New York — A recent Supreme Court decision has potentially narrowed the utility of bankruptcy as a tactic for resolving extensive lawsuits, impacting strategies employed by large organizations such as the Catholic dioceses, Boy Scouts of America, and opioid manufacturers. The ruling denied the ability of bankruptcy courts to clear legal claims against affiliated parties that have not themselves sought bankruptcy protection, a strategy previously available and frequently utilized in mass tort litigation.
Historically, bankruptcy courts have offered valuable tools for entities crushed by substantial legal challenges. These tools include a stay on existing litigation, binding recalcitrant claimants to settlements, and setting a framework to handle future similar claims. Significantly, bankruptcies could extend protections to third parties or non-debtors linked to the primary entity involved, through financial contributions to the settlement in exchange for legal immunity. Such arrangements have been instrumental in large-scale settlements and restructurings.
The allure of bankruptcy for large corporations facing mounting lawsuits has often been criticized. Opponents argue it is a way for financially sound entities to avoid culpability and settlement payments commensurate with their involvement or liability. The Supreme Court’s judgment emphasizes that such non-debtor immunity is not supported by U.S. bankruptcy law unless all plaintiffs provide their consent, a stipulation that could set a precedent for future cases.
This ruling directly impacts Purdue Pharma’s attempt to settle claims through a bankruptcy plan involving its owners, the Sackler family, who offered up to $6 billion toward addressing the opioid crisis. Under the foiled agreement, the family would have been shielded from further lawsuits despite not filing for bankruptcy themselves.
Experts in bankruptcy law express concern that the absence of such protections might complicate future settlements. Companies might face larger litigations or have to increase payments to persuade victims. According to the Chamber of Commerce and the American Tort Reform Association, without the non-debtor release mechanism, settlements could become less comprehensive, thwarting the ability to amass the “largest possible pool of available assets to pay the largest number of claimants.”
Critics of bankruptcy-driven resolutions argue that these concerns are overstated and that entities can still negotiate settlements without leveraging bankruptcy protections. They suggest that the outcome could lead to fairer negotiations and more substantial victim compensations.
Disapproval of the Supreme Court’s decision was voiced by Justice Brett Kavanaugh in his dissent, where he highlighted the importance of non-debtor releases in handling complex bankruptcies. He stressed that without these releases, crucial funds intended for community restitution and individual victims could potentially be lost.
Justice Neal Gorsuch, writing for the majority, suggested that while the Sacklers might have legitimate reasons to settle, changes to legal protections should be pursued through legislative avenues rather than the courts.
In the wake of this decision, alternative dispute resolution strategies like multidistrict litigation or proactive, transparent negotiations might gain traction. This shift could mark a significant transformation in how companies approach mass tort claims and seek to resolve them without the broad shield of bankruptcy protection.