Editor’s Note: On August 10, 2023, the Supreme Court of the United States agreed to hear the appeal of the bankruptcy of Purdue Pharma. In its grant of certiorari, the Supreme Court asked the parties to brief and argue “[w]hether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.” Following on the BRT’s previous coverage of recent developments in mass tort bankruptcies, the next few posts will address Purdue’s bankruptcy in particular and the issues raised by third-party releases and mass tort bankruptcies more generally.
For some prior coverage on the BRT regarding Purdue Pharma’s bankruptcy, please see articles here (by Martin J. Bienenstock & Daniel S. Desatnik and Jared Mayer) here (by Jonathan Lipson, Adam Levitin, and Stephen Lubben), here (by William Organek), here (by Marshall Huebner and Marc Tobak), and here (by Jonathan Lipson).
By Lauren Pansegrau and Jessie (Ziyu) Lin (Harvard Law School)
On September 19, 2023, the U.S. Senate Judiciary Committee convened a significant hearing to examine the use of Chapter 11 bankruptcy by corporations, with a particular focus on Johnson & Johnson (J&J) and its “Texas Two-Step” strategy to address mass tort liabilities related to its baby powder products. The hearing featured several key witnesses, including Mr. Erik Haas, J&J’s Worldwide Vice President of Litigation, legal experts Mr. Stephen Hessler, Professor Melissa Jacoby, and Professor Samir D. Parikh, and a mesothelioma victim’s family representative, Ms. Lori Knapp.
The debate revolved around whether bankruptcy is an appropriate avenue for resolving mass tort liabilities or if it is being misused to shield corporate wrongdoers from accountability. Some witnesses and committee members expressed concern about corporate maneuvers, such as divisive mergers, which may allow companies to enjoy the benefits of bankruptcy without its costs. They emphasized that bankruptcy was not intended to serve as an alternative justice system for tort claims, calling for additional safeguards if bankruptcy continues to be used for this purpose. Others argued that bankruptcy provides a more efficient and equitable way to compensate victims in mass tort cases, compared to lengthy class action or multi-district litigation processes. The hearing focused particularly on J&J’s Texas Two-Step strategy, where the company restructured its subsidiary to separate talc liabilities from other assets, followed by a bankruptcy filing. Some senators questioned the legitimacy of this approach, given J&J’s significant financial strength, and inquired whether Congress can implement federal laws to establish a minimum standard for the use of divisive merger in mass tort cases.
Another topic discussed was nonconsensual third-party releases, which involve extinguishing claims held by third parties without their consent. There was a split of opinions among witnesses: some advocated for individual claimants to have the option to consent to having their rights altered or opt out, while others maintained that the Bankruptcy Code does provide for nonconsensual third-party releases and emphasized that such releases are essential to resolving cases and improving tort victim recoveries. In addition, in the hearing, senators also emphasized the need for improved protection of employee claims and administrative priority claims in bankruptcy proceedings.
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