Dietrich Knauth
NEW YORK (Reuters) – Bankruptcy may become a less attractive way to resolve numerous lawsuits after a U.S. Supreme Court ruling overturned OxyContin maker Purdue Pharma’s Chapter 11 settlement and sharply limited the court’s ability to throw out lawsuits against entities that did not sue. . bankruptcy of ourselves.
Bankruptcy courts offer companies and other organizations several attractive tools for resolving mass tort litigation, which has been used in cases involving widespread sexual abuse claims against Catholic dioceses and the Boy Scouts of America, the marketing and sale of addictive opioid painkillers, and that consumer products cause cancer.
A bankruptcy filing automatically stops further litigation, giving debtors breathing space to pursue a reorganization or global settlement. It can bind dissenting plaintiffs who will not agree to a settlement offer, and even allows debtors to finally settle similar claims that may arise in the future.
Until Thursday’s Purdue decision, bankruptcy can also be used for a so-called debtor discharge, which provides broad civil immunity to companies, people or organizations that have not filed for bankruptcy themselves. Outside parties often contributed financing to bankruptcy proceedings in exchange for this legal protection.
These tools were intended to serve the broader purpose of bankruptcy—to give a fresh start to people or organizations saddled with debt. But bankruptcy is increasingly being used—and, some critics say, abused—by wealthy corporations and defendants who face costly lawsuits instead of traditional debts.
The Supreme Court’s Purdue decision on Thursday eliminated that option from consideration, ruling that nothing in U.S. bankruptcy law allows courts to throw out lawsuits against debtors without the consent of the people suing them.
A deal with Purdue would protect the company’s wealthy owners, members of the Sackler family, from lawsuits alleging they and their company created the opioid addiction crisis through misleading marketing of the painkiller OxyContin, although they themselves have not filed for bankruptcy.
The Sacklers were willing to pay up to $6 billion for their part of the settlement, all of which would go toward undoing the harm caused by the opioid crisis.
Purdue’s decision will put more pressure on other strategies for resolving mass torts, such as consolidating cases in federal multidistrict trials or pursuing a lengthy series of trials in other courts.
“CRITICAL TOOL”
Some experts, such as University of Chicago law professor Anthony Casey, worry that resolving mass tort cases outside of bankruptcy will result in less money for victims because outside parties such as the Sacklers or insurance companies often receive real settlement money in exchange for unfulfilled obligations. – the debtor is released from liability in order to receive a final decision on his liability.
In his dissenting opinion on Thursday’s decision, Judge Brett Kavanaugh said that the defaulter waiver “has long been a critical tool for bankruptcy courts in managing mass bankruptcies” and that the Purdue settlement “was a shining example operation of the bankruptcy system.” “
Without the Sacklers’ legal protections, communities and individuals affected by the opioid crisis risk losing $7 billion in funding, much of which was provided by the Sacklers’ agreement, Kavanaugh wrote.
Organizations such as the Boy Scouts of America and Catholic dioceses argue that bankruptcy is the only way to fully resolve their legal problems, and that releasing debtors from liability is necessary to collect donations from outside organizations that may also be liable for the alleged damages.
A final bankruptcy ruling gives interested parties an incentive to participate in the deal rather than having to spend money defending themselves in future lawsuits, attorneys say.
“Bankruptcy provides an excellent forum for resolving mass tort claims because it brings together the largest possible pool of available assets to pay the largest number of plaintiffs,” the Chamber of Commerce and the American Tort Reform Association wrote in an amicus brief filed with Purdue. happening.
Beyond bankruptcy, mass torts could lead to a “race to the courthouse” and an endless series of “lottery” lawsuits in which some plaintiffs receive huge payouts while others receive nothing, tort reform advocates say.
Melissa Jacoby, a law professor at the University of North Carolina and author of Unfair Debt, says these concerns are overblown and that companies will simply have to offer higher settlement payouts to win over victims of wrongdoing rather than using the threat of bankruptcy relief. to force a settlement.
Justice Neil Gorsuch, writing for the Purdue majority, said the Sacklers might be willing to put up more money to buy off dissenting litigants who did not vote on the deal, as they did earlier in the bankruptcy case.
But the debate over the payments is best left to Congress or other forums because the law simply does not allow Sackler’s release, Gorsuch wrote.
Massive cases have been settled outside of bankruptcy.
Industrial conglomerate 3M, for example, tried to use the bankruptcy of its subsidiary Aearo to settle some 300,000 lawsuits alleging that the company sold defective earplugs to the US military. 3M argued that the case, which escalated into the largest mass tort in U.S. history, showed that the system was “no longer a viable forum” for resolving multiple lawsuits and was “broken beyond repair.”
However, once the bankruptcy court rejected Aearo’s Chapter 11 as an improper attempt to protect 3M from lawsuits, it quickly reached a $6 billion settlement, not including bankruptcy.