Not All Third-Party Releases Are the Same

My friend Professor Tony Casey has been the most vocal academic defender of non-consensual non-debtor releases in bankruptcy. I obviously disagree with Tony on both the legality and policy substance, but Tony's repeatedly taken me to task in scholarship (here and here) and various social media platforms (here and here) for having supposedly changed my view of the issue.

Tony's charge that I've flip-flopped is based on a 2019 blog post in which I defended then presidential candidate Elizabeth Warren's work in Dow Corning, which Tony thinks is a non-consensual non-debtor release case. 

Unfortunately, Tony's misread Dow Corning and therefore sees a contradiction where none exists.  I have never taken issue with consensual releases of creditors' claims against non-debtors as part of a global settlement (although what constitutes adequate consent is a separate issue). Instead, my concern has always been with mandatory, non-consensual release of claims against non-debtors. Dow Corning released third-parties, but it was not a non-consensual release case. Unlike in, say, Purdue Pharma, where the non-debtor releases purport to bind all creditors irrespective of consent, the dissenters in Dow Corning were allowed to opt-out and pursue their remedies.

Here is the key language from the 6th Circuit's Dow Corning decision:

We hold that when the following seven factors are present, the bankruptcy court may enjoin a non-consenting creditor's claims against a non-debtor: (1) There is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor; (4) The impacted class, or classes, has overwhelmingly voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; (6) The plan provides an opportunity for those claimants who choose not to settle to recover in full and; (7) The bankruptcy court made a record of specific factual findings that support its conclusions.

Dow Corning doesn't use the term "opt-out," but factor (6) basically requires one. The "opportunity" for non-settling claimants "to recover in full" would seem to mean that they would have to be able to preserve their right to sue the nondebtor. But you don't need to rely on my reading of the case. Consider how a bankruptcy court within the 6th Circuit has interpreted Dow Corning:

Dow Corning held that this situation, which was in essence a proposed class-action settlement embedded into a reorganization plan, required that individual plaintiffs be entitled, consistent with Rule 23 of the Federal Rules of Civil Procedure, to opt out of the settlement option and retain their rights to litigate their personal injury claims seeking to establish the full value of those claims, or risk losing completely.

In re FirstEnergy Sols. Corp., 606 B.R. 720, 744 (Bankr. N.D. Ohio. 2019), accord In re City of Detroit, 524 B.R. 147, 175 (Bankr. E.D. Mich. 2014) (finding that releases did not meet requirement of Dow Corning factor 6 because of lack of opt-out) and In re K3D Prop. Servs., LLC, 635 B.R. 297, 316 (Bankr. E.D. Tenn. 2021) ("The Sixth Circuit might have referred to this as the mechanism to pay the creditor in full or an opt out had it been faced with this case.").

The Dow Corning opt-out requirement doesn't exist in every circuit, but opt-out cases are fundamentally different than non-consensual release cases. It's equivalent to the distinction between FRCP 23(b)(2) and FRCP 23(b)(3) classes. One can praise an opt-out case with high adherence and be completely consistent in opposing non-consensual releases. They're just different, and Tony should know better than to equate them. See here for Ted Janger’s discussion of this point.

We'll see soon enough what the Supreme Court rules in Purdue Pharma, but I hope this puts to rest any concerns Tony has about the consistency of my thinking.

Comments

[Tony Casey]

Interesting. I did not expect you to claim that the Down Corning releases were consensual.

That is just false. Don’t believe me? Just go back and read the Dow Corning Plan. The releases there were not consensual. There was no opt out. And the dissenters did not, as you suggest, “preserve their right to sue the nondebtor.”

To the contrary, there was a channeling injunction that forced all claims to be litigated against a “Litigation Facility” that was created by the plan. What you are calling an opt-out was described this way in the Plan:

"Notwithstanding this section 8.4, each Non-Settling Personal Injury Claimant shall be entitled to continue or commence an action against the Litigation Facility in which the Non-Settling Personal Injury Claimant shall be entitled to a jury trial for the sole purpose of obtaining a judgment as permitted by the Litigation Facility Agreement, thereby liquidating such Non-Settling Personal Injury Claimant’s Claim so that it may be paid with other Allowed Personal Injury Claims in the ordinary course of the operations of the Litigation Facility, consistent with the provisions of the Litigation Facility Agreement."

And all rights they retained to litigate were “subject, however, to the provisions of the Plan and the Litigation Facility Agreement.”

If you view this as meaningful opt out, then you should support Purdue’s structure. The plans in Purdue and Boy Scouts and all the other big mass tort cases have provisions just like the one in Dow Corning

Purdue’s plan provides:

"personal injury or wrongful death claims against the Debtors held by claimants who “opt out” of the liquidation procedures of the [Tort Distribution Plans] as applicable, shall, in accordance with and subject to the terms of the [Tort Distribution Plans] be liquidated in the tort system"

These provisions allow the dissenting claimants to have jury trials against the funds about amounts of liability. Just like in Dow Corning.

Even in the bankruptcy case you cite as describing Dow Corning as having an opt out, the very next sentences points out that the option is to sue against the funds, which guarantee full recovery only “within a reasonable degree of certainty.”

That is why the Sixth Circuit in the Dow Corning opinion you cite opens its analysis with this:

"The first issue we are asked to decide is whether a bankruptcy court has the authority to enjoin a non-consenting creditor's claims against a non-debtor to facilitate a reorganization plan under Chapter 11 of the Bankruptcy Code."

That is the exact same question that is on review in Purdue.

The fact that the release were nonconsensual is also why in your 2019 post supporting such injunctions you didn’t mention consent. Rather you emphasized (correctly) that “It was the product of lengthy, mediated negotiations and was supported by 94.1% of the personal injury claimants who voted on it, and ultimately approved by the bankruptcy court and upheld by the 6th Circuit Court of Appeals.”

[Adam Levitin]

Tony,

You mischaracterize my claim, which was about the 6th Circuit's opinion, not about the details of the proposed plan. I did not claim that the proposed releases in the Dow Corning plan were consensual. Of course they were not. That's the whole reason there was an appeal! My claim was that the 6th Circuit's opinion requires an opt-out, which is another way of saying that it required consent.

The 6th Circuit’s Dow Corning opinion was addressing the propriety of an injunction to enforce the release of non-debtors and channel creditors to recover solely from a trust, not whether there was a right to litigate the amount of liability against the trust. The 6th Circuit said that there had to be an opportunity for plaintiffs who do not settle to recover in full (factor 6). The 6th Circuit concluded that there was no evidence that factor 6 was satisfied and remanded the issue despite having the text of section 8.4 before it and even describing the plan’s proposed channeling to the Litigation Facility.

In a mass tort case, there's no way to satisfy the "recover in full" requirement except with an opt-out from the channeling entirely. A creditor is only entitled to a single recovery, such that it could be satisfied by a special trust rather than by a third party. That would work with contractual creditors, but it doesn't work with tort victims because their recovery isn't just compensatories; it can include punitives. A tort victim will not be able to get punitives from litigating against the trust, so it cannot "recover in full" by virtue of being able to litigate the amount of damages against the trust. The only way a tort creditor can “recover in full”——meaning compensatories + punitives——is to be able to have unimpeded access in the tort system against the released non-debtors.

In any event, even if your reading were correct, consider how it would play out in a case like Purdue Pharma: under your reading the Purdue Pharma trust would have to be funded with enough money to pay in full every claim that seeks to litigate the amount of liability. I don’t recall there being an estimation in Purdue, but there are something like $40 trillion in claims, so even with crazy discounting there’d still be enormous feasibility questions.

I think we will have to declare this teiku, at least until SCOTUS issues its Purdue opinion, but it is flattering that you think my supposed flip-flopping has legal or policy significance!

[Tony Casey]

I will confess that you have lost me a little. In your post you write, "Dow Corning released third-parties, but it was not a non-consensual release case." In your comment you write, "I did not claim that the proposed releases in the Dow Corning plan were consensual."

So maybe you are emphasizing the opt out as separate from consent. You say, “the dissenters in Dow Corning were allowed to opt-out and pursue their remedies” and “preserve their right to sue the nondebtor.” That is not true. They were not free to pursue remedies because they were channeled to litigation against the fund. On remand the plan was not altered to change that. So the plan that you defended in 2019 remained a non-opt-out non-consensual release plan. I am not sure why it matters what the court opinion focused on.

In any event, of course I think what we do as academics is significant. You are one of the leading academics in the field. And I still think your argument in 2019 was a correct and very well-stated defense of non-consensual releases:

“In this case, the parties arrived at an agreement that limited Dow Chemical’s future liability in exchange for capitalizing a multi-billion dollar trust to pay out victims well into the future. That was good enough for the overwhelming majority of the people with personal injury claims who voted on the plan.”

[Adam Levitin]

To clarify: the issue in the case was about non-consensual releases, but the 6th Circuit opinion does not (as I read it) permit non-consensual releases. Hence it is not a non-consensual release case.

[Tony Casey]

Okay. But you were defending Senator Warrens' work on the case and the settlement it produced. That settlement included non-consensual releases even if the 6th Circuit didn't think it should.

[Adam Levitin]

Yup. And I stand by the 2019 blog post. The whole point of it was that Warren's work on the debtor side in that case wasn't some nefarious anti-consumer activity. The post was not a defense of non-debtor releases; as you noted, I didn't say a word in the 2019 blog post about the consent issue with the releases. The 2019 post simply didn't address the consent problem, which wasn't something I had given much thought to prior to the Purdue Pharma case. Having thought about it a lot now, I think it's without statutory authority, unconstitutional, and bad policy to boot.