Johnson & Johnson’s Bankruptcy Didn’t Work

The basic idea of bankruptcy is that if you have a company with $1,000 of assets and $2,000 of liabilities, you can’t pay back everyone everything you owe them. You could just pay back the first creditors who show up and ask for their money back, until the $1,000 is gone, and then give the remaining creditors zero, but that seems unfair and probably destroys value.1 So the bankruptcy system says, essentially, that you get all the creditors together and give them all 50 cents on the dollar. There are tons of nuances to this — about timing, about seniority, about collateral, about restructuring plans and equitization, about avoidable preferences, etc. — but that’s the core idea.

There are various extensions. One important one comes in what is called mass tort liability. If you have a company and it sells a lot of products and makes a lot of money and then it turns out that one of the products kills people, they will sue. Juries in the US don’t like it when companies make products that kill people, and they tend to award enormous damages in cases like that. You multiply enormous damages by lots of cases, and you can easily end up with damages that exceed the value of the company. This can lead to unfair results, not for you — who cares about you — but for your victims: If a $1 billion company has killed 100 people, the first 10 who sue might get $100 million each of damages, leaving nothing for the remaining 90.2 What you want is some sort of system that is like “we will set up a website to collect claims from everyone our product has harmed, and then when we have all those claims we will divide up our company’s assets equally among the victims.”3