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J&J's Third Bankruptcy & Election AI Law · Bloomberg Law

0:03
Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
0:10
Speaker 1: Johnson and Johnson first filed for bankruptcy in North Carolina,
0:15
Speaker 1: then in New Jersey. Will the third time in Texas
0:18
Speaker 1: be the charm. Jay and Jay is trying to resolve
0:22
Speaker 1: tens of thousands of suits alleging its talk based baby
0:25
Speaker 1: powder caused cancer by using special bankruptcy rules that allow
0:30
Speaker 1: corporations facing financial turmoil to force an end to all
0:35
Speaker 1: product liability lawsuits. The Third Circuit Court of Appeals in
0:39
Speaker 1: Philadelphia nixed its first bankruptcy attempt, and a New Jersey
0:43
Speaker 1: court nixed its second. Now it will be up to
0:46
Speaker 1: a judge in Texas if the case remains there. Lawyers
0:50
Speaker 1: representing TAUC claimants who opposed Jay and Jay's latest settlement
0:55
Speaker 1: proposal are asking Texas Bankruptcy Judge Christopher Lopez to transfer
1:00
Speaker 1: the case to New Jersey. Jay and j says it
1:03
Speaker 1: has overwhelming support for the roughly eight billion dollar settlement
1:08
Speaker 1: because eighty three percent of alleged victims voted for the deal.
1:12
Speaker 1: Joining me is Anthony Casey, a business and corporate bankruptcy
1:16
Speaker 1: professor at the University of Chicago Law School Tony tell
1:20
Speaker 1: us about the history of Jay and Jay's bankruptcy attempts
1:23
Speaker 1: and about the Texas two step.
1:26
Speaker 2: So this goes back to twenty twenty one. Johnson and Johnson,
1:31
Speaker 2: their consumer subsidiary, had been the defendant in suits alleging
1:36
Speaker 2: ovarian cancer theoliomo being caused by mostly their baby products line,
1:41
Speaker 2: although there's some other products involved containing CAUC and so
1:44
Speaker 2: there was a bad judgment around that time, and this
1:49
Speaker 2: leads to the decision in twenty twenty one to file
1:53
Speaker 2: an entity into bankruptcy. And this is when people start
1:55
Speaker 2: talking about the Texas two step. Now, the allegation is
1:58
Speaker 2: that there's asbestos in the product, and so what they
2:02
Speaker 2: looked to as a precedent where a few other companies
2:05
Speaker 2: had filed what had become majoratively known is Texas two steps.
2:09
Speaker 2: The idea of the Texas two step is Step one,
2:13
Speaker 2: you divide the defendant entity into two entities, one that
2:18
Speaker 2: houses the kind of ongoing business and one that houses
2:21
Speaker 2: the liabilities. Step two, you put the liability company into bankruptcy.
2:26
Speaker 2: And this, if you describe it that way, a lot
2:29
Speaker 2: of people get worked up and say, oh, look that's
2:31
Speaker 2: a fraud and transfer everyone kind of skips over. There's
2:34
Speaker 2: an intermediate step, which is you also include a funding agreement,
2:38
Speaker 2: and the funding agreement says, when the entity goes into bankruptcy,
2:42
Speaker 2: the new liability company, the new asset company, guarantees to
2:47
Speaker 2: make available the value of the assets that were available
2:50
Speaker 2: before the division. And by doing that, you're saying, look,
2:54
Speaker 2: we're actually making all the money available to the claimants
2:58
Speaker 2: for whatever liability ends up the end of the day,
3:01
Speaker 2: but we are separating the entity so that the bankruptcy
3:04
Speaker 2: only involves those liabilities. And the idea behind this is
3:09
Speaker 2: to streamline the bankruptcy. Now they said this kind of
3:12
Speaker 2: maejoritavely became known as the Texas two step. Where did
3:15
Speaker 2: that come from? Well, the statute under which you divide
3:17
Speaker 2: the company in the first step is a Texas divisional
3:20
Speaker 2: merger statute, and there have been a few of companies
3:22
Speaker 2: who had done this previously, where they divided under the
3:25
Speaker 2: Texas statute. Then they did step two. They filed in
3:28
Speaker 2: North Carolina, a western district of North Carolina, and those
3:32
Speaker 2: are still pending. Those cases. So Johnson and Johnson really
3:36
Speaker 2: Johnson and Johnson Consumer Products. There is a consumer ink
3:39
Speaker 2: JJCI was called that company does the divisional merger creates
3:44
Speaker 2: the new JJCI and the LTL LTL files in the
3:49
Speaker 2: Western District of North Carolina. There's a funding agreement that
3:53
Speaker 2: says all of the assets that were available before the
3:57
Speaker 2: division are still available. The value of those are available
4:00
Speaker 2: guaranteed for whatever liabilities end up, and in case those
4:03
Speaker 2: assets lose value, the parent company J and J guarantees
4:08
Speaker 2: to make good on any change in value. That was
4:10
Speaker 2: bankruptcy number one. Now that very quickly gets transferred from
4:15
Speaker 2: the Western Dustry of North Carolina to the District of
4:18
Speaker 2: New Jersey. There's a motion to dismiss in that case.
4:22
Speaker 2: The bankruptcy court denies the motion to dismiss, says this
4:25
Speaker 2: is a good use of bankruptcy. Bankruptcy is a tool
4:29
Speaker 2: to solve collective action problems. You've got tens of thousands
4:32
Speaker 2: of claims against this stutter. There's more coming in the future.
4:37
Speaker 2: The only way to get a global settlement is through
4:40
Speaker 2: a bankruptcy process. This is what bankruptcy is intended for.
4:44
Speaker 2: That goes on appeal to the Third Circuit. The Third
4:47
Speaker 2: Circuit says, no, you should have dismissed the case. Nothing
4:53
Speaker 2: to do with the Texas two step other than the
4:56
Speaker 2: funding agreement provided value, and the Third Circuit says, there's
5:00
Speaker 2: too much money available here for you to claim that
5:03
Speaker 2: you need to be in bankruptcy. You're too solvent, you're
5:06
Speaker 2: not in immediate financial distress. There's an irony in that
5:11
Speaker 2: is they said it was a bad faith filing or
5:13
Speaker 2: not in good faith filing because the debtor provided too
5:17
Speaker 2: much value for the creditors, which is normally the opposite
5:20
Speaker 2: of what you think of when you're able, like what's
5:21
Speaker 2: a bad faith debt are doing? They protected the setup
5:24
Speaker 2: so that there was enough money to cover the claims,
5:27
Speaker 2: and the division didn't change the amount of assets available.
5:31
Speaker 2: Because of that, the Third Circuit said, you're not close
5:35
Speaker 2: enough to financial distress. So that was an attempt one
5:38
Speaker 2: and so that case gets dismissed. A couple hours after
5:40
Speaker 2: the dismissal becomes effective, you have attempt to.
5:44
Speaker 1: So J and J filed the second time in New Jersey,
5:48
Speaker 1: which is the jurisdiction of the third Circuit.
5:51
Speaker 2: So what they do following kind of the logic of
5:54
Speaker 2: the opinion from that third circuit opinion is they reduced
5:58
Speaker 2: the amount of money available, but they maintain enough so
6:01
Speaker 2: that we're still a solvent entity, so that we're not
6:03
Speaker 2: going to underpay creditors. Is the way that they the
6:06
Speaker 2: second letter framed it, and they filed bankruptcy again, and
6:09
Speaker 2: this time in the District of New Jersey. This time,
6:12
Speaker 2: the bankruptcy judge says, well, I'm looking at the opinion
6:14
Speaker 2: before I'm looking at what you did. There's still enough
6:18
Speaker 2: money available that you're not close enough to financial distresses.
6:22
Speaker 2: I understand the opinion from the Third Circuit, So I'm
6:25
Speaker 2: going to have to dismiss this case that goes on
6:28
Speaker 2: appeal to the Third Circuit. The Third Circuit says, that's right, affirms,
6:32
Speaker 2: you know, essentially reiterating its opinion in the first case
6:36
Speaker 2: and saying that the bankruptcy coredit had applied it correctly
6:39
Speaker 2: in the second case. All right, So now we're on
6:43
Speaker 2: round three. So in the third round Johnson and Johnson's announced,
6:49
Speaker 2: I think back in May or earlier in the summer,
6:52
Speaker 2: rather than file bankruptcy and then see what happens, we're
6:55
Speaker 2: going to get the vote. First, we're going to go
6:58
Speaker 2: out to all the claimants and try to build a settlement. Now,
7:02
Speaker 2: the goal of the first to bankruptcies was to be
7:03
Speaker 2: in bankruptcy and then build a settlement that creates a
7:06
Speaker 2: fund that allows claimants both past and future to come
7:11
Speaker 2: and collect against that fund, and the company to continue
7:14
Speaker 2: operating separate from the fund. This time around, they're like, well,
7:17
Speaker 2: let's get everyone on board on the fund first, So
7:19
Speaker 2: they do what it's called a prepackaged bankruptcy. So we're
7:22
Speaker 2: going to get a vote of all the potential claimants
7:25
Speaker 2: and we've got to get a supermajority to get a
7:27
Speaker 2: settlement through. That was true in the first two cases,
7:29
Speaker 2: but we hadn't had the vote yet. This time, we're
7:32
Speaker 2: going to do the vote. We're not stopping any of
7:34
Speaker 2: the litigation while we're having the vote, because we're not
7:36
Speaker 2: going to file unless we get to the point where
7:38
Speaker 2: we have the vote in place. Now. During that time,
7:42
Speaker 2: they apparently determined that they were going to use bankruptcy
7:45
Speaker 2: to settle the ovarian cancer tout claims, but not them
7:49
Speaker 2: as othelioma claim So they separate those off and they
7:52
Speaker 2: have a vote among the ovarian cancer claimants over the summer,
7:56
Speaker 2: and then at the end of that they now say
7:59
Speaker 2: they have a rough eighty three percent of the potential
8:02
Speaker 2: claimants voting for a settlement, and the settlement was kind
8:06
Speaker 2: of laid out here. If you vote for this, here's
8:08
Speaker 2: the plan we're going to put before the bankruptcy court.
8:11
Speaker 2: Webb a vote when we go in. Are you on
8:14
Speaker 2: board with this? Because if you are, this is prepackaged
8:17
Speaker 2: in the sense of we know who's voted. You're the
8:19
Speaker 2: only class of claimants because of the simplification and splitting off.
8:24
Speaker 2: So what they did then was another divisional merger where
8:27
Speaker 2: they separated the company into three entities. So there was
8:30
Speaker 2: the holding company that existed. That company kind of swallows
8:34
Speaker 2: up all the other entities that have been divided out
8:37
Speaker 2: and then divided into three. The going forward company, the
8:41
Speaker 2: mesothelioma company, which is going to settle outside of bankruptcy,
8:44
Speaker 2: and the company that's kind of filed for bankruptcy, which
8:47
Speaker 2: is the taut claimants. And that's the case that filed
8:50
Speaker 2: last Friday, right, So this is the new entity filing,
8:53
Speaker 2: and they file in Texas this time with the vote
8:56
Speaker 2: in place, the plan drafted in line, hoping to get
9:00
Speaker 2: the kind of approval through the Texas Bankruptcy Court.
9:03
Speaker 1: So the opponents of this, some of the lawyers representing
9:07
Speaker 1: claimants say that JJ is trying to game the system
9:11
Speaker 1: because it's trying to get bankruptcy protections that are meant
9:15
Speaker 1: for companies that can afford to pay their debts. Do
9:18
Speaker 1: you agree with that, I mean no.
9:20
Speaker 2: So this has been the debate from the beginning, with
9:23
Speaker 2: the question of whether or not bankruptcy is the right
9:27
Speaker 2: place for mass tortue claims to be resolved, whether or
9:30
Speaker 2: not the Texas two step is a positive or negative. Now,
9:34
Speaker 2: one thing to note is that bankruptcy in the US
9:37
Speaker 2: Chapter eleven, I should say corporate bankruptcy has always been
9:40
Speaker 2: a tool for resolving collective action problems among creditors where
9:45
Speaker 2: their actions could destroy value. And the way that they
9:48
Speaker 2: can destroy value is you ultimately get a race to
9:51
Speaker 2: the courthouse. And so if you think about any of
9:54
Speaker 2: these mass torque cases, you've got tens of thousands of claimants.
9:58
Speaker 2: Some of them are going to go and get zero recovery,
10:01
Speaker 2: some of them are going to get a billion dollar recovery.
10:03
Speaker 2: And there was one large judgment for a group of
10:05
Speaker 2: plaintiffs that was in the billions. And what happens is
10:08
Speaker 2: that we don't know when these claims, particularly the asbestos
10:12
Speaker 2: will end because asbestos shows up years later, and so
10:16
Speaker 2: you have a decade long future of litigation that's costing.
10:20
Speaker 2: You know, at one point, I think they said it
10:21
Speaker 2: was costing a billion dollars a year to litigate these cases,
10:24
Speaker 2: and that's destroying value. Now, the third circuitance first opinion said, look,
10:29
Speaker 2: you're Johnson and Johnson. There's enough money for this to
10:32
Speaker 2: go on for quite some time without it causing any problems.
10:35
Speaker 2: Now that's true if these claims are actually valid. That
10:40
Speaker 2: won't always be true. Right, If you have one hundred
10:42
Speaker 2: thousand claims that are worth millions of dollars each, that'll
10:45
Speaker 2: bankrupt any company in the world. Now, the irony was
10:48
Speaker 2: that people say, well, yeah, but they're not really valid claims,
10:50
Speaker 2: so they're not in that much financial trouble, which is
10:53
Speaker 2: a weird argument. I mean, like everyone's arguing these from
10:55
Speaker 2: like odd positions. The plaintiffs are arguing, yeah, but most
10:58
Speaker 2: of the claims aren't any good, so you don't need
11:00
Speaker 2: to worry about it, which is such an odd argument.
11:03
Speaker 2: And what's really going on is stakeholders are losing value
11:07
Speaker 2: in the current world because there's this endless litigation. If
11:12
Speaker 2: money runs out, it'll be the case that the first
11:15
Speaker 2: to come win and the later to come lose. And
11:19
Speaker 2: bankruptcy has the only mechanism in our legal system that
11:23
Speaker 2: can get parties to a global resolution that says, here's
11:27
Speaker 2: the money available, let's stop destroying value. And that benefits
11:32
Speaker 2: the debtor, but it also benefits the creditors because it
11:35
Speaker 2: gets the money put aside and available sooner rather than later.
11:39
Speaker 2: So if you're in line, if you're one of the
11:43
Speaker 2: current eighty thousand claimants or so, when is your trial
11:46
Speaker 2: going to happen? When is yourself am not going to
11:48
Speaker 2: happen outside of bankruptcy. And if you're someone who doesn't
11:51
Speaker 2: even know that they're sick yet, you know, the timing
11:53
Speaker 2: of when the value gets put aside for you is
11:57
Speaker 2: years or decades away. So bankruptcy, the way I look
12:00
Speaker 2: at it, is intended to solve those kind of problems.
12:03
Speaker 1: Right.
12:03
Speaker 2: It says, Look, when you have a pool of assets
12:06
Speaker 2: and you have a group of creditors who collectively want
12:10
Speaker 2: the same thing, but individually have incentives to kind of
12:14
Speaker 2: try to cut in line, get ahead of each other
12:16
Speaker 2: and get the big payouts. We want to solve that problem.
12:19
Speaker 2: That's what bankruptcy is supposed to do. The critics as
12:21
Speaker 2: you say, no, no, no, it's only supposed to be
12:23
Speaker 2: when you're running out of money. And if you look
12:26
Speaker 2: around the world, there are jurisdictions that have said you
12:29
Speaker 2: can't file for bankruptcy until you're totally insolvent. And what
12:33
Speaker 2: you see is that companies fail because they don't file
12:37
Speaker 2: soon enough. And there's been a trend around the world
12:39
Speaker 2: of things called pre insolvency proceedings, which our countries realizing that, wait,
12:44
Speaker 2: it's too late if we start helping them when they're insolvent.
12:48
Speaker 2: We should do what the US does and help them
12:50
Speaker 2: before they're insolvent. But we can't do it because our
12:52
Speaker 2: system requires them to be insolvent. So let's create a
12:54
Speaker 2: whole other system, a pre insolvency system. If you look
12:58
Speaker 2: at Chapter eleven, it's both says you can file early,
13:01
Speaker 2: you can file before you're insolvent, and file when you're insolvent,
13:04
Speaker 2: and you want to encourage you to use it as
13:07
Speaker 2: soon as you've become aware of the potential to preserve
13:09
Speaker 2: value through coordination. Now, it is true if there was
13:12
Speaker 2: a debt that like had zero possibility of ever having
13:17
Speaker 2: financial problems. Bankruptcy is not made for that debtor. And
13:21
Speaker 2: that was what the first bankruptcy opinion in New Jersey
13:24
Speaker 2: said it. So listen, if you do the math, there's
13:26
Speaker 2: a possibility here, a real one. But this is going
13:29
Speaker 2: to eat up a lot of value for people. Now,
13:32
Speaker 2: the Third Circuit says it is not immediate enough. They
13:34
Speaker 2: didn't define that, but they said it has to be,
13:38
Speaker 2: you know, somehow, like imminent or on the horizon. And
13:43
Speaker 2: my view, and I think the view of a lot
13:45
Speaker 2: of lawyers and some mac bankruptcy scholars, is that just
13:48
Speaker 2: makes people wait too long. And an engender's litigation of
13:52
Speaker 2: am I close enough? Am I close enough? And you
13:55
Speaker 2: have weird cases where American Airlines and Hurts, for example,
13:58
Speaker 2: everyone thought they were insolvent when they files for bankruptcy,
14:01
Speaker 2: but at the end of their bankruptcies they were solvent.
14:03
Speaker 2: Does that mean that you need to undo everything because
14:05
Speaker 2: they shouldn't have been there. You don't want to be
14:08
Speaker 2: litigating that every day, like do you have enough money?
14:10
Speaker 2: Do not have enough money? And that's why mighty is
14:12
Speaker 2: the Third Circuit rule, which is the only court that
14:14
Speaker 2: has that immediate financial distress rule, is too onerous on
14:18
Speaker 2: debtors and discourages filing the colorful metaphor people uses. It
14:23
Speaker 2: tells them to call the fire department after the house
14:25
Speaker 2: burned down, Right, you want to do it earlier. You
14:26
Speaker 2: want to do it when there's some potential danger or
14:29
Speaker 2: value destruction that you're trying to stop.
14:32
Speaker 1: Coming up Next, will the judge transfer the case to
14:35
Speaker 1: New Jersey? You're listening to Bloomberg, Johnson and Johnson's third
14:41
Speaker 1: bankruptcy filing to resolve tens of thousands of lawsuits alleging
14:46
Speaker 1: its talk based baby powder cost Cancer is facing familiar
14:51
Speaker 1: challenges by opposing lawyers, including its new choice of venue Texas.
14:57
Speaker 1: I've been talking to Anthony Casey, a bit business in
15:00
Speaker 1: corporate bankruptcy professor at the University of Chicago Law School.
15:05
Speaker 1: So why did Jay and Jay pick Houston for the
15:08
Speaker 1: third bankruptcy filing.
15:10
Speaker 2: I don't know why exactly, a big Houston. There's a
15:13
Speaker 2: couple of things going on. One is, when they filed
15:16
Speaker 2: in North Carolina, the court said, well, you created this
15:19
Speaker 2: entity in Texas and the next day you filed in
15:21
Speaker 2: North Carolina. So we're going to venue chance you to
15:23
Speaker 2: New Jersey. So to do this structure where you simplify
15:28
Speaker 2: and say, look, we're only putting into bankruptcy the claimants
15:32
Speaker 2: whose claims were trying to resolve and the ones who
15:36
Speaker 2: overwhelmingly want to resolve it, right, they voted they want
15:39
Speaker 2: to resolve this. In order to do that, you need
15:41
Speaker 2: to do this divisional merger, which requires you to be
15:44
Speaker 2: a Texas entity when you do it. So one reason
15:46
Speaker 2: they might have filed in Texas. They're like, look, we're
15:49
Speaker 2: not going to venue shop this time. Everyone criticized this
15:51
Speaker 2: for it, So we'll do a Texas divisional merger and
15:55
Speaker 2: then we'll file in Texas. Right, So that's one argument
15:59
Speaker 2: for why to file time. You know, I don't think
16:02
Speaker 2: it's lost on people that if they have filed again
16:06
Speaker 2: in New Jersey, right, they would have faced the same standard.
16:09
Speaker 2: And so New Jersey, because of the third Circuit rule,
16:13
Speaker 2: puts in place a block that says you can't restructure
16:16
Speaker 2: this until it's too late. And so I think those
16:19
Speaker 2: two things together made Texas the obvious venue to file, right.
16:24
Speaker 2: So the third circuit, which would be Pennsylvania, New Jersey
16:27
Speaker 2: and Delaware, right, that's off the table because you'd have
16:31
Speaker 2: to make the company so close to insolvency, you know, dangerously,
16:36
Speaker 2: so that you might be taking something away from the claimants. Right,
16:39
Speaker 2: this entity is just money and a settlement for the victims.
16:45
Speaker 2: And so if the requirement in the Third Circuit is
16:47
Speaker 2: you need to make that entity insolvent, the requirement is
16:51
Speaker 2: you need to make sure you're not paying the claimants
16:53
Speaker 2: in full. Right, So you don't want to do that,
16:55
Speaker 2: and if you go that far, you run into a
16:58
Speaker 2: fraudent transfer problem. Really, if you want to resolve this,
17:01
Speaker 2: you can't file in the third Circuit. Now, no other
17:04
Speaker 2: circuit in the country has that rule, so that opens
17:07
Speaker 2: up the possibility of other places. And again like when
17:11
Speaker 2: they filed in North Carolina the first time, they got
17:13
Speaker 2: venue transferred. But filing in Texas, well, your Texas entities
17:16
Speaker 2: you have to be Texas entities because that's what was
17:18
Speaker 2: required for you to do this structure. So yeah, inferring here, Okay,
17:23
Speaker 2: well we'll just file in Texas, which also is a
17:27
Speaker 2: very experienced, known jurisdiction. This dealt with a lot of
17:30
Speaker 2: large cases. You're not going to overload the court in
17:33
Speaker 2: that way, which some people thought maybe that was happening
17:35
Speaker 2: in North Carolina. So those would be. I think the
17:38
Speaker 2: reasons they're in Texas. But that's why I don't think
17:41
Speaker 2: there's any venue transfer coming.
17:43
Speaker 1: And that was my next question, because the attorneys for
17:46
Speaker 1: the tel climates, who oppose the latest settlement proposal, are
17:52
Speaker 1: trying to get it transferred out of Texas, and the
17:55
Speaker 1: Justice Department's Bankruptcy Monitor, the US Trustees Office filed in
18:00
Speaker 1: New Jersey to get it transferred to that.
18:03
Speaker 2: State, and that already failed, right, so the New Jersey motion,
18:07
Speaker 2: I didn't quite understand why you're trying to file it there.
18:11
Speaker 2: There's lots of legal problems with trying to get the
18:14
Speaker 2: New Jersey court to take the case from Texas. Partly,
18:20
Speaker 2: you know, there is a bankruptcy rule that says if
18:23
Speaker 2: a debtor with a pending case files somewhere else, the
18:27
Speaker 2: court with the pending petition can bring it in. But
18:30
Speaker 2: the New Jersey court dismissed the case. Right, there's no
18:32
Speaker 2: petition pending there, so it's not clear that that court
18:36
Speaker 2: would even have the power. There's all kinds of weird
18:39
Speaker 2: questions that arise if the New Jersey court tries to
18:42
Speaker 2: take it. So one, it's not clear the court could
18:44
Speaker 2: take it, but two, the Court has the discretion not to,
18:49
Speaker 2: and I can't imagine would want to open up all
18:52
Speaker 2: those questions, which I think is why it already denied
18:55
Speaker 2: that motion yesterday afternoon, saying you know, for now I'm
18:58
Speaker 2: not taking the case. I think it's a without prejudice
19:00
Speaker 2: and they might try it again. Go okay, So then
19:03
Speaker 2: the right place to bring a venue transfer motion is
19:05
Speaker 2: in the court where the case that you want transferred
19:08
Speaker 2: is pending, Like that's what the statute says. That would
19:10
Speaker 2: be the Texas Court. But what's the argument for transferring it?
19:14
Speaker 2: So the argument for the New Jersey Court to take it,
19:17
Speaker 2: generally that rule in bankruptcy is, in order to make
19:21
Speaker 2: administration easier and more coherent, we should bring the cases together.
19:26
Speaker 2: The New Jersey case has been dismissed, so there's nothing
19:28
Speaker 2: to administratively bring it together with. So there's not that argument.
19:33
Speaker 2: So then you know, if someone really egregiously manufactures venue,
19:38
Speaker 2: courts can transfer venue. Now this would be the court
19:42
Speaker 2: where you file to the Texas Court. But go back
19:44
Speaker 2: to well why is their venue in Texas? Well, it's
19:48
Speaker 2: a Texas entity. Why is it a Texas entity? Because
19:51
Speaker 2: the only way to structure this thing this way was
19:53
Speaker 2: to make it a Texas entity, and so Texas actually
19:56
Speaker 2: is the first and obvious place to file for a
20:00
Speaker 2: company that has used the Texas Statute to structure itself
20:05
Speaker 2: in this way where we simplify the bankruptcy and think
20:08
Speaker 2: about it the simplification, the mesothelioma claimants aren't voting for
20:13
Speaker 2: a bankruptcy settlement. The ovarian claimants are, and so the
20:19
Speaker 2: value of the separation, just to use an example, is
20:22
Speaker 2: we're going to put the ovarian claimants into the bankruptcy process,
20:25
Speaker 2: which overwhelming they voted in favor of, and we're not
20:28
Speaker 2: going to put the mesotheliomal claimants. We're also not going
20:31
Speaker 2: to put all the other creditors of the operations of
20:34
Speaker 2: the business. We're not going to have them subject to
20:37
Speaker 2: the bankruptcy and we're not going to have them able
20:39
Speaker 2: to step in and make objections. So we're really simplifying
20:43
Speaker 2: so that the only way that a plan gets confirmed
20:46
Speaker 2: in the Texas Bankruptcy is if there is a valid
20:49
Speaker 2: vote of a supermajority of these claimants. No one else
20:52
Speaker 2: can affect that. It's really just about whether or not
20:56
Speaker 2: they want this settlement, and that's the simplification that the
21:00
Speaker 2: Texas two step allows, and if to get there you
21:04
Speaker 2: have to become a Texas entity. That makes Texas in
21:07
Speaker 2: my mind, the obvious venue. Now, some people are going
21:10
Speaker 2: to say, some critics are going to say, but you
21:11
Speaker 2: should never have been able to do the divisional merger
21:14
Speaker 2: in the first place. The only problem with that argument
21:17
Speaker 2: is no court has ever said that. And importantly, the
21:20
Speaker 2: Third Circuit when they dismissed the case, it was not
21:23
Speaker 2: because of the structure. It was because too much money
21:26
Speaker 2: was available. That was the only reason. And if you
21:28
Speaker 2: read it, the opinion applies to any debtor who isn't
21:32
Speaker 2: close enough to financial distress, regardless of how they're structured.
21:36
Speaker 2: And so as I read the opinion, it would have
21:38
Speaker 2: applied to old JJCI, the old Johnston, Johnson and Consumer Company,
21:43
Speaker 2: had it filed without ever dividing. The Third Circuit rationale
21:47
Speaker 2: suggests it would have dismissed that case has nothing to
21:49
Speaker 2: do with the Texas divisional merger. And so at that
21:52
Speaker 2: point you're like, well, state law says you can do this.
21:54
Speaker 2: They did this under state law, and now they're Texas entities.
21:57
Speaker 2: The first time. They then moved to North Carolina and
22:01
Speaker 2: got a venue transfer. So this time they didn't do that.
22:03
Speaker 2: They stuck with Texas and they file in Texas. I
22:06
Speaker 2: don't see how what the argument to the court is
22:10
Speaker 2: for venue transfer. Where should this case be. It should
22:14
Speaker 2: be where the parent company is. I guess that would
22:17
Speaker 2: be the argument for sending it back to New Jersey.
22:21
Speaker 2: But as long as we're allowing the divisional merger, it's
22:25
Speaker 2: not clear why that has any benefit to anybody, right,
22:27
Speaker 2: It doesn't make the case smoother, it doesn't make the
22:29
Speaker 2: case easier. There's nothing to consolidate it with. So the
22:32
Speaker 2: only reason I would see to transfer it is if
22:35
Speaker 2: you went as far as saying you can't do the
22:37
Speaker 2: Texas divisional merger, which would be a shocking thing for
22:41
Speaker 2: a federal bankruptcy court to say that a state law
22:43
Speaker 2: transaction is just out of bound.
22:46
Speaker 1: So then you think that there is almost no way
22:48
Speaker 1: that the Houston judge will transfer venue to New Jersey.
22:53
Speaker 2: Correct. Yeah, I didn't think there was any chance that the
22:56
Speaker 2: New Jersey judge would take it, and we saw that,
22:59
Speaker 2: and I think there's no way that'll change. And I
23:02
Speaker 2: think there's very little chance that the Texas judge will
23:06
Speaker 2: send it somewhere else, because I just don't see the
23:09
Speaker 2: You know, if you look at the statute, read the
23:11
Speaker 2: language of the statue, where's your principal's business, where's your headquarters,
23:14
Speaker 2: where you incorporated? Those are the things you look for.
23:16
Speaker 2: And here we have that. We have a business that
23:20
Speaker 2: is a Texas entity. And so this isn't a mailbox case,
23:23
Speaker 2: This isn't anything, and it wasn't on the ev either, right,
23:26
Speaker 2: So these transactions were announced months ago, right, and voted
23:29
Speaker 2: on by the majority of creditors and claimants. So all
23:32
Speaker 2: the formal things are there. And then if you get
23:35
Speaker 2: the discretion, what's the discretionary reason to send the case
23:38
Speaker 2: somewhere else when you've got a supermajority of the claimants
23:43
Speaker 2: in favor of it, when you've got the venue. The
23:46
Speaker 2: move to Texas was very open. The reasons for it
23:50
Speaker 2: are very clear. I'm just trying to think, like, what's
23:53
Speaker 2: the hook for sending this case somewhere else.
23:56
Speaker 1: I can see that the lawyers for the cancer victim
24:00
Speaker 1: who want to try their cases, why they want it moved,
24:03
Speaker 1: But why does the Justice Department want it moved?
24:08
Speaker 2: So I think the Trustees Office has taken a negative
24:13
Speaker 2: view of a lot of the mass tort bankruptcy structures.
24:20
Speaker 2: Maybe there is a view that, like you said, that
24:23
Speaker 2: you know, you need to truly be insolvent. You know,
24:25
Speaker 2: this is partly why they appealed to the Supreme Court
24:28
Speaker 2: in the Purdue case. You know, they had a policy
24:31
Speaker 2: view that you're not supposed to use third party releases
24:34
Speaker 2: in master bankruptcy cases. I'm a little surprised in their
24:37
Speaker 2: motion in New Jersey because the Office tends to be
24:40
Speaker 2: kind of textualless and formalists, and if you look at
24:43
Speaker 2: the rule, I don't see how the New Jersey Court
24:46
Speaker 2: had the power, and so they were asking it to
24:48
Speaker 2: do something I think that would be not formalist beyond
24:52
Speaker 2: the power of the statute, which is not the way
24:54
Speaker 2: I normally think of their positions. That said, I think
24:57
Speaker 2: that they view themselves as the watchdog of bankruptcy process,
24:59
Speaker 2: which I think is a good thing. But they have
25:02
Speaker 2: a view that what large companies are doing to reach
25:05
Speaker 2: mass towards settlements and bankruptcy is problematic. I think that's
25:09
Speaker 2: an incorrect view, but I think that's what's driving this.
25:13
Speaker 2: As you say, it's not their views are put out
25:16
Speaker 2: there even when they conflict with the majority views of
25:19
Speaker 2: the claimants. And that was true in Purdue for sure,
25:22
Speaker 2: and it seems to be true here as well. They're
25:25
Speaker 2: just like, but this is the way it should be done,
25:27
Speaker 2: and that's why they want it, I guess in New Jersey.
25:30
Speaker 2: I mean the weird thing about wanting it in New Jersey.
25:32
Speaker 2: If your a claimant, why is New Jersey any different?
25:35
Speaker 2: So the claimants are everywhere, so it's not clear, like
25:37
Speaker 2: why New Jersey is better for a claimant than anywhere else. Now,
25:41
Speaker 2: maybe their view is you've already been dismissed in New Jersey,
25:44
Speaker 2: you should stay there. You shouldn't be able to try
25:47
Speaker 2: to change things. And that view, if you go down
25:51
Speaker 2: the road, gets really problematic because how long would you
25:54
Speaker 2: be bound by the company's circumstances change over time? So
25:58
Speaker 2: how long do they think they're bound the fact that
26:00
Speaker 2: they had a ruling in one court at one time
26:03
Speaker 2: and then a year later company files again even after
26:07
Speaker 2: there was dismissed, Like, are they bound into infinity to
26:10
Speaker 2: never file anywhere ever? Again? It can't be right. So
26:13
Speaker 2: I'm not totally sure the theory that the Trustee's office has,
26:16
Speaker 2: but it seems to be that they don't like what's
26:19
Speaker 2: going on in a kind of a vague sense, and they'll.
26:22
Speaker 1: Be basically nothing going on until October eleventh. Judge Lopez
26:26
Speaker 1: ruled that no talk litigation can proceed against Jay and
26:30
Speaker 1: Jay until that date while he considers whether the bankruptcy
26:34
Speaker 1: case should proceed in the Houston court or not, so
26:38
Speaker 1: he could find out fairly quickly whether the bankruptcy will
26:41
Speaker 1: proceed in Texas or not. Thanks so much for being
26:44
Speaker 1: on the show, Tony. That's Professor Anthony Casey of the
26:47
Speaker 1: University of Chicago Law School coming up next on The
26:50
Speaker 1: Bloomberg Lawn Show. With AI Supercharging the Threat of Election Disinformation,
26:56
Speaker 1: California's governor has signed three bills to crack down on
27:00
Speaker 1: the use of AI to create false images or videos
27:04
Speaker 1: in political ads ahead of November. I'm June Grosso and
27:08
Speaker 1: you're listening to Bloomberg with Artificial Intelligence Supercharging the Threat
27:13
Speaker 1: of Election disinformation. Lawmakers across the country have raised to
27:18
Speaker 1: address the issue over concerns the manipulated materials could erode
27:23
Speaker 1: the public's trust in what they see and hear. California
27:27
Speaker 1: has been on the cutting edge of regulating AI, and
27:31
Speaker 1: Governor Gavin Newsom signed three bills last week to crack
27:35
Speaker 1: down on the use of artificial intelligence to create false
27:38
Speaker 1: images or videos in political ads ahead of the election.
27:42
Speaker 1: Joining me is Joanna rosen Forster, a partner at Crowell.
27:46
Speaker 1: So Joanna start by telling us about the rising concerns
27:50
Speaker 1: about AI and deep fakes in particular.
27:54
Speaker 3: Yeah, I think that there has been a rise at
27:56
Speaker 3: the state and at the federal level of concerns learn
28:00
Speaker 3: with respect to what we're calling deep fakes, which is
28:04
Speaker 3: passing off somebody's image or voice as authentic even though
28:08
Speaker 3: it's been manipulated or as artificial and using AI, or
28:13
Speaker 3: not even using AI, just using photoshops to do it,
28:16
Speaker 3: and the concern being that, on one hand, is it
28:19
Speaker 3: deceptive to consumers? Is it deceptive to voters or their
28:26
Speaker 3: votes being manipulated or procured through false means or pretenses,
28:31
Speaker 3: And to a degree also with respect to actors and
28:34
Speaker 3: personalities and celebrities their likeness. I think the big issue
28:39
Speaker 3: that we all are thinking about on this is the
28:42
Speaker 3: Taylor Swift deep fake that was a few weeks ago.
28:45
Speaker 3: So I think there's been a big concern about the
28:48
Speaker 3: use of AI to manipulate images in elections, in particular
28:53
Speaker 3: because of the concern that it could falsely procure votes
28:57
Speaker 3: or put undue influence on voters. And the concern has
29:01
Speaker 3: also risen with respect to AI tools because the AI
29:04
Speaker 3: tools make it so easy to make the deep fakes,
29:08
Speaker 3: and to make the deep fakes so convincing such that
29:12
Speaker 3: it's almost imperceptible to the naked eye or indiscernible to
29:16
Speaker 3: humans that it is indeed a deep fake. So Congress
29:20
Speaker 3: has been considering this for a while. Congress, for federal
29:24
Speaker 3: or for worse, has been unable really to put together
29:27
Speaker 3: any type of real truth federal statue or federal mandate
29:30
Speaker 3: on this, leading it to the states to start to
29:33
Speaker 3: regulate on this. I think when I last looked at it,
29:36
Speaker 3: over forty states have now in some stage of legislation,
29:41
Speaker 3: whether it be introduced to enacted, or addressing this. And
29:46
Speaker 3: last week Governor Newsom in California passed into law a
29:50
Speaker 3: set of landmark with being called first in the nation
29:54
Speaker 3: type laws that really address not only celebrity likeness control
30:00
Speaker 3: for celebrities in deep fake, which is with respect to elections,
30:04
Speaker 3: or not just in general. Heart blaunched the use of
30:07
Speaker 3: a personalities image or likeness in a deep fake. And
30:11
Speaker 3: then separately, a series of bills that were passed in
30:14
Speaker 3: California he signed into law that specifically addressed the threat
30:19
Speaker 3: of using manipulated or artificial images and sound recordings in elections.
30:24
Speaker 3: And it's been hailed as an effort to really try
30:29
Speaker 3: to safeguard the election process, make it safer, more secure,
30:33
Speaker 3: and be more fair and equitable. And those laws went
30:36
Speaker 3: into effect immediately, so they are in effect right now.
30:40
Speaker 3: I think the concern that you see from industry in
30:44
Speaker 3: a lot of ways is that one of the laws
30:47
Speaker 3: AB two six fifty five is directed almost entirely at
30:52
Speaker 3: social media companies and puts a lot of obligation in
30:56
Speaker 3: burden on the shoulders of social media companies operating in
30:59
Speaker 3: Californi to identify, route out, address, takedown, deep fakes, or
31:06
Speaker 3: things that they think might be deep fakes. And it's
31:10
Speaker 3: caused quite a scramble for social media companies as a results.
31:14
Speaker 1: How would these laws be enforced?
31:16
Speaker 3: Yeah, it's a great question. So there's three different sets
31:19
Speaker 3: of laws with respect to the electoral process. So two
31:23
Speaker 3: out of the three can be enforced by average citizens,
31:27
Speaker 3: can be enforced by the elected officials themselves or by
31:31
Speaker 3: the attorney general. And what they do is they create
31:35
Speaker 3: a private cause of action and or the ability for
31:39
Speaker 3: the attorney general or for a state enforcer to file
31:43
Speaker 3: an action in court that takes precedence, so they get
31:46
Speaker 3: to the top of the docket for injunctive relief or
31:49
Speaker 3: other remedies. So there's not really much of a financial stick.
31:54
Speaker 3: You know, in California, we have the Fair Political Practices Commission,
32:00
Speaker 3: and for decades now it has had the power to
32:05
Speaker 3: enforce violations in the electoral process for pecuniary violations right
32:10
Speaker 3: for five thousand dollars per violation. These other laws really
32:13
Speaker 3: more give power to individuals, to the elected official itself
32:19
Speaker 3: or the candidate, and to enforcers of the law in
32:23
Speaker 3: California to bring civil actions and to seek injunctive relief.
32:27
Speaker 1: Without these kinds of laws, how difficult is it to
32:31
Speaker 1: get social media companies to take down content when someone
32:37
Speaker 1: says that's a deep fake.
32:39
Speaker 3: Yeah, So that's I think the real question. And I
32:41
Speaker 3: think you're going to get different answers depending on who
32:44
Speaker 3: you're talking to. And I think if you talk to
32:46
Speaker 3: legislators and Sacramento, the reason why they passed twenty six
32:50
Speaker 3: fifty five. What their argument is, it's almost impossible to
32:55
Speaker 3: do it. I think if you were to talk to
32:57
Speaker 3: social media companies or talk to those within the ambit
33:01
Speaker 3: of the definition of social media, which in California could
33:05
Speaker 3: also embrace potentially certain e commerce companies and others, it
33:10
Speaker 3: was really defined to be companies that have outward facing
33:14
Speaker 3: websites or applications to consumers or end users, and have
33:18
Speaker 3: at least a million users in California in the preceding
33:22
Speaker 3: twelve months. So we're not talking only about YouTube and
33:26
Speaker 3: Google and x. It's a much broader sweep. So I
33:30
Speaker 3: think that if you talk to the social media companies,
33:32
Speaker 3: they would say, we're doing this already with respect to
33:36
Speaker 3: the tools that we have and with the powers that
33:38
Speaker 3: we have and the contractual obligations that we have under
33:42
Speaker 3: our terms and conditions. And that's really I think the
33:45
Speaker 3: crux of the issue is that the legislators are saying,
33:48
Speaker 3: you're not doing enough. The social media companies are saying,
33:52
Speaker 3: we're doing what we can when it violates our terms
33:54
Speaker 3: and conditions, our rules of play to being on our platform.
33:58
Speaker 3: And I think they would also say, you know, frankly,
34:01
Speaker 3: there's a limit to what we actually have to do,
34:04
Speaker 3: that this legislation abrogates our rights under the First Amendment.
34:10
Speaker 3: It is potentially preempted by the Communications Decency Acts section
34:14
Speaker 3: two thirty. So I think there's conflict there about what
34:18
Speaker 3: social media companies actually have to do and whether that
34:21
Speaker 3: stute can require them to do it.
34:23
Speaker 1: Also, and did the social media companies lobby against the bill?
34:27
Speaker 2: They did.
34:28
Speaker 3: You know, if you look at the legislative history and
34:30
Speaker 3: the letters that were submitted, you see a fair number
34:34
Speaker 3: of letters that were submitted by institutions like the First
34:38
Speaker 3: Amendment Coalition, which was arguing exactly what I said, that
34:43
Speaker 3: these laws abrogate social media companies First Amendment rights and
34:47
Speaker 3: us preempted by section two thirty. You had net Choice,
34:51
Speaker 3: which is a trade group that represents many social media
34:56
Speaker 3: companies and Internet players. They also lobbied and and wrote
35:00
Speaker 3: letters in and protests to the law. You know, in
35:04
Speaker 3: the amendment process, some of their concerns were addressed a
35:08
Speaker 3: little bit, and then an urgency measure that was also
35:11
Speaker 3: adopted and enacted with twenty six fifty five, which is
35:15
Speaker 3: AB twenty eight thirty nine, addressed some of the I
35:19
Speaker 3: would say some of the social media company's concerns. But
35:22
Speaker 3: the root issue here, you know, the first principle here
35:25
Speaker 3: that the social media companies are concerned about is hey,
35:29
Speaker 3: this is government intrusion. And the Supreme Court, in what
35:34
Speaker 3: you know, those of us who work in the space,
35:37
Speaker 3: considered landmark. On July first, issued a case called Moody
35:41
Speaker 3: versus Net Choice, and in that decision, a majority of
35:44
Speaker 3: the justices said that Texas and Florida laws essentially requiring
35:51
Speaker 3: social media companies to curate or not curate political speech
35:57
Speaker 3: implicated the First Amendment. And you had majority ruling, and
36:01
Speaker 3: then you had concurring justices essentially saying that social media
36:05
Speaker 3: companies and the way they present information to end users
36:09
Speaker 3: and their selection the feed are expressive compilations which are
36:14
Speaker 3: worthy of First Amendment protection. So you have this tension
36:19
Speaker 3: now between what legislators think might be right for people
36:25
Speaker 3: and what first principles of our of our country are
36:29
Speaker 3: with respect to First Amendment.
36:30
Speaker 1: Now there's a battle over SB ten forty seven, which
36:34
Speaker 1: is California's first of its kind AI safety bill, and
36:39
Speaker 1: there's a question about whether Governor Newsome will even sign it.
36:42
Speaker 1: He has until September thirtieth, to do that. Why is
36:46
Speaker 1: that bill so much more controversial than the ones he
36:48
Speaker 1: did sign.
36:49
Speaker 3: The bills that were passed were really more focused on
36:52
Speaker 3: the electoral process, and the AI bill is pretend not
36:58
Speaker 3: just potentially, but it's far more wide sweeping and would
37:01
Speaker 3: create disclosures or requirements with respect to the use of
37:05
Speaker 3: AI is in nearly everything and every aspect of a
37:10
Speaker 3: California citizen residents experience with AI. The three bills that
37:15
Speaker 3: were passed last week solely deal with the electoral process.
37:20
Speaker 3: So something a note about AB two six fifty five
37:23
Speaker 3: is it really is also time constraint, So this burden
37:27
Speaker 3: on social media companies and in general labeling or disclosing
37:31
Speaker 3: deep fakes or otherwise taking them down. For the most part,
37:35
Speaker 3: it's in relation to an election, So it's one hundred
37:38
Speaker 3: and twenty days before the election is when the obligation
37:41
Speaker 3: kicks in and runs in some instances, depending on the
37:46
Speaker 3: section of the statute, runs for sixty days after the election.
37:49
Speaker 3: So in an election year, when you've got a primary
37:52
Speaker 3: and a general, you know it may be in place
37:55
Speaker 3: for most of the year, but outside of the electoral
37:58
Speaker 3: process it has no effects.
38:00
Speaker 1: So someone has to sue to enforce these laws to
38:03
Speaker 1: get a deep fake in a political advertisement taken down.
38:07
Speaker 1: Let's say the election is in what less than six weeks?
38:12
Speaker 1: So how fast can that be done in California's courts.
38:16
Speaker 3: Yeah, so all three of the laws create precedence for
38:20
Speaker 3: these lawsuits, and in twenty six fifty five, the one
38:24
Speaker 3: that regulates social media companies, the cause of action can
38:27
Speaker 3: arise very quickly. So what you know, the general process
38:31
Speaker 3: is that the social media companies have to have some
38:35
Speaker 3: type of mechanism or repository or interfaith on their sites now,
38:40
Speaker 3: or some type of email address where a consumer, an
38:43
Speaker 3: end user, a citizen, even a candidate or a committee
38:47
Speaker 3: could say, hey, this image of you know, candidate X
38:51
Speaker 3: is a deep fake. You need to take it down.
38:53
Speaker 3: And the social media companies have thirty six hours it's
38:57
Speaker 3: not very long, you know, a day and a half
38:59
Speaker 3: to reply that and say we've taken it down or
39:02
Speaker 3: here's what we're going to do. In some instances they
39:05
Speaker 3: have seventy two hours. But that cause of action arises
39:08
Speaker 3: very quickly from the time that they are unnoticed, and
39:11
Speaker 3: then once that time period elapses, ostensibly the cause of
39:15
Speaker 3: action is complete if the action hasn't been taken or
39:18
Speaker 3: no action has been taken, and the claimant can run
39:22
Speaker 3: into court and their case pursuant to the statute gets priority,
39:26
Speaker 3: so they go to the front of the line. And
39:28
Speaker 3: so what I would envision, because it fors injunctive relief,
39:32
Speaker 3: is that you would see lit against filing for tros
39:35
Speaker 3: or preliminary injunctions which also get heard and ruled on
39:39
Speaker 3: a fast track basis.
39:41
Speaker 1: Thanks so much, Joanna. That's Joanna Rosenforster, a partner at Crowell.
39:46
Speaker 1: And that's it for this edition of the Bloomberg Law Podcast.
39:49
Speaker 1: Remember you can always get the latest legal news by
39:51
Speaker 1: subscribing and listening to the show on Apple Podcasts, Spotify,
39:55
Speaker 1: and at Bloomberg dot com, slash podcast, slash Law. I'm
39:59
Speaker 1: June gross So, and this is Bloomberg