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. This week’s post features two independent articles highlighting different aspects of the process-based challenges raised by mass tort bankruptcies (including, or perhaps even especially, Purdue): one about the problematic nature of the private bargaining and negotiations (the “rule of the deal”) that occurred in the Purdue Pharma Bankruptcy, and another about the due process flaws in current mass tort bankruptcies caused by weakened protections for individual creditors in current mass tort bankruptcies.
For some prior coverage on the BRT regarding Purdue Pharma’s bankruptcy, please see articles here (by Lauren Pansegrau and Jessie Lin), 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).
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Post One: The Rule of the Deal: Bankruptcy Bargains and Other Misnomers
By Jonathan C. Lipson (Temple University – James E. Beasley School of Law)
Jonathan C. Lipson
Practice under chapter 11 of the Bankruptcy Code depends on bargaining and negotiation to produce a plan of reorganization for the corporate debtor. Because this bargaining occurs behind closed doors, its dynamics are opaque. In most cases, this is not a problem because we infer that quasi-private ordering will produce greater economic recoveries for more claimants, even as it may occasionally distort or deviate from positive law (the “rule of the deal”).
In a recent paper, The Rule of the Deal: Bankruptcy Bargains and Other Misnomers, 97 Am. Bankr.L.J. 41 (2023), I assess the rule of the deal in the normatively difficult bankruptcy of opioid-maker Purdue Pharma. As is well-known, the opioid-maker introduced the synthetic analgesic OxyContin in the 1990s. The company’s fraudulent marketing claims about the drug are said to have contributed significantly to the opioid crisis.
The Purdue Pharma bankruptcy was an effort to impose a deal struck by the owners of the debtors, the Sackler family, and a group of creditor representatives on all current and potential opioid claimants. The most notorious deal in that case was the nonconsensual “release” of hundreds of individuals and entities for direct liability for their alleged role the debtors’ twice-confessed federal drug-marketing crimes, including the Sacklers and the company’s CEO, who has taken home millions of dollars in pay during the bankruptcy, even as he was an executive at the company while it committed its felonies.
Less attention has been paid to deals that made those releases virtually inevitable from the outset. This article fills that gap, explaining how “ex ante” and “ex post” bankruptcy bargains—a governance change, a stipulation, and a settlement with the Department of Justice—made it practically impossible for creditors to resist those releases.
The paper exposes the fallacies and contradictions of the rule of the deal as it played out in Purdue Pharma, including that the debtors were both separate from, and yet “inextricably intertwined with,” the Sacklers and that creditors somehow agreed to the Sackler release. It also shows that, even though bargaining during the case increased the face amount of creditor recoveries, it appears that the present value of creditor recoveries actually declined both because creditor representatives agreed to extend the Sacklers’ payout period and because the drug-maker declined in value during the bankruptcy.
The paper argues that the rule of the deal was especially problematic here not only because it defeated its own rationale—maximizing creditor recoveries—but also threatened the rule of law because the underlying debt—liability for opioid-marketing fraud—is a species of what I call elsewhere “social debt.” The normative stakes of social debt require special attention to the rule of law, which was in tension in with the rule of the deal as it played out in Purdue Pharma.
The case, and the fate of the Sackler release, are now pending before the Supreme Court.
Click here to read the full article.
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Post Two: Sorting Bugs and Features of Mass Tort Bankruptcy
By Melissa B. Jacoby (University of North Carolina School of Law)
Melissa B. Jacoby
At the request of the Solicitor General of the United States, the Supreme Court is ending its decades-long avoidance of a vexing question: can a chapter 11 bankruptcy terminate the direct personal liability of nondebtors to claimants who did not consent? In or out of bankruptcy, a party can agree to release a third party, solvent or not. The catch is imposing that outcome on everyone else. The majority can bind dissenters when it comes to obligations of the debtor – that is one of chapter 11’s remarkable superpowers. Does majority rule protect nondebtors too, for direct causes of action? Judging by the Senate Judiciary Committee hearing on September 19, 2023, lawmakers’ interest in these questions persists.
Whenever the majority can bind dissenters to changes in their legal rights, rules and norms around claims classification and voting become especially important. The stakes are even higher for unliquidated tort claims because these bankruptcies aim to alter the method of determining responsibility in the first place (and includes nonmonetary objectives) rather than just terms of repayment. As documented in earlier work of Elizabeth Gibson and Ralph Brubaker, mass tort bankruptcies tend to combine all claims of injured people in one class and value each claim at $1 – wherever they fall on a spectrum of severity, wherever they fall on a spectrum of being carefully vetted. In addition to negating the weighted voting element of section 1126, people with disparate diagnoses and varying levels of proof supporting their claim have the same leverage for purposes of plan negotiation and confirmation. I talked about these issues at a conference primarily about multidistrict litigation, which culminated in the article Sorting Bugs and Features in Mass Tort Bankruptcy, and then again in written testimony for the recent Senate hearing.
These norms give defendants incentives to recruit and cut deals with less well vetted claims, for whom the cost-benefit analysis of ceding access to the civil justice system may be very different from others who had filed carefully considered lawsuits. Consider Johnson & Johnson’s bankruptcy gambits that got significant attention at the recent Senate hearing. When J&J’s bespoke liability-only subsidiary, LTL, initiated its second chapter 11 case, J&J issued a press release announcing that “LTL secured commitments from over 60,000 current claimants to support a global resolution on these terms.” J&J’s recent Senate testimony doubled down on its assertion that the “vast majority” supported a deal, although was more careful than the press release to clarify that the support came from law firms representing large numbers of people, not the claimants themselves. The issue for present purposes is this: if new claimants had types of cancer other than mesothelioma and ovarian cancer (the new paperwork talked about “gynecological cancer” more generally), why should claimants with less scientific backing of a talc connection get to outvote the plaintiffs from the first case and change their rights? At the very least, shouldn’t each cancer group be separately classified? Returning full circle to the issue before the Supreme Court, the stakes of these norms are even greater if law firms for newly recruited and less vetted claim can be used to cap liability of other parts of the entire corporate family as well as the debtor over the objections of other injured parties. However the Supreme Court rules, injured individuals need more protections during the course of a mass tort bankruptcy. Sorting the claims of injured people in the trust, once their legal rights have changed forever, is too little and too late.
Click here to read the full article.
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