Please Don’t Forget the Victims: Mass Torts, Third Party Releases and the U.S. Bankruptcy Code
by | posted in: Bankruptcy, Bankruptcy Reform, Chapter 11, Legislation, Mass Torts, Statutory Interpretation, Third-Party Releases | 0

By Marshall S. Huebner and Marc J. Tobak (Davis Polk & Wardwell LLP)

Marshall S. Huebner
Marc J. Tobak

[Editor’s Note: The authors, along with other attorneys at Davis Polk & Wardwell LLP, represent Purdue Pharma L.P. and various affiliated debtors in connection with their ongoing bankruptcy proceedings.]

For decades, third party releases have been the cornerstone of mass tort bankruptcies that have resolved previously intractable litigation and provided meaningful compensation to victims who might well have otherwise recovered nothing.  In cases such as Johns-Manville (asbestos), A.H. Robins (Dalkon Shield), Dow Corning (silicone breast implants), Mallinckrodt (opioids), and Boy Scouts of America, courts concluded, on a developed factual record informed by pre-bankruptcy litigation history, that value-maximizing settlements and plans of reorganization were viable only by providing settling parties paying into the estate third party releases of appropriate scope.  The alternative to these broadly and deeply supported settlements, many in the billions of dollars, was years of costly and uncoordinated litigation in scores of fora and resulting in greatly diminished victim recoveries.

Critiques of third party releases often argue that these releases are in some way unfair to the parties subject to the release, or that third party release cases privilege monetary recoveries over nonmonetary goals.  This article aims to address these issues and refocus the debate on the importance of third party releases in achieving and maximizing monetary and nonmonetary goals of victims in mass tort bankruptcies.

First, we canvass the overwhelming judicial consensus that the Bankruptcy Code (including sections 105 and 1123) authorizes third-party releases and channeling injunctions where important or essential to a value-maximizing reorganization, meet additional limiting tests, and are within the court’s jurisdiction.  We highlight that a thorough examination of United States v. Energy Resources Co., 495 U.S. 545 (1990), demonstrates that the Supreme Court specifically affirmed the power of bankruptcy courts to confirm plans of reorganization that nonconsensually adjust rights and liabilities among third parties when such adjustments enable a successful reorganization.

Second, we examine how existing law—properly applied—appropriately limits third party releases to circumstances in which they maximize value for, and are broadly supported by, victims and other creditors.  Proponents of a third party release plan must not only convince the court that it is objectively superior to the alternatives; in addition, the parties directly affected by the release must vote in favor of the plan by an “overwhelming” margin.  Unsurprisingly, such plans are often crafted by creditors and debtors together, ensuring that they reflect victims’ monetary and nonmonetary goals.

Finally, we consider how mass tort resolutions would necessarily change if third party releases were to become unavailable.  We note that recent legislative initiatives to categorically ban third party releases outside the asbestos context would make mass tort victims far worse off without achieving countervailing benefits.  We recommend that legislative efforts directed at third party releases instead subject them to uniform procedures and standards.  Such legislation would address valid critiques of overused third party releases while ensuring that they remain available, under uniform standards, in cases in which they are indispensable.

Click here to read the full article.

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Note: This is the Harvard Law School Bankruptcy Roundtable’s last scheduled post for the fall of 2022.  The BRT intends to resume posting around mid-January, 2023.  The BRT wishes all its readers an enjoyable holiday season!

Third-Party Releases Under Continued Fire in E.D. Va. Decision
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Chapter 11, Third-Party Releases, Venue | 0

By Adam C. Harris, Douglas S. Mintz, Abbey Walsh, and Kelly (Bucky) Knight (Schulte Roth & Zabel)

Adam C. Harris

Douglas S. Mintz

Abbey Walsh

Kelly (Bucky) Knight

Earlier this year, a District Court in the Eastern District of Virginia vacated a Bankruptcy Court order confirming a plan that provided non-consensual third-party releases to certain of the debtor’s prepetition executives. This reversal followed on the heels of the Southern District of New York’s reversal of the Purdue Pharma plan, also on account of the inclusion of non-consensual third-party releases. As discussed in this article, these decisions may presage a growing willingness by Courts to curb the granting of these releases. The authors also provide practical considerations and takeaways from the decision for debtors, creditors and other estate constituents that are noteworthy.

The U.S. District Court for the Eastern District of Virginia vacated the confirmation order in the Mahwah Bergen Retail Group, Inc. (f/k/a Ascena Retail Group, Inc.) Chapter 11 cases on the grounds that the plan contained impermissible non-consensual third-party releases. While the Court did not find that non-consensual third-party releases are prohibited per se, it imposed stringent limitations on their availability and on the Bankruptcy Court’s ability to grant such releases if the scope of the release extends to non-bankruptcy claims. The Court attributed its ruling, in part, to the fact that the “ubiquity of third-party releases in the Richmond Division demands even greater scrutiny of the propriety of such releases.” The decision holds that third-party releases should be granted only “cautiously and infrequently” and sets up an onerous process for their consideration and approval, which may make many third-party releases practically unavailable, particularly if a plan seeks to release non-core claims.

Read the full article here.

“A Bitter Result”: Purdue Pharma, a Sackler Bankruptcy Filing, and Improving Monetary and Nonmonetary Recoveries in Mass Tort Bankruptcies
by | posted in: Bankruptcy, Bankruptcy Reform, Chapter 11, Corporate Governance, fraudulent transfer, Mass Torts, Third-Party Releases | 0

By William Organek (Harvard Law School)

William Organek

Purdue Pharma, the maker of OxyContin, filed for bankruptcy in 2019 to resolve thousands of opioid-related lawsuits.  Two years after filing, a reorganization plan was confirmed: in exchange for a financial contribution of several billion dollars by the Sackler family and relinquishment of their ownership in Purdue, the family would be released from all civil liability associated with their ownership and control of Purdue.  Individual claimants, state attorneys general, the United States Trustee, the Department of Justice, Congress, academics, and others criticized the settlement as an abuse of the bankruptcy system.  These parties contended that granting this immunity over their objections–known as a third-party release–was an unfair remedy.  They stated that such a plan would reduce creditors’ financial recoveries and make it more difficult to achieve their goals of learning about Purdue’s role in the opioid crisis and preventing future corporate malfeasance.  Instead, if the Sacklers were to receive immunity, critics suggested that the Sacklers should be required to file for bankruptcy.  A Sackler bankruptcy filing, they claimed, would increase creditor recoveries and ensure that creditors’ nonmonetary goals would be met.

This Article argues that these criticisms rely on a deeply problematic assumption: on closer inspection, it is not at all clear that a Sackler bankruptcy filing would result in better monetary or nonmonetary outcomes for creditors, and could actually detract from these goals.

From a monetary perspective, demands for a Sackler bankruptcy filing overlook the factual complexity that this would entail, and the corresponding weaknesses in remedies available to creditors under bankruptcy law.  The Sacklers engaged in sophisticated asset protection strategies that limited creditors’ financial recoveries by spreading ownership and control of Purdue, as well as their other holdings, across dozens of domestic and international spendthrift trusts to benefit scores of family members.  Demands for a Sackler bankruptcy filing ignore collections issues, the illiquidity of their holdings, the discounts that might be applied to recoveries of minority interests, and the limitations on creditors’ fraudulent transfer remedies.  To overcome these problems and maximize financial recoveries, the parties agreed to a “de facto substantive consolidation”: a consensual dissolution of the legal barriers separating the assets of individual members of the Sackler family, their trusts, and Purdue.  This ad hoc solution, while effective, depended on Sackler acquiescence.

Achieving creditors’ nonmonetary goals, such as broader disclosure, restrictions on the opioid businesses of Purdue and the Sacklers, and limitations on Sackler charitable donations, would probably have been made more difficult by a Sackler bankruptcy filing.  A bankruptcy filing likely would have pitted family members against one another, making disclosure or other consensual resolutions more difficult.  Courts also have limited ability to force debtors to divest assets or refrain from participating in business or charitable endeavors.  Instead, the Sacklers agreed to these undertakings because it was clear from the commencement of the case that the availability of a third-party release was contingent upon their cooperation.  Only by being able to offer what the Sacklers wanted–civil immunity–could creditors and the court cajole the Sacklers into agreement.

This Article demonstrates the institutional limits faced by the bankruptcy system in addressing certain kinds of monetary harms and nonmonetary objectives.  It ends by proposing reforms to fraudulent transfer law that would close the international spendthrift trust loophole that was so critical to the strategy pursued by the Sacklers to limit creditors’ monetary recoveries.  It also argues that the price of achieving creditors’ nonmonetary goals can be reduced in future mass tort bankruptcy cases by mandating expanded disclosure by parties seeking third-party releases, more consistent appointment of trustees to manage the debtor in mass tort bankruptcies, and appointment of examiners to uncover information about the causes of a mass tort.

The full article is available here.  Comments to the author are welcomed: worganek [at] law [dot] harvard [dot] edu.

Congressional Committees Propose Changes to Bankruptcy Code Prohibiting Non-Consensual Releases of Third Parties and Limiting Other Important Bankruptcy Tools
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Jurisprudence, Legislation, Third-Party Releases | 0

By Michael J. Cohen, Michael A. Rosenthal & Matthew J. Williams (Gibson Dunn)

The recent decision in In re Purdue Pharma did not uphold the third-party releases in the bankruptcy court’s approved plan. This post discuss the third-party releases issue.

— Harvard Law School Bankruptcy Roundtable Editors

Michael J. Cohen
Michael A. Rosenthal
Matthew J. Williams

On July 28, 2021, certain Democratic members of Congress, primarily in response to the $4.325 billion contribution made by the Sackler family to fund the settlement underpinning Purdue Pharma’s chapter 11 plan, introduced the Nondebtor Release Prohibition Act of 2021 (the “NRPA”), which proposes to amend the Bankruptcy Code to (i) prohibit the use of non-consensual third party releases in chapter 11 plans, (ii) limit so-called “Section 105” injunctions to stay lawsuits against third parties to a period no greater than 90 days after the commencement of a bankruptcy case, and (iii) provide a ground for dismissing a bankruptcy case commenced by a debtor that was formed within 10 years prior to such case via a divisional merger that separated material assets from liabilities.

When viewed against the backdrop of current complex chapter 11 practice, the NRPA is a flawed remedy for issues for which alternative means of redress already exist. First, the proposed elimination of the important bankruptcy tools of non-consensual third party releases and Section 105 injunctions – each of which is extraordinary in nature and only permitted in the rarest of circumstances – is a blunt force measure that threatens to vitiate the longstanding bankruptcy policy of favoring settlements over interminable value-destructive litigation.  Second, the loss of these tools may cause inequitable disruption in currently pending cases and stymie the implementation of critical creditor-supported strategies to resolve the most difficult cases going forward.  Moreover, a per se prohibition against non-debtor releases would contravene core bankruptcy principles by elevating the interests of a minority of creditors who would otherwise be bound to the terms of a chapter 11 plan containing such a release that is supported by the requisite majorities required under the Bankruptcy Code.  Third, while the disincentive against divisional mergers would affect a far more limited set of cases, it appears that the harm raised by some divisional mergers that are followed by bankruptcy may be adequately addressed through clarifying the applicability of fraudulent transfer law to challenge these transactions.

On November 3, 2021, the House Judiciary Committee sent the NRPA to the House floor for further consideration; the Senate Judiciary Committee has yet to act on the bill.  For more detail on the NRPA and our analysis of the bill, please find the full article here.

Mandatory Aggregation of Mass Tort Litigation in Bankruptcy
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Corporate Governance, Jurisprudence, Supreme Court, Third-Party Releases | 0

By Ralph Brubaker (James H.M. Sprayregen Professor of Law, University of Illinois College of Law)

The recent decision in In re Purdue Pharma did not uphold the third-party releases in the bankruptcy court’s approved plan. This post discuss the third-party releases issue.

— Harvard Law School Bankruptcy Roundtable Editors

Ralph Brubaker

This response to Professor Lindsey Simon’s Bankruptcy Grifters article challenges the controversial practice at the epicenter of the bankruptcy grifter phenomenon that Simon critiques: so-called nonconsensual nondebtor (or third-party) “releases” and “channeling” injunctions that discharge the mass tort obligations of solvent nondebtor entities who have not themselves filed bankruptcy. These nondebtor releases are an illegitimate and unconstitutional exercise of substantive lawmaking powers by the federal courts that contravenes the separation-of-powers limitations embedded in both the Bankruptcy Clause and Erie’s constitutional holding. The federal courts have manufactured out of whole cloth the unique, extraordinary power to impose mandatory non-opt-out settlement of a nondebtor’s mass tort liability on unconsenting tort victims through the bankruptcy proceedings of a codefendant. The bankruptcy “necessity” that supposedly justifies this astounding and unique settlement power—to mandate nonconsensual non-opt-out “settlements” that are otherwise impermissible and unconstitutional—is (at best) naive credulity or (at worst) specious sophistry.

Nonconsensual nondebtor releases are not “necessary” for the bankruptcy process to facilitate efficient aggregate settlements of the mass tort liability of both bankruptcy debtors and nondebtor codefendants. The bankruptcy jurisdiction, removal, and venue provisions of the Judicial Code already contain the essential architecture for mandatory, universal consolidation of tort victims’ claims against both bankruptcy debtors and nondebtor codefendants. Bankruptcy can be an extremely powerful aggregation process that facilitates efficient (and fair) settlements of the mass tort liability of nondebtors, even (and especially) without nonconsensual nondebtor releases, particularly if the Supreme Court elucidates the full expanse of federal bankruptcy jurisdiction. Nondebtor releases are an illicit and unconstitutional means of forcing mandatory settlement of unconsenting tort victims’ claims against solvent nondebtors, and the Supreme Court should finally resolve the longstanding circuit split over the permissibility of nonconsensual nondebtor releases by categorically renouncing them.

The full article is available here and is forthcoming in the Yale Law Journal Forum.

Bankruptcy Grifters
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Corporate Governance, Jurisprudence, Third-Party Releases | 0

By Lindsey Simon (University of Georgia School of Law)

The recent decision in In re Purdue Pharma did not uphold the third-party releases in the bankruptcy court’s approved plan. This post discuss the third-party releases issue.

— Harvard Law School Bankruptcy Roundtable Editors

Lindsey Simon

Grifters take advantage of situations, latching on to others for benefits they do not deserve. Bankruptcy has many desirable benefits, especially for mass-tort defendants. Bankruptcy provides a centralized proceeding for resolving claims and a forum of last resort for many companies to aggregate and resolve mass-tort liability. For the debtor-defendant, this makes sense. A bankruptcy court’s tremendous power represents a well-considered balance between debtors who have a limited amount of money and many claimants seeking payment.

But courts have also allowed the Bankruptcy Code’s mechanisms to be used by solvent, nondebtor companies and individuals facing mass-litigation exposure. These “bankruptcy grifters” act as parasites, receiving many of the substantive and procedural benefits of a host bankruptcy, but incurring only a fraction of the associated burdens. In exchange for the protections of bankruptcy, a debtor incurs the reputational cost and substantial scrutiny mandated by the bankruptcy process. Bankruptcy grifters do not. This dynamic has become evident in a number of recent, high-profile bankruptcies filed in the wake of pending mass-tort litigation, such as the Purdue Pharma and USA Gymnastics cases.

This Article is the first to call attention to the growing prevalence of bankruptcy grifters in mass-tort cases. By charting the progression of nondebtor relief from asbestos and product-liability bankruptcies to cases arising out of the opioid epidemic and sex-abuse scandals, this Article explains how courts allowed piecemeal expansion to fundamentally change the scope of bankruptcy protections. This Article proposes specific procedural and substantive safeguards that would deter bankruptcy-grifter opportunism and increase transparency, thereby protecting victims as well as the bankruptcy process.

The full article is available here and is forthcoming in the Yale Law Journal.

Do Bankruptcy Courts Have Constitutional Authority to Approve Nonconsensual, Third-Party Releases?
by | posted in: Bankruptcy Roundtable Updates, Supreme Court, Third-Party Releases | 0

By Shmuel Vasser and Cara Kaplan (Dechert)

Shmuel Vasser
Cara Kaplan

The Third Circuit, applying the Supreme Court’s decision in Stern v. Marshall, recently held that the Bankruptcy Court has the authority to confirm a chapter 11 plan containing nonconsensual, third-party releases when such releases are integral to the debtor’s successful reorganization.

In Stern, the Supreme Court examined the scope of the bankruptcy court’s constitutional authority and found, among other things, that the bankruptcy court can resolve a matter that is integral to the restructuring of the debtor-creditor relationship.  Analyzing Stern, the Third Circuit in In re Millennium held that the Bankruptcy Court could confirm a plan that included non-consensual, third party releases because the releases were the result of “highly adversarial” and “extremely complicated” negotiations and without the releases, the debtor would not have been able to successfully reorganize.

The full article is available here.