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Purdue Pharma Decision: a Big Win for Mass Tort Victims

posted by Adam Levitin
Mass tort victims won a big victory in the Supreme Court today with its 5-4 decision to reverse confirmation of the Purdue Pharma bankruptcy plan because it included impermissible nonconsensual releases of nondebtors. The case is a victory for tort victims not just in Purdue Pharma but across the board. The decision will not prevent the global resolution of mass torts in bankruptcy, but will simply eliminate the "bankruptcy discount."
 
Before Purdue Pharma non-debtors could piggyback on a bankruptcy case to get 100% resolution of their own liability to the debtor’s creditors based on contributing enough to get 75% of tort victims to consent. Now the price of 100% resolution will be the price necessary to get 100% of tort victims to consent and the price of 95% resolution will be the price necessary to get 95% of victims to consent, etc. In other words, non-debtors will get what they pay for, but there’s no longer a bankruptcy discount for mass tort settlements with nondebtors.  That’s a major win for tort victims.
 
I. The decision itself
 
The Court’s decision was a bit closer than I anticipated; I thought it would be 6-3 with the Chief in the majority, but after oral argument it was never really in doubt that Purdue Pharma would lose.  Bankruptcy lawyers sometimes drink too much of their own Kool-Aid, especially about the importance of nondebtor releases and they often forget that the Supreme Court is a court of generalists, not bankruptcy insiders.  The Justices are all too aware of their own lack of expertise on specific subjects, much less policy matters, so they resort to statutory reading as their primary crutch.  Outside of a subset of highly politicized cases, policy concerns or “the deal” don’t generally drive SCOTUS.  This over-reliance on text drives me bonkers—anyone who has ever drafted legislation knows how little thought is put into some words and how much thought into others.  (We really ought to require all judges to work for a year drafting legislation before assuming the bench….) The key point is that the Court is a court of textualists, and the statutory argument for non-consensual non-debtor releases was extremely weak:  1123(b)(6)’s catchall for “other appropriate provisions not inconsistent with the applicable provisions of this title” and section 105(a)’s writ of rachmones. As the majority recognized, these are mouse holes, not dragon pits.  
 
The majority opinion, written by Justice Gorsuch, focused entirely or section 1123(b)(6), but its most impactful line might actually be in FN 2, when it addresses section 105(a), leaving no doubt that “it serves only to ‘carry out’ authorities expressly conferred elsewhere in the code.” That line is going to get trotted out all the time now when debtors make motions based on section 105(a) without a tie-in to an express authority. In other words, it's going to be harder to cite to In re Rachmones.
 
As for 1123(b)(6), the opinion is basically about the scope of “appropriate,” rather than the “not inconsistent” part, and in determining what is “appropriate” the majority relied on the ejusdem generis canon—that general words are construed as limited to similar categories as those expressly mentioned.  Given that the rest of 1123 is all about debtor-creditor relations, it makes no sense to read 1123(b)(6) to authorize the restructuring of creditor relations with non-debtors. 
 
There was a surprisingly long and vigorous dissent written by Justice Kavanaugh that has some huge shout-outs to "leading scholars" Professors Tony Casey and Joshua Macey. Not a bad consolation prize!
 
The dissent was very much focused on the policy impact, which is surprising both because that’s not what this Court generally does and because all of the policy claims are highly contestable. Unfortunately, the dissent did a somewhat confused job of making the policy argument.  To give a couple examples, dissent made a big deal about bankruptcy being designed to address the collective action problem of the race to the courthouse. That’s true, but it has nothing to do with non-debtor releases. That’s a problem addressed by the automatic stay, and the Sacklers could always file for bankruptcy themselves, thereby triggering the stay.  The collective action problem is just irrelevant to the non-debtor release issue.  Likewise, the dissent hemmed and hawed about Purdue’s indemnification of the Sacklers, but that indemnification is contingent until the Sacklers are actually found liable for something, and that means that the indemnification claim would be disallowed under section 502(e). The dissent seems unaware of the operation of 502(e), however.  But there's no point in beating a dead horse: the majority opinion is what matters. 
 
II. Implications for Purdue Pharma
 
In terms of the Purdue Pharma case itself, the decision throws things back to the bankruptcy court, where the parties will try to hash out a new plan and get it confirmed.  My prediction is that the new plan (Purdue 2.0) will look virtually identical to the current plan, only it will have an opt-out provision regarding the Sackler release.  So all creditors will be bound by the plan as to their claims against Purdue Pharma, but only those who fail to opt-out will be bound as to the release of the Sacklers (and other folks). Because of the opt-out, the revised plan will have two different payout tiers—one for those who opt-out and one for those who don’t—but the total dollar figure for the revised plan will likely be materially the same, although I would not be surprised to see the Sacklers will kick in a bit more money to reduce the number of opt-outs (and they can afford to with another couple of years of investment earnings while the appeals were pending).  
 
On a more granular level, here’s what to expect:  after a bit of negotiating, there will be a new disclosure statement filed and then approved, then a new solicitation of votes, this time with an opt-out provision, and a new plan confirmation hearing. I predict there will be very few opt-outs; there are real challenges to successfully suing the Sacklers, as evidenced by the paucity of suits actually filed against them prior to the extension of the stay to them. There will be some lingering legal questions about whether an opt-out provision binds a creditor who received solely publication notice and doesn’t receive or return a ballot, but I have trouble seeing a large number of suits materializing against the Sacklers before statutes of limitations run even if publication notice isn’t binding.
 
III. Implications for Mass Torts in Bankruptcy
 
If I’m right that the the Sacklers still be willing to pay a lot of money to get peace with 99% of plaintiffs, even if they can’t get 100%—it will show that the dissent was completely wrong on the policy argument. The dissent seemed to think that the choice was between the nonconsensual release deal and no deal whatsoever. But prohibiting non-consensual non-debtor releases does not prevent deals in bankruptcy. It just changes the terms of what those deals can be by shifting the initial assignment of the entitlement (in this case to litigate). This is just pure Coase theorem.  And following the Coase theorem, we should expect that shifting the entitlement to individual plaintiffs is a higher settlement price. In other words, the outcome of the decision should be higher recoveries for mass tort victims in bankruptcy, both in Purdue Pharma and in other cases. 
 
Some of the Purdue Pharma surplus will accrue to all victims, as nondebtors will offer more money in order to ensure low opt-out rates, but those creditors who are willing to opt-out and credibly threaten litigation will likely get higher settlements outside of bankruptcy.  Nevertheless, I would expect the equilibrium to be one of low opt-out rates unless victims are represented by well-organized and disciplined counsel.  
 
Purdue Pharma made clear that it is not going to affect confirmed but not fully consummated plans (like Boy Scouts of America), but it will absolutely cover cases like LTL 3.0 (J&J). Purdue Pharma does not affect the scope of section 524(g), which allows releases of a limited set of nondebtors for derivative liability claims in asbestos bankruptcy cases, but J&J is hoping to get releases both under 524(g) and under 105(a), and the 105(a) route is closed now. That’s going to be a problem for LTL/J&J because some of the talc claims are against J&J itself and are not derivative, but direct claims. 
 
[Update: J&J has since amended the proposed plan for LTL 3.0 (Red River). Astonishingly, the amendments have nothing to do with the scope of the non-debtor releases, which continue to be non-consensual and well beyond the scope of section 524(g). What Jones Day is thinking here is beyond me; unless further amendments are forthcoming there is no way the plan is confirmable.]
 
IV. Implications for Chapter 11 More Generally 
 
The Purdue Pharma ruling is not limited to mass torts. Instead, it covers all nondebtor releases.  So consider a situation in which an oil & gas company was spinoff and then later files for bankruptcy. The pre-spin-off parent might have liability for clean-up obligations under a state’s predecessor liability law.  Prior to Purdue Pharma the parent might kick in some money to the bankruptcy in exchange for a release. The money kicked in would not be earmarked for the state or for the cleanup, but would just be general estate funds, so the marginal increase in the state’s recovery would be limited.  Nevertheless, the release would be forced on the state if a sufficient majority of creditors voted to accept the plan.  Those creditors would not have the same interests as the state (and would include creditors in other classes), but the state would be bound by their vote and would have to share the contribution made in exchange for its own direct claim with other creditors.  No longer.  Now if the parent wants a release from the state, it will have to pay the state full freight for that release.  And that’s exactly how it should be.  
 
Purdue Pharma does not formally put an end to inside-out, parasitic bankrupties, where the entity or entities with the real assets and liabilities is not a debtor (e.g., J&J/LTL, Boy Scouts with local councils, 3M/Combat Arms). But it makes this sort of maneuver less attractive. The nondebtor still avoids the scrutiny of the bankruptcy court, but it will no longer be able to get a bankruptcy discount on settling its own liability.  The operational benefits might be enough to encourage more "drop-down" bankruptcies like LTL's but we've also seen that relying on a non-operating company as debtor carries risks of its own. So I think we're not going to see this sort of inside-out case much more in the future.
 
V. Follow-Up Issues
There’s going to be a bunch of follow-up legal issues from the Purdue Pharma decision. First will be what constitutes “consent” to a release? Some courts have insisted on opt-in, rather than opt-out and mass torts with publication notice presents a particular problem.  
 
Second, if releases are about consent and are contractual, is there now a requirement of a contribution to the estate or to the releasing creditors? That is, does regular consideration doctrine (or perhaps some heightened scrutiny of its adequacy) attach?
 
Third, what happens to exculpation provisions in plans for professionals?  I don’t seen how they survive Purdue Pharma.  The majority did not carve them out and the dissent seemed to think that they were threatened.  Perhaps there’s some different statutory hooks, but I’m not seeing them.  I suspect we’ll be back in opt-out land, but there might be separate opt-outs for the professionals and for other non-debtors. 
 
Fourth, there’s going to be more scrutiny of free-and-clear sales that purport to cut off successor liability. There are other statutory pieces in play there, but it’s hard to square a limitation of successor liability with a prohibition on non-consensual nondebtor releases. 
 
Fifth, the question of non-debtor stays remains unresolved. The policy issues there are a little different, particularly in the international context, but I think long-term non-debtor stays are now much harder to justify. 
 
Finally, the most important thing I learned in law school might have been “Pigs get fat, hogs get slaughtered.” (My students hear me explaining cases as implementing this rule all the time….) If Purdue Pharma’s lawyers could go back in time, I suspect they would have pressed the Sacklers for an opt-out structure.  In retrospect, however, it wasn’t unreasonable for them to try to force through a non-consensual deal:  but for Judge McMahon staying the effectiveness of the plan, they would have gotten away with it, as happens in almost every case, if only because of equitable mootness.  That Purdue Pharma turned out differently is a reminder about the still unaddressed problem of bankruptcy appeals, which rarely happen with the speed necessary to ensure review of many of the critical issues in Chapter 11.  
 
The Supreme Court often creates as many problems as it fixes when it takes up bankruptcy cases (does anyone know what is a final order?), but in this instance the Court got it 100% right, and in so doing fixed a fundamental abuse of the bankruptcy system.  

Comments

You don't mention any consumer impacts, whether that consumer creditors most frequent try to get away murder through 105(a) or that Chapter 13 shows that Congress knows how to write a co-debtor stay, so the absence else would seem intentional.

I practice bankruptcy appeals and have followed this case closely. I thought the Sackler position never made sense under the relevant statutes. Any decision for them could be based only on policy grounds, and this is not how the Supreme Court construes statutes these days. (With notable exceptions even in the past week.)
At least one District Court judge has criticized me for taking too many appeals in bankruptcy cases. I point to the breadth of the appellate jurisdiction statute and the word "final." I stress that if my clients do not appeal right away (14 days in bankruptcy cases), they lose their arguments forever. This one judge is not convinced. But finality, like pornography (apologies to Justice Stewart), is rarely apparent.

TYPO = I though

SUGGEST = I thought

Thank you Howard. It's corrected.

Ed--I simply didn't think about the consumer impact when writing this. But the 105(a) line will definitely affect things there as well.

What's 502(e) all about, anyway?

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