New York, NY — The recent ruling by the U.S. Supreme Court regarding bankruptcy claims has significant implications for how nondebtors can settle disputes related to a debtor’s bankruptcy estate. Following the court’s decision in the Purdue Pharma case, third-party claimants cannot have resolutions imposed on them without their explicit consent, even if those claims are closely linked to the debtor’s bankruptcy.
Two notable mass tort cases illustrate the ongoing efforts by debtors and third parties to forge comprehensive settlements despite the challenges highlighted by the Purdue decision. These cases include the bankruptcy filings of the Roman Catholic Diocese of Rockville Centre and KFI Wind-Down Corp.
The Roman Catholic Diocese of Rockville Centre entered Chapter 11 bankruptcy in October 2020 with the aim of securing a global settlement for hundreds of sexual abuse survivors, insurers, and related entities, such as local parishes. Insurers and parishes were willing to engage in negotiations, seeking protection from liability through a reorganization plan. Chief Bankruptcy Judge Glenn facilitated mediation, leading to a financial agreement among the involved parties. Under this settlement, insurers opted to buy back their insurance policies for approximately $88 million, which will be directed to a trust established for abuse claimants. The plan includes a reserve fund to handle direct claims against the insurers, providing that cash will flow into the trust once a required number of claimants releases their direct claims.
In the case of KFI Wind-Down Corp, the proposed Chapter 11 plan aims to resolve claims spanning both bankruptcy and nonbankruptcy contexts. A hearing for the disclosure statement is set for May. The plan promises to address claims from the debtor, as well as thousands of third-party plaintiffs against nondebtors. An agreement has been reached to establish an opt-out class-action settlement for plaintiffs’ direct claims against the debtor’s indirect parent company. This agreement, subject to U.S. District Court approval, would involve the parent company committing substantial financial resources over five years to a plan-settlement trust. In addition, both the debtor and the parent would collaborate on recovering shared insurance proceeds.
Both the Rockville Centre and KFI Wind-Down Corp cases reflect the continuing desire among debtors, creditors, and third-party claimants to achieve broad resolutions in the wake of the Purdue decision. This pursuit underscores the complexities involved in bankruptcy proceedings, as well as the need for innovative settlement strategies to address overlapping claims.
As these cases unfold, they highlight the shifting landscape of bankruptcy law and its impacts on how entities handle collective claims.
The positions expressed in this article originate from the authors, Robert D. Drain, Justin Winerman, and Jamie Slocum, all affiliated with Skadden, Arps, Slate, Meagher & Flom LLP.
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