bankruptcy strategy known in legal circles as the "Texas two-step."

Cancer patients and the Texas two-step

Here's how the maneuver worked. First, last October, J&J spun off a subsidiary in Texas called LTL.

Then, using a wrinkle in Texas state law, J&J was able to transfer all of the potential liability linked to the tsunami of baby powder asbestos claims into the shell of the new company, while keeping valuable assets separate.

LTL then quickly filed for bankruptcy in North Carolina. That move immediately halted the baby powder cases, which could remain on hold for months or years.

Speaking on a public conference call with investors in October, one of J&J's top executives defended the strategy.

"There's an established process that allows companies ... to resolve claims in an efficient and equitable manner," said J&J Chief Financial Officer Joseph Wolk. "It's really the bankruptcy courts that will ultimately decide this."

But for families seeking compensation from J&J, the move by one of the wealthiest corporations in the U.S. sparked anger and dismay.

"It's heartless; it's ruthless," said Hope Schiller Wilt, Hanna's mother. "It's disgusting that for monetary gain they will stop at nothing."

"It is so expensive being sick," added Hanna Wilt. "I can't work, so I'm not providing an income. My Mom can't work. She's taking care of me."

A separate justice system for "Bankruptcy Grifters"?

Legal experts tell NPR that a growing number of wealthy companies, organizations and individuals accused of serious wrongdoing are using similar bankruptcy tactics, hoping to delay or permanently block lawsuits.

They've found openings in state and federal law that allow them to leverage the sweeping power wielded by bankruptcy judges when cutting deals.

But they're not being forced to endure the financial pain and exposure that comes with actually filing for bankruptcy.

Often this means creating a new subsidiary and pushing it into bankruptcy, as in the J&J case. In other instances, wealthy companies or organizations are able to "piggyback" on the bankruptcies of other companies that are actually insolvent.

"I think the level of concern [over this strategy] is high and it's going higher and higher," said Lindsey Simon, who teaches bankruptcy law at the University of Georgia.

Simon was one of the first to raise alarm about the practice in a legal paper called "Bankruptcy Grifters" that was widely circulated before being published this month in the Yale Law Journal.

"These 'bankruptcy grifters' act as parasites," Simon wrote. They get many of the benefits of actual bankruptcy while experiencing "only a fraction of the associated burdens."

These bankruptcy maneuvers have quietly reshaped some of the most important legal cases of recent years.

Members of the Sackler family who own Purdue Pharma aren't themselves bankrupt. But they're expected to piggyback on the bankruptcy of their insolvent drug company.

Under terms of the deal, they would pay roughly $6 billion in exchange for sweeping protections from lawsuits that accused them of marketing OxyContin in ways that fueled the opioid epidemic.

Critics say that payment, while substantial, doesn't achieve the kind of justice and accountability that many victims of OxyContin hoped for.

The settlement, which is still pending, requires no apology from the Sacklers, who have long denied any wrongdoing. It will also leave much of the $10 billion in revenue the family earned from opioid sales untouched.

In the end, if the deal is finalized, those harmed by OxyContin addiction will be forced to forfeit any right to sue the Sacklers, while often receiving only a few thousand dollars in compensation.

The Koch brothers, billionaires known for funding a wide range of conservative political organizations, also used a bankruptcy maneuver to freeze asbestos-related lawsuits linked to one of their companies, Georgia-Pacific.

In that case, also still pending, Georgia-Pacific spun off a new subsidiary in 2017 called Bestwall that quickly filed for bankruptcy. Georgia-Pacific offered to pay $1 billion into a compensation fund.

But no payments have yet been made. People attempting to sue over cancer claims in that case have seen their lawsuits frozen for nearly five years.

The U.S. Olympic & Paralympic Committee and the Boy Scouts have also used complex bankruptcy maneuvers to shield themselves and their affiliate organizations from lawsuits linked to claims of child sexual abuse.

Critics, including Republican and Democratic members of Congress, point out that these legal maneuvers are available only to those wealthy enough to pay large sums as part of bankruptcy settlements.

"There's a justice system for rich people, powerful corporations and then there's a justice system for everybody else," said U.S. Sen. Dick Durbin, D-Ill., in a recent speech on the Senate floor decrying these bankruptcy deals.

"Many days it seems the gulf between these two systems is just getting wider and deeper."

Is this even legal?

The U.S. Justice Department's bankruptcy watchdog division has also condemned settlements of this type, describing them as unconstitutional.

In legal filings last year made after Purdue Pharma filed for bankruptcy, the DOJ argued that such deals force people who have filed lawsuits to "involuntarily settle" even if they prefer to have their case heard in court, effectively denying them due process rights.

In a statement in December 2021, U.S. Attorney General Merrick Garland said "the bankruptcy court did not have the authority to deprive victims of the opioid crisis of their right to sue the Sackler family."

That settlement deal, along with several others involving non-bankrupt players, is now being challenged. Some legal scholars believe they will eventually be declared improper nationwide by federal appeals courts.

"I think if you really look closely at what bankruptcy code allows, it's not altogether clear this is permitted," Simon said.

"I think there's a realistic chance that at some point a court will say it's not allowed."

Congress is also considering bipartisan legislation that would sharply limit these bankruptcy deals.

Opening the floodgates

But for now, a relatively small number of bankruptcy judges are allowing and even encouraging wealthy companies and individuals accused of wrongdoing to use this kind of maneuver.

After J&J offered to create a fund worth billions of dollars through the bankruptcy court to compensate cancer victims, the bankruptcy judge presiding over the case praised the proposed arrangement.

"Justice will best be served by expeditiously providing critical compensation through a court-supervised, fair, and less costly settlement trust arrangement," wrote Judge Michael Kaplan in February.

Kaplan acknowledged concern that "allowing this case to proceed will inevitably open the floodgates to similar machinations" by other companies. He then added, "maybe the gates indeed should be opened."

During a hearing on the J&J matter this week, Kaplan also acknowledged this case is both controversial and precedent-setting and therefore warrants review by the federal appeals court.

"I'm being blamed for a lot," Kaplan said. "Clearly ... this impacts decisions and restructurings or potential restructurings beyond what's being litigated in this court."

But bankruptcy maneuvers of this kind, involving non-bankrupt companies and individuals, do have supporters.

Some judges, legal scholars and corporate executives see bankruptcy court as an efficient way to simplify and reach closure on complex litigation, even in cases where the main players aren't insolvent.

They argue that companies sometimes wind up paying victims and creditors faster.

Even some critics, including Simon, say these kinds of settlements should be available to bankruptcy courts as a tool in rare, carefully regulated situations.

Caught in a legal maze as time ran out

But individuals caught in this legal maze say it feels unfair and baffling to find their lawsuits sidelined because of bankruptcy maneuvers carried out by wealthy companies.

In cases involving ovarian cancer and mesothelioma, there's a high likelihood people will die while waiting for these maneuvers to play out.

"I'm a young girl, my entire life has been dramatically changed," Hanna Wilt said before her death on Valentine's Day. "I'm angry and I think there's a lot of sadness."

"For her to see justice would have not saved her life," said her mother, Hope. "But she would have felt like a company like this couldn't get away with doing what they've done and causing such horrible heartache."

Wilt's family said they do plan to continue her lawsuit — "It's what she wanted," her mother said — but the case could remain stuck in bankruptcy court for months or years.

It's not clear how a court will rule in any of the tens of thousands of remaining baby powder cases, if they are eventually allowed to move forward.

What is clear, according to legal experts, is that this Johnson & Johnson case is being watched and studied as a test case.

If this bankruptcy maneuver works for Johnson & Johnson, even more wealthy companies and individuals are likely to use bankruptcy court to delay or permanently block lawsuits when accused of wrongdoing.

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