NEW YORK — The Uamsung the decision by the Supreme Court could signal a pivot in the way corporations may use bankruptcy proceedings to settle massive lawsuits. This follows a recent decision which invalidated a key part of the agreement that would have resolved multidistrict litigation against Purdue Pharma, the manufacturer of OxyContin. The court ruled against the ability of bankruptcy courts to absolve claims directed at third parties who have not themselves declared bankruptcy—a standard practice that had been utilized by firms facing sizable litigation burdens.
For years, bankruptcy courts provided a setting allowing companies facing extensive torts — such as sexual abuse claims against large organizations like the Catholic dioceses and the Boyscouts of America, or pharmaceutical companies in opioid litigation — to reach global settlements. Bankruptcy filings not only halted ongoing litigation but also forced objecting claimants to abide by the settlement, and in some instances, bar future claims.
Prior to the decision involving Purdue Pharma, third parties, such as corporate affiliates or executives, could contribute to the settlement fund and in exchange gain immunity from individual lawsuits through non-debtor releases. These releases were essential for consolidating the support of all involved towards a unified settlement that benefits alleged victims without further court actions.
However, the Supreme Court’s decision strips bankruptcy courts of that capacity, clarifying that the bankruptcy law does not permit the dismissal of claims against individuals or entities who haven’t filed for bankruptcy unless each claimant agrees. The Purdue case particularly highlighted this point, as the agreement would have shielded the Sackler family — owners of Purdue Pharma — from further lawsuits despite their personal non-debtor status while contributing financially to the opioid crisis settlement.
Facing litigation, members of the Sackler family had agreed to provide up to $6 billion as part of the settlement, recognizing their role in marketing strategies that contributed heavily to the opioid epidemic in America. The funds were earmarked specifically to address the fallout of widespread opioid addiction.
In the wake of this decision, companies might now be compelled to seek alternative pathways for resolving mass tort litigation. Options include federal multidistrict litigation or protracted state and federal court trials, though these methods might not prove as efficient or encompassing as bankruptcy settlements.
Critics of outside-the-bankruptcy settlements argue that without the ability for non-debtor releases, external parties like insurers or corporate affiliates will contribute less to settlements, potentially decreasing the overall compensation available to victims. Justice Brett Kavanaugh, in his dissenting opinion, lamented that eliminating such releases would dismantle a critical mechanism under which bankruptcy law has managed complex cases effectively.
Supporters of severe bankruptcy scrutiny counter that businesses should enhance their settlement offers to appeal to plaintiffs instead of relying on non-debtor immunity as leverage. These discussions raise fundemental questions about the balance between equitable resolution for victims and the proper use of bankruptcy protections.
Organizations have varied in their responses to the ruling. Entities that had depended heavily on bankruptcy’s broad protections to manage liabilities, like the Boy Scouts of America and Catholic dioceses, may find it increasingly challenging to secure comprehensive settlements.
Time will tell how aptly the judiciary, legislature, and the business community adapt to the changing landscape of tort settlements post this pivotal Supreme Court ruling. Alternative strategies may evolve as litigants and defendants search for an equitable middle ground that respects both creditor rights and the need for finality in settlements. The intricate interplay of law, finance, and ethics promises to provoke further debate and potentially, significant legal reforms.