Analysis-U.S. Supreme Court's Purdue ruling makes mass torts harder to resolve in bankruptcy By Reuters

By Dietrich Knauth

NEW YORK (Reuters) – Bankruptcy may become a less attractive way to resolve sprawling lawsuits after a U.S. Supreme Court ruling struck down OxyContin maker Purdue Pharma's Chapter 11 deal and sharply curtailed a court's ability to strike out legal claims against entities that have not filed their own bankruptcy claims.

Bankruptcy courts offer several attractive tools for businesses and other organizations to resolve mass tort litigation, which have been used in cases involving widespread sexual abuse claims against Catholic dioceses and the Boy Scouts of America, the marketing and sale of painkillers addictive opioids, and that consumer products cause cancer.

A bankruptcy proceeding automatically halts litigation from moving forward, giving debtors breathing room to allow for a reorganization or global settlement. It can bind plaintiffs who do not accept a settlement offer and even allows debtors to permanently resolve similar claims that may arise in the future.

Until Thursday's decision in Purdue, bankruptcy could also be used to grant so-called debt discharges that provide civil immunity to businesses, individuals or organizations that have not filed for bankruptcy. Third parties often contributed funds to a bankruptcy settlement in exchange for that legal protection.

Those tools were meant to serve bankruptcy's broader purpose of giving a fresh start to people or entities overwhelmed by debt. But bankruptcy is increasingly used — and, some critics allege, abused — by wealthy corporations and defendants who find themselves threatened with costly lawsuits rather than traditional debts.

The Supreme Court, with its decision Thursday in the Purdue case, took that option off the table, ruling that nothing in U.S. bankruptcy law allows courts to release legal claims against non-debtors without the consent of the people who They sued them.

The settlement with Purdue would have protected the company's wealthy owners, members of the Sackler family, from lawsuits alleging they and their company created an opioid addiction crisis through their deceptive marketing of the painkiller OxyContin, even though they themselves did not file for bankruptcy.

The Sacklers were willing to pay up to $6 billion for their part of the deal, all of which would have gone toward addressing harm caused by the opioid crisis.

The Purdue ruling will put more pressure on other strategies for resolving mass torts, such as consolidating cases into multidistrict federal litigation or holding a long series of trials in other courts.

'CRITICAL TOOL'

Some experts, such as University of Chicago Law Professor Anthony Casey, fear that resolving mass tort cases outside of bankruptcy will result in less money for victims, because outside parties, such as the Sacklers or the companies' insurers, They often provide actual settlement money in exchange for releases from non-debtors to obtain finality from their own liability.

In a dissenting opinion to Thursday's decision, Justice Brett Kavanaugh said that debt discharges for non-debtors “have long been a critical tool for bankruptcy courts in handling mass tort bankruptcies” and that the Purdue settlement “was a shining example of the bankruptcy system at work.”

Without legal protections for the Sacklers, communities and people harmed by the opioid crisis risk losing $7 billion in funding, most of which was provided by the Sackler settlement, Kavanaugh wrote.

Organizations such as the Boy Scouts of America and Catholic dioceses have argued that bankruptcy is the only way to comprehensively address their legal problems, and that non-debtor releases are essential to raising contributions from outside organizations that may also be liable for the alleged damages.

The finality of a bankruptcy filing provides an incentive for related parties to contribute to a settlement rather than setting aside funds for their own defense in future lawsuits, according to advocates.

“Bankruptcy provides a superior forum for resolving mass tort claims because it brings together the largest possible pool of assets available to pay the largest number of plaintiffs,” the Chamber of Commerce and the American Tort Reform Association wrote in an amicus brief filed in the case of Purdue.

Outside of bankruptcy, mass torts can result in a “race to the courts” and an endless series of “lottery-like” lawsuits, with some plaintiffs getting massive payouts and others getting nothing, reform advocates say of grievances.

Melissa Jacoby, a UNC law professor and author of “Unjust Debts,” said those fears are overblown and that companies will simply have to offer better settlement payments to win over grievance victims, rather than using the threat of a bankruptcy discharge to force them to settle.

Justice Neal Gorsuch, writing for the Purdue majority, said the Sacklers might be willing to pony up more money to buy out litigants who did not vote for the settlement, as they did previously in the bankruptcy case.

But debates over the settlement money are best addressed in Congress or other forums, because the law simply does not allow Sackler's release, Gorsuch wrote.

Massive cases have been resolved outside of bankruptcy.

Industrial conglomerate 3M, for example, sought to use the bankruptcy of its subsidiary Aearo to settle some 300,000 lawsuits alleging the company sold defective earplugs to the U.S. military. 3M had argued that the case, which became the largest mass tort in U.S. history, showed the system was “no longer a viable forum” for resolving sprawling claims and was “broken beyond repair.”

However, once a bankruptcy court dismissed Aearo's Chapter 11 as an inadequate effort to protect 3M from lawsuits, it quickly reached a $6 billion settlement out of bankruptcy.