Reorg’s Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions, and issues across courts. We use this space to comment on and discuss emerging trends in the bankruptcy world; our opinions are not necessarily those of Reorg as a whole. Today we consider the proposed Lahaina fire and nuclear contamination mass tort settlement funds, Invictus’ battle with its investors and Johnson & Johnson’s latest rough wooing of the talc plaintiffs’ bar.
I’m From the Government and I’m Here to Help
While the Supreme Court
considers the use of chapter 11 to resolve mass tort cases via nonconsensual nondebtor releases (you can pick through the tea leaves yourselves), Congress - yes, the
United States Congress - and the state of Hawaii are exploring an alternative that
does not trigger serious constitutional concerns: statutory settlement funds for mass tort victims. Both of these proposals have issues, but fortunately they do not have
bankruptcy issues - so we are 100% on board.
On Nov. 9, Hawaii Gov. Josh Green
announced a proposed $150 million settlement fund to compensate the families of those killed and others injured by the August 2023 Maui wildfires. The fund would also benefit the state’s “partners” in the project - including utility
Hawaiian Electric Co., or HECO, property owner
Kamehameha Schools and property owner/emergency services provider
Maui County. Of course, these “partners,” like the
state itself, were also
allegedly partners in causing deaths and injuries associated with the fires.
Green touts the “One ‘Ohana Initiative” as a triumph of local warm-and-fuzzies over the vagaries of litigation and, in a somewhat bizarre framing, “international banks,” but the fund is clearly aimed at getting HECO - the Sick Man of the defendants - off the hook so it can keep the lights on. According to Green, the plan is supported by “a statewide coalition of prominent businesses” and the governor is confident “Hawaiʻi can avoid protracted legal conflicts” that might “jeopardize Hawaiʻi’s energy future” and “severely delay reconstruction and economic recovery.”
Reading between the lines: HECO and its lobbyists and advisors have convinced the state that bankruptcy and even liquidation are a real possibility.
Unlike PG&E, we doubt that the state or mainland international banks are interested in taking over HECO’s island energy business should the company liquidate. See also: the
Puerto Rico Electric Power Authority.
“The intent is for key local stakeholders” - read “the defendants” - “to work to ensure that the families of those lost or seriously injured in the wildfire can choose to obtain swift and generous financial payment for their losses, without the need to go through time-consuming litigation.” To get that “swift and generous payment,” of course, the claimants must “waive their ability to bring legal action related to
associated claims” (emphasis very much added).
“Associated claims” is doing a lot of hidden work there. Might be more straightforward if they just came out and said “property damage claims.” To receive compensation for personal injuries from the fund, claimants must release not only the personal injury claims but also their property damage claims - which could be the costliest claims facing HECO (
see also the
property damage focus in the PG&E fire claims estimation process).
The
‘ohana concept apparently does not extend to Hawaiians looking for compensation solely for their property being reduced to a smoldering pile of rubble.
“I appreciate the courageous leadership of Governor Green to forge a path that allows us to work together toward solutions that can help Maui’s people and communities in a way that reflects Hawaiʻi’s values,” HECO’s CEO says, which,
of course you do. The government is offering HECO “
securitization plans” - no doubt backed or funded by the state government, like the
Storm Uri securitization that bailed out Texas power producers - so the company
can avoid asking those dastardly “international banks” for financing to cover its fire victim compensation obligations.
“Our hope is that those families who choose to engage in this process can find a healing path to closure,” Maui County’s mayor says. Maybe this will be the first case in mass tort history in which defendants’
thoughts and prayers for a speedy resolution bring closure to victims; we’re just dumb
haoles, after all.
Surely the plaintiffs’ lobby gearing up for multibillion-dollar jury verdicts (and multi-hundred-million-dollar fee awards) against HECO will oppose the fund? According to Green’s press release, at least two “prominent” local plaintiffs’ lawyers are already on board, Mark Davis of Davis Levin Livingston and Rick Fried of Cronin, Fried, Sekiya, Kekina & Fairbanks. The California-based plaintiffs’ lawyers who purchased beachfront Malibu homes using their share of fees from the cash portion of the PG&E chapter 11 settlement may have been unavailable for comment.
Thinking we have some qualms about this settlement fund proposal? Well, of course we do
wait what is this: Green says that “a comprehensive legislative package will be submitted to protect consumers while allowing for fund generation going forward, to improve and harden the grid and address the impacts of climate change, and to establish a program to provide coverage for future catastrophic events and to help keep homeowners insurance available and affordable.”
Well, never mind.
Elected legislatures and governors are
allowed to do things like, say, use the offer of
immediate payments to cajole (or even
coerce) claimants into releasing litigation claims against third parties. Their motives, unlike those of nondebtors and Article I bankruptcy judges, are totally irrelevant to us and totally beyond the scope of our skepticism. We love the One ‘Ohana spirit unconditionally.
See also: On Nov. 28,
our new BFF Sen. Josh Hawley issued a stern
press release threatening to withhold support for the National Defense Authorization Act, or NDAA, budget bill if it does not include his
proposed amendment providing compensation to victims of nuclear contamination from the Manhattan Project in St. Louis. Like the Lahaina fund, this would cover only personal injury claims, but then again, Hawley’s fund would not force claimants to waive their property damage claims against nuclear contamination defendants like our old friend
Mallinckrodt, which,
come on guys, nuclear waste AND opioids?
Anyway, the point is the same: Congress is free to eradicate federal- or state-law causes of action against anyone, whether in exchange for a recovery fund or not (that’s how
statutes of repose can exist). If Congress wanted to force opioid claimants to accept, say, $6 billion in compensation and channel their claims against the Sacklers to a trust without their consent,
fair play, that’s the way the Constitution works.
During the
Purdue oral argument, Justice Samuel Alito and Justice Brett Kavanaugh asked counsel why their newly unearthed “Major Questions” doctrine does not prevent bankruptcy judges from taking on issues of major political or economic significance absent express instruction from Congress in the Bankruptcy Code.
We’re so proud. Bankruptcy judges - like, well, us - have seemed convinced for some time that legislatures will
never address mass tort compensation as a policy issue, and thus the
floodgates must be opened. Maybe … we were
wrong?
Or not: On Dec. 6, the House of Representatives issued a
conference report on the NDAA that omits Hawley’s radioactive contamination fund amendment. Hawley vows to slow-walk the NDAA to get the amendment reinserted.
Sigh.
An Unconquerable Soul
In August we raised a glass to the adventurous spirit of Invictus Global Management “for keeping things interesting” in several cases, including
DeCurtis,
Tuesday Morning,
Sorrento,
LATAM,
Grupo Aeroméxico and
Washington Prime. “Shine on, you crazy diamond,” we urged them. Well, about that.
On June 22, Austin, Texas-based Invictus
sued Corbin Capital in New York state court alleging that Corbin “sought to exert improper leverage” over the “fledgling,” “minority and woman-owned” manager by withholding performance fees for managing Corbin investments and using preferential terms for Corbin’s investment in Invictus’ first fund to “bully Invictus into doing Corbin’s bidding.” In other words, Goliath threatened to cut off the revolving facility David uses to buy slingshots.
Invictus says it managed early co-investments for Corbin for a flat 25% performance fee, including a “portfolio of legal claims being prosecuted by the Perry Sanders Law Firm,” and later investments for a 1% management fee and 10% performance fee. Under the Perry sub-advisory agreement, Invictus explains, “Invictus would not see any compensation for its work on the Perry Investment until the investment realized a profit, and then it would receive 25% of that amount.” Invictus also maintains that netting provisions in the later one-and-10 co-investment agreements do not apply to the Perry claims.
According to Invictus, the Perry claims scored a $6 million profit for Corbin, but Corbin refused to pay the 25% performance fee, asserting that losses on other managed co-investments had to be netted against the Perry profit. Invictus argues that when it refused to play ball (
BEGIN METAPHOR), Corbin tried to use its leverage as a big investor in a small fund to get Invictus to drop its fee demand. Invictus says a Corbin representative threatened to “abruptly sever the entire relationship, an outcome far, far worse for the economics of your business” than the loss of the Perry performance fee.
In February 2023, Invictus says, Corbin terminated its co-investment agreements but left the investments in place “and demanded that Invictus keep managing them without compensation.”
Invictus says Corbin also refused to reimburse legal expenses related to the investments. “For example, a key strategy Invictus uses involves investing in claims in bankruptcy,” Invictus says, and this strategy “involves hiring counsel, which results in legal expenses.”
See above. “On more than one occasion, lawyers hired to pursue investment-related claims have threatened to quit because of Corbin’s refusal to pay its fair share,” Invictus asserts.
In response to this violation of the
unwritten rules of fund investing, Corbin charged the mound with fists up. On Aug. 21 Corbin filed a
motion to dismiss the state court action, asserting Invictus filed suit “to extort unearned and undeserved fees” instead of taking responsibility “for its own failures as an investment manager.” The idea of Corbin (a $6 billion fund) getting extorted by Invictus (whose website seems
permanently busted) is a bit much, kind of like Zach Greinke getting run at for throwing a 70-mph curveball at Aaron Judge? Of course, you don’t get to be a $6 billion fund by throwing away $1.5 million.
According to Corbin, “Invictus proved itself to be an extremely difficult counterparty, as well as an unskilled investor who lost substantial sums of Invictus’s investors’ money on the one hand, while seeking outsized and unauthorized fees for that privilege on the other.” “Difficult counterparty,” we can understand, judging by Invictus’ litigation strategy.
Our favorite part: In a footnote, Corbin says that “a series of unaffiliated, sophisticated parties have each recognized Invictus’s unsanctionable behavior” in several chapter 11 cases. Those cases? Well, we listed them above, including,
you guessed it, Grupo Aeroméxico, Tuesday Morning and DeCurtis.
In September, Corbin and other investors in DIP lender Invictus Special Situations Master I LP voted to remove Invictus as manager for the fund. We know this because this allegation is included in a
motion for preliminary injunction filed on Oct. 13 by investors in the fund in the DeCurtis case. That’s right, this investor-manager tussle became a
full-on bench-clearing brawl. To clarify the metaphor, the bankruptcy lawyers are the bullpen guys who half-jog toward the fight and stand on the fringes of the melee chatting amiably with each other while
Nolan Ryan and Robin Ventura go at it. You
knew we had to link to that.
Until Sept. 23, Invictus still served as agent for the DeCurtis debtors’ DIP loan, even while the investors in the DIP lender and Invictus, as agent, squabbled over fees and control. As we discussed on Aug. 16, Judge Stickles
concluded on Aug. 9 that Carnival holds an interest in DeCurtis’ key DXP platform asset, scuppering Invictus’ DIP stalking horse bid for the entire company and effectively pushing the case into
chapter 7. Little did we know Judge Stickles’ decision would also lead to Invictus throwing another fastball right at Corbin’s head.
Prior to conversion, Invictus, as DIP agent, used the Carnival decision as the trigger to pull another questionable-but-entertaining maneuver: It terminated the DIP facility and proceeded with a
strict foreclosure of DeCurtis’ assets under Delaware law without seeking relief from Judge Stickles. The assets were acquired by UnumX, an affiliate of the DIP lender, Invictus Special Situations Master I - the fund Invictus claimed to be running for free while the fight over fees proceeded. Invictus then caused UnumX to cut a deal with Virgin, a user of the DXP platform, to sell the debtors’ interest in DXP for $8 million.
At a
status conference on Aug. 24, counsel for Carnival accused Invictus of using the foreclosure to end-run Judge Stickles’ ownership decision before an injunction could be entered and a chapter 7 trustee appointed. Invictus’ counsel responded that the DIP lender provided notice of termination as required under the interim DIP order, and no objections were raised, entitling it to proceed with the foreclosure without further court order.
Counsel also assured Carnival it could foreclose only on the debtors’ interest in the DXP platform, leaving Carnival’s interest unaffected. Carnival counsel colorfully described DXP as a “scrambled egg” and accused Invictus of attempting to “foreclose on the egg white.” Good to know we aren’t the only ones slinging tortured metaphors (hash?) out here.
But it gets even better: According to the motion filed by the Invictus Special Situations Master I investors in the DeCurtis case, after the foreclosure but prior to its removal as manager and DIP agent, Invictus transferred $4 million of the Virgin cash to
its own account, which Invictus used to pay $1.7 million in expenses. The investors asked Judge Stickles to order the return of those funds.
Like any good umpire, Judge Stickles tossed the instigators out of the game. On Oct. 17, she held that the bankruptcy court lacks subject-matter jurisdiction over the dispute because the DIP had been repaid by the foreclosure, leaving the combatants to scuffle in the parking lot (New York state court, of course,
keep up with us here).
Corbin’s motion to dismiss Invictus’ state court suit to collect fees remains pending. On Nov. 20, Invictus
sued another investor - Gatewood Capital - for taking advantage of its lack of bargaining leverage and resulting contracts of adhesion. “Gatewood preys on a pipeline of talented new investment managers to fuel its ongoing scheme to obtain valuable economics and control rights while forcing these new managers into unsustainable contractual and financial burdens,” Invictus alleges.
Invictus specifically contends that Gatewood “was working with Corbin to stay in control” of the Invictus funds, despite Corbin initially encouraging Invictus to find a buyer for Gatewood’s interest in its fund.
Court Opinion Review Hall of Famer Andrew Glenn of GlennAgre is Invictus’ counsel in the Gatewood suit. When dealing with “
the Barber,” you best
watch out for in your ear. We’ll be watching, whether cozied up to the hot stove, in the sun of spring training or in the humid nights of midseason ball.
Switching Sides
We don’t
quite get this
motion filed by Johnson & Johnson in the cosmetic talc MDL on Tuesday, Dec. 5. Ostensibly, J&J seeks removal of a prominent talc plaintiffs’ firm, Beasley Allen, and its head talc partner, Andrew Birchfield, from the MDL plaintiffs’ executive committee, or PEC, for negotiating with a totally unrelated party, Legacy Liability Solutions, to come up with a framework for a $19 billion global resolution of the talc claims that is in no way binding on J&J.
Why does J&J care? Well, Legacy is not
totally unrelated - its founder and CEO is James Conlan, a former partner at Faegre Drinker Biddle & Reath. Faegre just so happens to represent J&J and its Texas two-step scapegoat, LTL Management, in the talc litigation. According to J&J, before leaving Faegre, Conlan personally billed more than 1,600 hours “working hand-in-hand with J&J’s in-house and outside counsel” on “a strategy to bring full and final resolution to the talc litigation,” including related to a possible LTL filing.
J&J says Conlan left Faegre and via Legacy “formed an alliance with plaintiffs’ attorney Andy Birchfield of the Beasley Allen firm on a strategy for resolving the very same talc litigation - one that is adverse to the path J&J is pursuing,” for example, imposing a settlement on claimants through a
third LTL Management chapter 11.
After J&J rebuffed Legacy’s August 2022 offer to “acquire and manage LTL or affiliated entities holding liability for present and future talc claims” and administer a J&J-funded nonbankruptcy settlement, Conlan apparently decided to frame up a deal with plaintiffs on his own that he could take back to his former client. On Oct. 18, J&J says, Conlan sent a message to J&J indicating that “
Legacy has the support of lead counsel for the [ovarian cancer] claimants (including Andy Birchfield) for an MDL opt-in settlement matrix with Legacy.”
The proposed deal: a settlement matrix for estimating talc claims that implied a $19 billion total settlement value. That’s $10 billion more than J&J offered in the second LTL case. J&J says it told Conlan not to let the door hit him on the way out. Okay then.
But what seems to have
really gotten J&J’s goat is Conlan and Birchfield going on a traveling conferences-and-op-eds road show to diss the company’s Texas two-step strategy. On Nov. 2, Conlan penned an
op-ed for
Bloomberg titled “Time to Ditch the Texas Two-Step for a New Mass Tort Strategy.” Conlan calls J&J’s LTL strategy a “spectacular failure” that “polluted the dialogue about the legitimate interest of a public company in obtaining ‘finality’ with respect to both current and future claims, and plaintiffs’ legitimate interest to have their claims determined or settled in the tort system and paid in full.”
Well, Conlan would not be the first lawyer to suggest that a
former client’s legal strategy was
ill-considered and doomed to failure. Perhaps less shocking to us but still seemingly irritating to J&J: Birchfield, a long-time opponent of the LTL strategy from the plaintiffs’ side,
agrees with Conlan that the two-step was a bad way to reach a deal. “Plaintiffs’ lawyers in talc-related ovarian cancer cases share Mr. Conlan’s concerns that the Texas Two-Step has ‘polluted’ the narrative,” Birchfield said in a press release that also endorsed Conlan’s nonbankruptcy settlement proposal.
This is a conspiracy, that’s what this is!
Putting aside the faux-outrage, J&J’s legal claim here is that in Conlan’s discussions with Birchfield, he
must have leaked some confidential information, which, if true, yeah, Conlan and Birchfield should join former judge David R. Jones in the hot tub. But the motion is entirely free of any evidence that this happened, other than the apparent negotiations between Conlan and Birchfield and their meeting of the minds on the Texas two-step being a bad idea.
The latter does not mean much; Conlan is free to express his thoughts on the best way for J&J to resolve the talc liability after two LTL filings were dismissed, and Birchfield has always fought the Texas two-step concept. J&J’s motion goes into detail on Birchfield’s financial incentives to pursue a nonbankruptcy solution - apparently J&J is also
shocked that unlike the multinational conglomerate that cares only about compensating victims, this guy is in it for the
money! - but none of that is a secret.
As for the negotiations, according to J&J, Conlan participated in negotiations with Birchfield while working for the company. “Birchfield knew Conlan possessed those confidences, having been on the opposing side and directly adverse to Conlan in the talc litigation and negotiations,” the motion said. Presumably, Conlan negotiated with Birchfield while Conlan was employed by Faegre without spilling any privileged information - so why presume he did so when negotiating with Birchfield on behalf of Legacy?
The $19 billion ovarian cancer settlement matrix Conlan pitched to J&J could have been constructed using data from the litigation or data from Birchfield, rather than any proprietary information.
Again, it is possible that Conlan did breach his duty of confidentiality to his former client, and that would seemingly justify severe sanctions against Conlan and the disqualification of Birchfield, who would be tainted by any information he received. We’ll see what J&J digs up. But we can’t help but suspect J&J really filed this motion to take
yet another dig at the plaintiffs’ bar.
“For the $19 billion demanded by Conlan and Birchfield for the Legacy proposal, Beasley Allen would stand to gain a substantial share of
$1.52 billion to $2.28 billion diverted from settling plaintiffs into the common benefit fund,” J&J says. Well, so what? Birchfield wants to make money off mass tort litigation. So does Conlan. And so, really, does J&J: Given the talc liability is known and digested by markets, the more J&J can minimize the ultimate liability it actually owes, the more its share price will rise (and the more those responsible internally will be showered with accolades and bonuses).
Danny, this isn’t Russia.
Of course, J&J repeatedly emphasizes that its pursuit of a Texas two-step bankruptcy solution
has nothing to do with money. The company says it wants to pursue a chapter 11 solution not to reduce the settlement amount, but because
fairness. “By voluntarily filing for Chapter 11 bankruptcy, LTL initiated a process designed to resolve these claims in a way that would be reasonable for all parties, including current and future claimants,” the company says.
Malarkey. Not to beat a dead horse, but there is nothing wrong with companies pursuing legal strategies to minimize their exposure, just like there is nothing wrong with lawyers pursuing legal strategies to get more for plaintiffs so they can collect more in fees. Whatever you think of our legal system - you know what we think - here we are.
The biggest irony here is that J&J takes issue with Conlan’s argument that the Texas two-step strategy poisoned the well for settlement. If J&J wants to maintain an open, fair and friendly settlement discussion with plaintiffs’ firms, maybe undertaking a tricksy corporate restructuring, filing a second bankruptcy hours after the first one was dismissed, suing plaintiffs’ experts and going after the plaintiffs’ lawyers for talking and appearing on the dais with a former J&J lawyer is the wrong way to go about it.