Washington, D.C. — In a landmark decision, the U.S. Supreme Court has issued a ruling that will reshape the landscape of bankruptcy law, particularly affecting how companies deal with mass tort liabilities through Chapter 11 bankruptcy cases. This decision notably impacts liability insurers who often resort to bankruptcy proceedings to resolve large-scale legal claims.
At the center of this pivotal case is Purdue Pharma, the pharmaceutical giant behind OxyContin. This drug, marketed as a time-released painkiller, became wildly popular, turning into the most prescribed opioid in the United States. This, however, came at a steep cost as the opioid crisis escalated, leading to hundreds of thousands of claims asserting injuries from the drug’s use. The revenues from OxyContin funneled billions into Purdue Pharma, controlled by members of the Sackler family, who found themselves deeply embroiled in these legal battles.
The Sacklers, facing potentially crushing personal liability, saw Purdue Pharma file for Chapter 11 bankruptcy. The move was a strategic attempt to manage the overwhelming flood of claims. The bankruptcy plan included a notable proposal from the Sacklers to add billions to the settlement pot – a contribution contingent upon a bankruptcy plan and confirmation order that would discharge all existing and future OxyContin claims against Purdue Pharma and themselves.
However, this proposal hinged on a legal mechanism called a “non-consensual third-party release,” which has been a contentious issue in bankruptcy courts. The legality of such releases varies across federal circuits, adding layers of complexity to the case. The release would essentially absolve the Sacklers from further claims in exchange for their financial contribution, even though they themselves were not filing for bankruptcy.
The bankruptcy judge initially approved the plan, which was contested by various government entities. The Second Circuit upheld the plan, but with the circuit courts divided on the issue, the Supreme Court agreed to hear the case. The arguments focused largely on sections of the Bankruptcy Code, particularly Section 1123(b)(6) and Section 105(a). These sections outline what a plan of reorganization may include, with proponents of the plan arguing it was necessary to resolve the cases fairly and efficiently.
However, the Supreme Court’s decision, penned by Justice Neil Gorsuch, was narrowly split at 5-4. The majority ruled against the Sacklers, finding that the Bankruptcy Code does not explicitly authorize non-consensual third-party releases. The decision underscores the court’s textualist approach to statutory interpretation, focusing solely on the language of the law without venturing into policy implications or practical outcomes.
The ruling sends a clear message: it’s up to Congress to legislate on such matters. This decision is likely to complicate future bankruptcy cases involving mass tort claims, where similar third-party releases have been used to streamline settlements in multifaceted legal disputes ranging from asbestos exposure to defective medical devices
The impact of this decision extends beyond the immediate parties involved. Liability insurers, in particular, face new challenges. These companies have historically utilized Chapter 11 filings not only to protect insureds but also to shield themselves from direct claims. The Supreme Court’s ruling may now prevent such comprehensive protections, potentially leading to increased costs and liabilities for insurers.
Moreover, this decision raises questions about the fate of past settlements that employed similar legal mechanisms now deemed inconsistent with the Bankruptcy Code. While the majority did not address whether previously confirmed plans could be unraveled, the uncertainty alone may prompt fresh legal challenges, reopening settled cases.
The dissent, authored by Justice Brett Kavanaugh, highlighted the practical and policy complexities ignored by the majority. He warned of the potential chaos and adverse effects on victims of mass torts, suggesting the need for Congressional action to address these emerging gaps in bankruptcy protections.
This pivotal decision thus not only reframes the parameters of bankruptcy law but also sets the stage for potential legislative reform. As the implications unfold, all eyes will turn to Congress to see how it responds to the judicial invitation to refine the scope of bankruptcy discharges, particularly in cases as nationally significant as opioid-related bankruptcies.
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