Washington — The recent U.S. Supreme Court ruling has significantly impacted how bankruptcy can be employed, particularly in mass tort litigations involving organizations like Purdue Pharma, the makers of OxyContin. The court has curtailed the scope of bankruptcy courts, specifically rescinding their authority to dismiss legal claims against non-debtors without the explicit consent of the involved parties.
Historically, bankruptcy proceedings have provided a robust mechanism for organizations to manage and settle widespread legal challenges, including cases related to sexual abuse and consumer products linked to health issues. Such procedures allowed for the automatic halting of ongoing litigation, offering companies space to reorganize or reach global settlements. Additionally, these proceedings had the power to enforce settlements on dissenting claimants and cover future similar claims.
Before this pivotal decision, entities not directly filing for bankruptcy could obtain legal immunity through what is known as non-debtor releases. These releases were often secured by external parties contributing to the bankruptcy settlement, in exchange for protection from legal repercussions.
The intent behind these tools was to offer overwhelmed entities a chance to start afresh, free from crippling debts. Critics, however, argue this mechanism has been exploited by affluent corporations to sidestep costly lawsuits that stem from their business practices rather than conventional financial obligations.
The Supreme Court’s decision has now eliminated the use of non-debtor releases without claimants’ consent, fundamentally altering how bankruptcy can be leveraged in complex legal settlements. This was evident in the case involving Purdue Pharma, where the ruling disrupted a proposed agreement that would have shielded the company’s owners—the Sackler family—from lawsuits despite their non-bankrupt status. The family had agreed to contribute up to $6 billion towards mitigating the opioid crisis as part of the settlement.
Legal experts express concerns that resolving such cases outside of bankruptcy courts will channel lesser compensation to victims. This is because external contributors like insurers or wealthy individual defendants are less inclined to participate financially without the assurance of a legal release.
Justice Kavanaugh, in a dissenting opinion, emphasized the importance of non-debtor releases in managing mass-tort bankruptcies, describing the Purdue settlement as an exemplary instance of the system’s functioning.
Furthermore, organizations including the Boy Scouts of America and various Catholic dioceses have maintained that bankruptcy provides the most comprehensive solution for handling their extensive legal woes and that non-debtor releases are crucial for securing contributions from other involved parties.
Outside of bankruptcy, mass tort cases can result in uneven compensation for claimants, leading to a scramble amongst victims and prolonged legal battles. Advocates for legal reform argue this creates a ‘race to the courthouse’, where claimants seek the highest possible settlements irrespective of equitable distribution.
Melissa Jacoby, a legal scholar, rebuts that companies will inevitably have to propose better settlements to win over plaintiffs instead of relying on the threat imposed by bankruptcy releases. This shift might enhance payouts to victims but could draw out litigation and reduce overall efficiency in resolving mass torts.
In sum, while massive settlements have occasionally been reached outside of bankruptcy, as in the recent $6 billion agreement by 3M to resolve claims over defective military earplugs, the new limitations on bankruptcy courts may lead to more fragmented and less predictable outcomes for mass tort litigations.