Taking Bankruptcy Exceptionalism Seriously in Mass Tort Reorganization After Purdue Pharma

The Supreme Court’s deeply divided 5-4 decision last summer in the chapter 11 case of opioid-maker Purdue Pharma ended the use of nonconsensual third-party ‘releases,’ which would eliminate liabilities of nondebtors who may share liability with a corporate debtor that seeks bankruptcy protection. Yet our recent article, The End(s) of Bankruptcy Exceptionalism: Purdue Pharma and the Problem of Social Debt, shows that the Purdue Pharma majority’s correct but narrow opinion ignored the problematic ‘exceptionalism’ of the lower courts and the reality that Purdue Pharma involved what we have characterized elsewhere as ‘social debt’ or ‘onslaught litigation’—liability for serious misconduct which the bankruptcy system was not built to address, leading to litigation that threatens to take significant resources and cause reputational costs.

The Purdue Pharma majority’s omission left a gap for bankruptcy courts to perpetuate a version of exceptionalism in mass tort reorganizations that existed prior to its ruling—an opening that we fear some bankruptcy courts already have used in the wake of Purdue Pharma. But there are ways that bankruptcy courts can uphold due process and other important rights, while still recognizing the unique nature of bankruptcy as a ‘special remedial scheme.’

‘Bankruptcy exceptionalism’ is an easy-to-understand, though contested, concept. It describes the tendency in bankruptcy to bend the rule of law in order to accommodate the claimed exigencies of ‘unique’ cases that demand ‘equity’ and ‘fairness.’ It has been conceived of in two forms—methodological and structural. The methodological version focuses on deviations from textualistic statutory interpretation. The majority’s decision in Purdue Pharma can be read as a rejection of methodological exceptionalism.

Structural exceptionalism, by contrast, reflects a willingness to deviate from constitutional rules, standards, norms, and values in support of a bankruptcy goal. Structural exceptionalism manifests in cases that combine some public interest with financial distress. Historic examples have included the railroad receiverships of the 19th and 20th centuries, and the Court’s jurisprudence on state sovereign immunity. Courts (and some academics) justify this exceptionalism by citing the benefits of maximizing economic recoveries and delivering ‘value’ to creditors. Justice Kavanaugh’s flawed yet emotional dissent in Purdue Pharma fully embraced this version of bankruptcy exceptionalism without acknowledging the extraordinary power he would vest in bankruptcy judges.

Indeed, on the surface, Purdue Pharma seemed like a strong candidate for an exceptionalist ruling. The company, along with the Sackler family, perpetrated a massive public health crisis that has taken hundreds of thousands of lives. The company, again along with the Sackler family, touted chapter 11 as the only way to offer ‘global peace’ for these liabilities, while promoting uniformity of treatment, which might be lacking if the underlying litigations remained with courts of original jurisdiction. But for reorganizations that involve social debt, structural exceptionalism threatens individual due process rights and other noneconomic interests in having a neutral adjudication on the merits of serious allegations—that is, a voice and a day in court.

Justice Kavanaugh lauded the Purdue Pharma chapter 11 proceeding as a ‘shining example’ of how bankruptcy can work. In reality, however, the case demonstrated the problematic nature of using reorganization to deal with social debt and onslaught litigation under the process’s current framework without enacting or introducing protections for the victims of serious wrongdoing flung into bankruptcy proceedings. During the reorganization case, rather than use the proceeding to craft an equitable distribution after a neutral determination of liability, the Sacklers used the process to halt judicial determination of their liability, turning bankruptcy into a civil litigation shield, completely opposite to the usual and fundamental liability-determining role that civil courts play in the judicial system.

Although the Purdue Pharma majority opinion, by Justice Gorsuch (joined by Justices Alito, Barrett, Jackson, and Thomas), purports to end the statutory exceptionalism of the use of nonconsensual third-party releases in bankruptcy, its failure to address deeper concerns may allow structural exceptionalism to flourish in reorganizations dealing with social debt and onslaught litigation and other mass tort reorganizations. Third-party releases are not the only trick in the mass tort reorganization playbook that companies desire to use. And third-party releases predicated on virtually no consent still may be achievable in substance, if not in technical form, through these other tricks.

The immediate fight in mass tort reorganizations will be over what constitutes consent for third-party releases. Does failing to vote on a plan that contains a third-party release constitute consent to that release? Stated differently, must creditors affirmatively ‘opt out’ of a third-party release such that the default is to release the third party? We think not. That sounds like a nonconsensual third-party release in disguise, especially if the notice, ballot, and disclosure statement accompanying the plan are difficult to read for the typical tort claimant. But some bankruptcy courts post-Purdue Pharma have allowed such ‘opt out’ plans. Alternatively, and we think correctly, other bankruptcy courts have required that creditors affirmatively vote yes on the plan or ‘opt in’ to the third-party release.

In addition, the other leading issues that will continue to plague mass tort reorganizations are questions involving how to determine whether third-party claims are ‘direct’ or ‘derivative’; how to protect the participatory interest of tort claimants, particularly through the appointment and use of future claimant representatives; and how to deal with the uncertain allegiances of the privatized fiduciaries who often are in charge of reorganization cases. Importantly, the majority’s holding in Purdue Pharma resolved none of these issues, and all of them can pose challenges to fundamental rules, norms, and values of the civil justice system.

Finally, returning to Justice Kavanaugh’s dissent, its passion, though flawed, may embolden those who desire an amendment to the Bankruptcy Code to create an ‘asbestos 2.0’—an expansion of the use of nonconsensual third-party releases in section 524(g) from that limited context to all reorganizations involving mass torts. Bankruptcy has the ability to play a role in mass tort adjudication, but it should not be allowed to continue to be a free-roving exception to the foundational structural protections of our legal system, either through an amendment to the Code that takes away the little gained in Purdue Pharma or through structural bankruptcy exceptionalism. 

Jonathan C. Lipson is the Harold E. Kohn Chair at Temple University Beasley School of Law.

Pamela Foohey is the Allen Post Professor of Law at the University of Georgia School of Law.

The article is available here.