Nov 19, 2024

Introduction
I. Background
            A. Manville and § 524(g)
            B. Lead-Up to Purdue Pharma
            C. Proceedings Below in Purdue Pharma
            D. But Wait, There’s More!
II. Response to Purdue Pharma?
            A. Do Nothing
            B. Expand the Authority of the Bankruptcy Courts Under 524(g)
III. Proposals to Amend the Code
IV. Other Alternatives
            A. Consensual Releases and Full-Pay Plans
            B. Opt-Out
            C. Equitable Mootness
            D. Temporary Releases
Conclusion

Introduction

    On June 27, 2024, the Supreme Court issued its ruling in Harrington v. Purdue Pharma L.P.,¹ holding that nonconsensual third-party releases included in a Chapter 11 plan of reorganization, other than one relating to asbestos liability claims, were impermissible under the federal Bankruptcy Code.² The releases at issue would have immunized members of the Sackler family, who controlled Purdue Pharma, from liability in connection with the company’s role in the opioid crisis.³ The Sacklers represent the epitome of the unpopular litigant,⁴ so no tears need be shed for them. In a sense, they just received a dose of their own medicine.

    The decision was as narrow as it gets (five-to-four), and the majority predictably grounded its holding squarely in the statutory text (or absence thereof).⁵ I have no particular quibble with that result,⁶ as the statutory, unlike the policy, arguments in support of a release from personal liability for nondebtors were always a bit of a stretch. The decision, however, was disconcertedly overbroad in failing to clearly distinguish direct and derivative claims, and it will inevitably make it more difficult to formulate and confirm mass tort reorganizations. This effect will be unfortunate—both for mass tort debtors and their victims.

    Shortly before the Purdue Pharma decision was issued, I penned an essay in response to the vitriol that has been hurled at the use of state law divisive merger statutes as a mechanism for resolving mass tort liability in Chapter 11.⁷ The piece was and is not a defense of or apology for the so-called Texas-Two-Step maneuver.⁸ Frankly, on that score, I am agnostic. However, I believe there is nothing intrinsically nefarious nor inherently beneficent about a Texas-Two-Step filing in the abstract.

    Rather, the piece was, if anything, a defense of Chapter 11 as an unrivaled, albeit not perfect, vehicle for aggregating, managing, and ultimately resolving mass tort claims.⁹ Simultaneously, it was a revival of a long-standing cri-de-coeur that good faith filings in Chapter 11 be tested on a case-by-case basis, with considerable latitude granted to the bankruptcy judge’s assessment if the filing represents a proper invocation of ever-evolving bankruptcy purposes.¹⁰

     By prophylactically taking nonconsensual nondebtor releases off the table, Purdue Pharma has rendered reorganization a less effective tool for achieving a global resolution of both existing and, in particular, future mass tort claims. In some quarters, that has been cheered as a vindication of constitutional protections afforded the victims of dangerous products, sexual abuse, consumer fraud, or noxious environmental emissions.¹¹ I think such constitutional claims are exaggerated, but it was not the basis for the majority decision in Purdue Pharma, and it is not my intention to debate them here. Rather, my position is that it should now be put to Congress to decide if and under what circumstances a channeling injunction in a non-asbestos-related case might be extended to include nondebtor entities.

I. Background

A. Manville and § 524(g)

    As part of the Bankruptcy Reform Act of 1994,¹² § 524(g) was added to the Bankruptcy Code to codify a procedure originally engineered by the United States Bankruptcy Court for the Southern District of New York in In re Johns-Manville Corp.¹³ This bankruptcy case was one of the earliest mass tort Chapter 11 cases to be filed under the Code.¹⁴ In Manville, after years of negotiation, the key players agreed upon, and the court confirmed, a plan that included an “Asbestos Health Trust,” which the court described as “a mechanism designed to satisfy the claims of all asbestos health victims, both present and future.”¹⁵ As an essential component of the plan, the parties also agreed that the bankruptcy court would issue a “channeling injunction” restricting all existing and future asbestos-related claims to the trust,¹⁶ thereby protecting Manville, its other operating entities, and its insurers from all asbestos-related lawsuits. This was perceived as necessary due to the long dormancy of asbestos diseases and, thus, to the prospect of large numbers of future claims.¹⁷

    Generally speaking, § 524(g) follows the Manville playbook, allowing debtors facing massive asbestos-based liability claims, whether raised in the case or contingent on a future event, to fund a settlement trust as the exclusive source of recovery for all asbestos exposure claims. Subsection (g) contains a number of additional requirements that must be met.¹⁸ These requirements include that the debtor is likely to be subject to a substantial yet currently uncertain amount of future liability arising out of the same or similar conduct that gave rise to the claims addressed by the injunction, the pursuit of which would threaten the purpose of the plan of reorganization to deal equitably with future demands.¹⁹ Effectively, in exchange for funding the trust, the court issues a channeling injunction providing immunity to the reorganized debtor from liability on such claims. Of course, this allows the firm to continue operations free from the distracting shadow of ongoing merciless litigation.

    Unlike in the traditional Chapter 11 case, subsection (g) also requires that the plan must be approved by 75 percent of the known tort victims,²⁰ as opposed to a mere majority as otherwise mandated by the Code^.21 Finally, to satisfy the requirement of due process, a future claimants’ representative,²² who is not eligible to vote on the plan, is appointed to negotiate on behalf of unknown claimants.²³ While limited to asbestos-related claims, Congress made explicit that no negative inference was to be drawn from that fact in non-asbestos mass tort proceedings.²⁴

    Of particular note for purposes of the instant treatment, § 524(g) also permits, without mentioning “releases” explicitly, the bankruptcy court to enjoin assertion of claims against certain categories of third-party nondebtors that are “alleged to be directly or indirectly liable for the conduct of” or claims made against the debtor,²⁵ to the extent this alleged liability arises from their past or present affiliation with, management of, or service as a director or officer to the debtor.²⁶ Again, however, this authority is limited to, and only to, cases where the debtor has been named as a defendant in a tort claim relating to the “presence of, or exposure to, asbestos or asbestos-containing products” at the time it filed its bankruptcy petition.²⁷ Lastly, in order to include nondebtors under the channeling injunction, § 524(g) requires the bankruptcy court to determine that the extension of the injunction’s protective halo is “fair and equitable” to those who might assert demands subject to the injunction in light of the third party’s contributions to the trust.²⁸

B. Lead-Up to Purdue Pharma

    In the aftermath of Manville, defendants—hit with a barrage of asbestos- and non-asbestos mass tort suits and frustrated with the delay and inadequacies of state and non-bankruptcy federal alternatives—turned to Chapter 11 to achieve an alacritous and global resolution of the mass tort claims. This included, in some cases, nonconsensual third-party releases. For example, In re Dow Corning Corp. saw a firm use Chapter 11 to receive relief from from lawsuits concerning silicone gel breast implants alleged to cause autoimmune issues.²⁹ There, the Sixth Circuit held that the Manville and § 524(g) approach could be replicated in non-asbestos cases utilizing § 105(a)’s grant of general equitable authority—the provision the court had relied on in Manville.³⁰ Moreover, the Dow Corning opinion also expanded the circumstances as to when a channeling injunction could extend to nondebtors.³¹ This made Chapter 11 that much more enticing to mass tort defendants, even if it came at the cost of bearing the stigma of a bankruptcy filing.

    The majority of circuits (as well as other courts) agreed with the Sixth Circuit’s conclusion that nonconsensual nondebtor releases were permissible under the courts’ § 105(a) authority,³² although there was no unanimity as to precisely what factors or findings should be taken into account in determining whether a proposed release was appropriate.³³ Sounding a contrarian note, the Fifth and Tenth Circuits disagreed with the proposition that, except under § 524(g), the bankruptcy courts had authority to approve over the objection of creditors a plan that provided for release of nondebtor parties or an injunction precluding assertion of claims against such parti^es.34 The Ninth Circuit, for a time, joined the minority,³⁵ but later switched horses.³⁶ This was the lay of the land in 2019 when Purdue Pharma filed its Chapter 11 petition in the U.S. Bankruptcy Court for the Southern District of New York.

C. Proceedings Below in Purdue Pharma

    At the time of Purdue Pharma’s bankruptcy filing, the company and its controlling shareholders, members of the Sackler family,³⁷ were defendants in 3,400 lawsuits seeking an estimated $40 trillion (that is not a typo) in damages.³⁸ “The value of Purdue[ Pharma’s] assets was estimated at no more than $1.8 billion.^”39 In September 2021, Purdue Pharma obtained confirmation of a Chapter 11 plan that included nonconsensual releases of various third parties, including the Sackler family, of liabilities stemming from their involvement in alleged deceptive and illegal activities undertaken by Purdue Pharma in marketing OxyContin and other opioid product^s.40 In exchange, the Sackler family would relinquish its ownership interest in the companies and contribute more than $4 billion to the settlement of the OxyContin litigation claims.⁴¹

    Although approved by a large majority of claimants,⁴² the U.S. Trustee, eight states, the District of Columbia, the City of Seattle, and various Canadian municipalities and Tribes—each of which wanted to preserve its own claims against the Sacklers—objected.⁴³ These parties, along with three individual personal injury claimants, appealed the confirmation. In December 2021, the U.S. District Court for the Southern District of New York vacated the plan confirmation order, ruling that the bankruptcy court did not have authority under the U.S. Constitution or the Bankruptcy Code to approve the nonconsensual releases granted under the plan.⁴⁴ Specifically, the district court found that the issue of releasing claims against nondebtors was “non-core” and that, therefore, under the Supreme Court’s ruling in Stern v. Marshall,⁴⁵ the bankruptcy court lacked the constitutional imprimatur to enter a final order adjudicating such claims^.46 Instead, the bankruptcy court should have issued proposed findings of fact and conclusions of law regarding the releases to the district court^.47 In its marathon opinion, the district court conceded that bankruptcy courts possess subject matter jurisdiction over third-party claims against nondebtors^,48 but concluded that the release of such claims was beyond either the statutory or equitable purview of the courts^.49

    The Second Circuit granted leave to appeal the interlocutory order of the district court, and, before the case was heard, the Sacklers agreed to add an additional $1.6 billion to the $4.3 billion settlement pot that they were to pay under Purdue Pharma’s original Chapter 11 plan.⁵⁰ Almost a year and a half later, the Second Circuit issued its long and eagerly awaited decision affirming the bankruptcy court’s original confirmation order and remanding for further proceedings.⁵¹ The three-judge panel, including one reluctant concurrence,⁵² found (1) that the bankruptcy court had both jurisdiction and statutory authority to approve nonconsensual third-party releases⁵³ and (2) that such releases complied with due process and were proper under this case’s facts and equities.⁵⁴

    Notably, the Second Circuit opinion, like the district court, framed the issue of law in the case as whether the bankruptcy court had the capacity to approve the nonconsensual release of direct third-party claims against the Sacklers.⁵⁵ In doing so, the Second Circuit rejected the bankruptcy court’s expanded definition of derivative claims,⁵⁶ and at least implied the absence of controversy over whether releases could apply to derivative claims, which, once the case was filed, belonged solely to the estate.

D. But Wait, There’s More!

    The Supreme Court initially stayed implementation of Purdue Pharma’s plan while the Court considered the issue.⁵⁷ Ultimately, of course, the Court reversed the Second Circuit, the majority opinion holding that no provision of the Bankruptcy Code ordains the bankruptcy courts with the power to provide what is tantamount to a discharge to a party that has not itself filed for bankruptcy or placed virtually all of its assets on the table for distribution to creditors.⁵⁸ Rather, the majority found that discharge is reserved for the debtor and “does not affect the liability of any other entity.”⁵⁹ Therefore, the Court ruled that, save for cases covered by § 524(g), the Code does not permit the bankruptcy courts to enjoin or release claims against third-parties without the consent of the creditor(s),⁶⁰ and that § 105(a) alone cannot form the basis for locating such authority.⁶¹ The majority opinion never addressed the distinction between direct and derivative claims except in the context of replying to the dissent’s assertion that the ability to release derivative claims is “indisputable.”⁶² What the Court did not decide in Purdue Pharma is discussed later^.63

    In an unusual coalition traversing traditional ideological lines, the Chief Justice, Justice Kagan, and Justice Sotomayor joined Justice Kavanaugh’s lengthy dissenting opinion,⁶⁴ which located the necessary statutory approbation in the combination of sections 1123(b)(1), (3), and (6).⁶⁵ In fact, the dissent opined that the bankruptcy court’s exercise of its discretion in approving the releases was a “shining example of the bankruptcy system at work.”⁶⁶ Noting that “[m]ass-tort cases present the same collective-action problem that bankruptcy was designed to address,”⁶⁷ the dissent lamented that the majority’s opinion had, for “no good reason,” deprived the bankruptcy courts of an important tool in managing mass tort bankruptcies and devastated the “more than 100,000 opioid victims and their families.^”68

    This was both a great and a hard case that, as predicted by Justice Holmes,⁶⁹ may have made bad law. However, if one is inclined to take a narrow textualist approach to statutory interpretation, as this Court is wont to do,⁷⁰ the outcome was not unexpected,⁷¹ and it is perhaps even surprising that it was as close of a call as it was. In any case, for better or worse, the matter has now been settled, and so the question becomes what to do next. While there may be some wiggle room at the margins,⁷² the basic alternatives are binary: Do nothing, or amend the Code to authorize even nonconsensual third-party releases.

II. Response to Purdue Pharma?

A. Do Nothing

    The Purdue Pharma decision will not eliminate mass tort bankruptcies because the processes and procedures available in Chapter 11 still make it a very viable alternative to disparate and uncoordinated litigation in the state and non-bankruptcy federal courts. Chapter 11’s most important features remain its abilities to (1) consolidate all mass tort claims in a single procedure;⁷³ (2) address the issue of unknown, future claims;⁷⁴ and (3) ensure uniform and equal treatment among claimants.⁷⁵

    It is true that there are other aggregation devices available, most notably multidistrict litigation (“MDL”) and class actions. In the case of the former,⁷⁶ however, federalism complicates the ability to truly achieve a complete settlement of all claims, as there is no formal jurisdiction in a federal MDL over cases filed and still pending in state court.⁷⁷ In addition, MDL judges have only pretrial jurisdiction over the cases brought into the consolidated proceeding.⁷⁸ Thus, any efficiencies gained through the combination of cases evaporate if cases are sent back to their individual home jurisdictions for trial, although, in fact, most MDL cases end up being settled before they can be returned^.79 This fact, however, highlights two other limitations of the MDL process. First, and of greatest import, only claims that have actually been filed in federal court can be included in the settlement,⁸⁰ leaving a potentially large number of future plaintiffs who will be unaffected by the settlement.⁸¹ Second, unlike in class actions and bankruptcy, there is neither judicial supervision over the settlement process nor any requirement that the settlement be approved by the cour^t.82

    Class actions could be a favorable aggregation device mass tort liabilities because, in such cases, the court remains fully involved throughout the life cycle of the case and must approve any proposed settlement agreement^.83 However, while all cases sharing a common question of fact may be transferred temporarily to the MDL judge, class actions cases must fall within a category enumerated in FRCP 23(b) to even be eligible for class treatment and class members must be given the opportunity to opt out^.84 The former has proved to be a dealbreaker for mass tort cases, as two Supreme Court decisions rendered in the 1990s⁸⁵ have all but ensured that mass tort class filings will not achieve certification.⁸⁶ And, of course, even if the class device were available, studies and experience suggest that class actions rarely result in meaningful recovery for class members.⁸⁷

    With the bankruptcy courts’ nationwide jurisdiction⁸⁸ and the Code’s automatic stay,⁸⁹ Chapter 11 offers certain advantages that are simply unavailable in multidistrict litigation and certainly in conventional civil litigation.⁹⁰ All claims arising out of the harmful product, toxic emission, or other wrongful conduct can be centralized and resolved on a global basis in a single bankruptcy proceeding.⁹¹ This includes claims that have yet to arise because of the absence of knowledge or manifestation of injury.⁹² As one commentator who has extensively examined the mass tort landscape has commented, “[B]ankruptcy is still the optimal venue for resolving many mass tort cases.”⁹³ The process provides closure to mass tort litigation and expedites compensation to victims. Meanwhile, Chapter 11 gives financially distressed debtors time to reorganize, revamp, and continue doing business so that the firm has the chance to survive^.94

    Some criticize mass tort bankruptcy because, notwithstanding the ability to render an all-encompassing resolution on an equitable basis, there are certain nonquantifiable losses claimants suffer once the case enters into a reorganization proceeding. Principal among these are individual voice rights and the ability to exercise the same level of control and participation as would be the case if the action proceeded as a disjoined piece of civil litigation.⁹⁵ Inevitably this is true, but to a significant, if not greater equal, the same can be said of the multidistrict process.⁹⁶

    Moreover, as one author has recently pointed out, bankruptcy’s voting procedures mediate a sportsman-like compromise between group and individual voice rights.⁹⁷ That is to say, while all claimants are entitled to cast a yea or nay vote on the proposed reorganization plan, the full enjoyment of this right can be subordinated to the will of the majority of the class to which the claim has been assigned. Thus, there is unquestionably some loss in the autonomy and the control that an individual litigant can exert in conventional civil litigation, but, again, this is no less true in multidistrict litigation. Inescapably a compromise of some sort must be struck in any collective action proceeding.⁹⁸

    So, Purdue Pharma notwithstanding, Chapter 11 remains an attractive surrogate to multidistrict litigation as well as class actions—to the extent that avenue even remains an option⁹⁹—and certainly to disjointed traditional state and non-bankruptcy federal court civil litigation. The efficiency gains are not trivial in comparison, and the debtor firm obtains the temporary benefit of the automatic stay and the lasting benefit of the discharge if a plan can be successfully confirmed and completed.¹⁰⁰ Survival of the company as an on-going entity also means continuation of employment for perhaps thousands of individuals, a reliable customer for vendors, an asset for the community in terms of both economic activity and philanthropy, and a return on investment for owners.¹⁰¹

B. Expand the Authority of the Bankruptcy Courts Under 524(g)

    In light of the foregoing, is there even a reason for considering a legislative reversal of Purdue Pharma? The answer lies in the identification of what ought to be the predominant goals in a mass tort situation. I believe those include, first and foremost, prompt compensation of, and closure for, victims and their families. Beyond that, there is genuine concern over relative equality among similarly situated claimants and a fair adjustment of unknown future demands.¹⁰² Bankruptcy is the only collective action mechanism that can consistently achieve all these goals.¹⁰³

    Put another way, mass tort cases ought not be about attaining the absolute highest compensation for any individual victim nor about maximum compensation for plaintiffs’ attorneys. Protracted litigation could produce either of those ignoble goals, but is that truly in the best interests of the tort claimants as a group and their survivors, or is it a Cadmean victory at best? Chapter 11 is not infrequently criticized for ignoring the individual dignity of claimants in mass tort cases in the myopic pursuit of cutting a deal.¹⁰⁴ And yet, those whose dignity has been injured, as opposed to those who write about them, overwhelming want to cut a deal.¹⁰⁵

    In some mass tort situations, the proper goals of the system may be served without the need for third-party releases. In many others, however, such as Purdue Pharma, the result likely will be liquidation of the company, unless another (and inevitably lesser) settlement is reached.¹⁰⁶ In any case, as a consequence of the Supreme Court’s decision, a race to trial in the direct claims against the Sacklers will now ensue.¹⁰⁷ In that event, a handful of tort victims may, someday, receive compensation greater than what they would have been paid under the rejected Purdue Pharma plan, even adjusted for time value.¹⁰⁸ However, most will not.¹⁰⁹ This is precisely the result bankruptcy is intended to avoid.¹¹⁰ Perhaps this is an important reason why over 95 percent of the claimants who voted on the plan, including most of the government entities, favored its approval.¹¹¹ They did so because it was preferable to continued costly litigation, with its prospects for intractable delay;¹¹² inconsistent (or just widely disparate) verdicts;¹¹³ and potential exhaustion of the resources that might leave the victims arriving late to the party with no recompense.¹¹⁴

    The subject of muckraking books, documentaries, and mini-series,¹¹⁵ neither Purdue Pharma nor the Sackler family are appealing defendants. It was not just the OxyContin itself. Purdue Pharma’s marketing of the pill as rarely addictive and a panacea for all manners of chronic pain, helped cause a major public health crisis that has led to hundreds of thousands of deaths and an untold number of debilitating addictions.¹¹⁶ However, at least in the short run, the Purdue Pharma decision has saved the Sacklers billions of dollars and probably put Purdue Pharma out of business. It also means victim compensation will be further delayed. It is difficult to see those ramifications as desirable consequences, implying we should perhaps temper our zeal to see the Sacklers receive their comeuppance. Confirmation of Purdue Pharma’s plan may not have been condign justice, but it would have counted as a win.

    If criminal mischief occurred, appropriate action should be taken.¹¹⁷ It is not, however, the role of the bankruptcy system to deliver that kind of justice. Instead, we have a situation out of control, with tens of thousands of victims, myriad lawsuits across the country, and a company responsible for the harm unable to provide anything approaching adequate redress. The only pragmatic solution was Chapter 11 and confirmation of Purdue Pharma’s plan, bearing in mind that the Sacklers are and would no longer be in control.

    Going forward things will only get worse. I understand the stubborn resolve not to allow the Sacklers, having apparently been responsible for damaging the lives of so many individuals and families, to walk away scot-free. Over six billion dollars, however, even if only a portion of the fortune made by the family from opioids,¹¹⁸ could hardly be described as “unscathed.” Any further reckoning should have been consigned to another day and a higher authority.

III. Proposals to Amend the Code

    Even before the Supreme Court’s decision in Purdue Pharma, some commentators called for Congress to amend the Code in order to expand the statutory authority permitting nonconsensual nondebtor releases beyond asbestos disease cases. In a thoughtfully crafted student note,¹¹⁹ one author cited the Second Circuit’s Purdue Pharma decision as presenting a win-win scenario for all parties.¹²⁰ Building, then, on a proposal made a couple of years earlier to expand § 524(g) to cover all mass tort cases,¹²¹ the author proposes going even a step further and including any mass litigation (such as securities fraud), defined as affecting a group of “no fewer than 100 similarly impacted persons who have civil liability claims against the same defendant arising out of the same act or omission.”¹²² While intriguing, this approach ignores, or at least minimizes, a principal rationale for § 524(g), which is the potentially long latency period characterizing most product and emission cases, or repression of memory in the case of sexual abuse. It also overlooks a golden opportunity to revisit the crafting of § 524(g).¹²³

    In an article published in the year prior to the Second Circuit’s decision in Purdue Pharma, Professor Samir D. Parikh, an expert and frequent commentator on mass tort restructurings,¹²⁴ took a somewhat more nuanced approach, focusing both on revision of the future claims representative process,¹²⁵ as well as nondebtor releases. With respect to the latter, as contemporary mass tort increasingly involve non-asbestos liability, Parikh proposed that § 524(g)(2)(B)(i)(I) be expanded to include any corporate debtors named in multidistrict litigation or that the bankruptcy court determines entail sufficient future demands for payment that “cannot be addressed equitably without the subsection’s protections.”¹²⁶ However, he also accurately pointed out that just modifying § 524(g) so that all mass tort cases are potentially covered is an incomplete and unsatisfactory solution.¹²⁷ Thus, he offered further amendments affecting classification, voting, and certain restrictions that he believes ineffectively attempt to link the settlement trusts fortunes to the reorganized debtor’s post-petition success.¹²⁸

    There is a good deal to be said for Parikh’s proposals, including, principally, restoring discretion to the bankruptcy courts to make judgments about cases that have not been assigned for consolidated pretrial proceedings by the Judicial Panel on Multidistrict Litigation.¹²⁹ However, what it arguably lacks is a non-exhaustive list of prudential factors or guiding principles to be taken into account by the bankruptcy courts facing the decision whether to approve proposed nonconsensual nondebtor releases in a plan of reorganization, which is the approach the majority of the circuits followed pre-Purdue Pharma. While every case, of course, is different such that any strict formulaic approach would unwisely handcuff the courts, the mandatory consideration of a uniform set of factors would tend to promote greater consonance and discipline in the decisional law.

    In Manville, the bankruptcy court extended the liability shield beyond the debtor because of concerns that the reorganization could not succeed without their contribution.¹³⁰ Section 524(g)(4)(A)(ii), which authorizes nonconsensual third-party releases in asbestos cases, identifies what categories of persons may be covered by the plan’s channeling injunction,¹³¹ but currently does not set a standard to methodize when their issuance is appropriate.

    The circuit courts that, prior to Purdue Pharma, concluded nondebtor releases were permissible under the Code and the courts’ equitable authority,¹³² tended to rely on various fact-based standards to determine if extension of the channeling injunction was appropriate.¹³³ This represented a healthy expansion on Manville’s insistence that the nondebtor releases must be essential to ensuring a successful reorganization. Indeed, courts came to approve third-party releases if such an injunction was “necessary to do the [specific] deal embodied in the plan of reorganization.”¹³⁴ Most important among the relevant considerations was whether, in exchange, the released nondebtors facilitated settlement by contributing substantial funds to the trust.¹³⁵

    As things turned out, the Second Circuit’s decision in Purdue Pharma did not provide the roadmap it might have for the Supreme Court for when third-party releases are appropriate because of the majority’s obstinate insistence on unequivocal statutory authority to sanction such an injunction in the first place. It could, however, provide just that for Congress, so the opinion is worth a closer look. Building upon and amplifying its earlier analysis in In re Metromedia Fiber Network, Inc.,¹³⁶ the Second Circuit panel held that a plan containing nonconsensual third-party releases in non-asbestos liability cases is permissible provided the bankruptcy court assures satisfaction of relevant equitable considerations by engaging in and making specific findings relating to a seven-pronged multifactor inquiry.¹³⁷ Such a fact-intensive inquiry necessarily would have ceded considerable discretion exactly where it belonged: to the judge who had overseen the case from the jump.¹³⁸

    The opinion could rather easily be crafted into legislation applying to issuance of nonconsensual third-party releases in all forms of mass tort restructurings.¹³⁹ The model is out there in § 4(b) of the Uniform Voidable Transactions Act, which has long followed the “badges of fraud”¹⁴⁰ approach that had characterized the reasoning in pre-codification caselaw going as far back as In re Twyne’s Case.¹⁴¹ Likewise, subsection (g)(4) of an amended § 524(g)—revised to apply to all mass tort reorganizations—could (1) codify and dictate consideration of the factors that the Second Circuit indicated must be considered; (2) require specific findings as to each; and (3) acknowledge the overriding influence of equitable considerations that might allow the court to deny the injunction even where all the factors are satisfied, or issue the third-party injunction even absent satisfaction of one or more of these factors.¹⁴² Thus, a revised version of § 524(g) might, in pertinent part, look as follows:¹⁴³

(g)(1)(A) After notice and hearing, a court that enters an order confirming a plan of reorganization under Chapter 11 may issue, in connection with such order, an injunction in accordance with this subsection to supplement the injunctive effect of a discharge under this section and ensure the success of the plan and preserve the res for future claimants.

                                                    * * *

(2)(B) The requirements of this subparagraph are that—

(i) the injunction is to be implemented in connection with a trust that, pursuant to the plan of reorganization—

(I) is to assume the liabilities of a debtor which at the time of entry of the order for relief has been named as a defendant in multiple personal injury, wrongful death, or property-damage actions seeking recovery for damages allegedly caused by—

(aa) the presence or use of, or exposure to, allegedly dangerous, defective, or harmful products or emissions; or

(bb) unlawful, wrongful, or other tortious conduct by one or more of the debtors, their agents, affiliates employees, or others acting on their behalf; and

(II) is to be funded in part by the securities of the debtors involved in such plan and by the obligation of such debtors to make future payments, including dividends;

(III) is to own, or by the exercise of rights granted under such plan would be entitled to own if specified contingencies occur, a majority of the voting shares of—

(aa) each such debtor; or

(bb) the parent corporation of each such debtor;

(IV) is to use its assets or income to pay claims and demands; and

                                              * * *

(4)(A)(i) Subject to subparagraph (B), an injunction described in paragraph (1) shall be valid and enforceable against all entities that it addresses.

(ii) Notwithstanding the provisions of section 524(e), such an injunction may bar any direct or derivative action brought against a third party who is identifiable from the terms of such injunction (by name or as part of an identifiable group) and is alleged to be personally or vicariously liable for the conduct of, claims against, or demands on the debtor to the extent such alleged liability of such third party arises by reason of—

                                              * * *

(B) Subject to subsection (h), if, under a plan of reorganization, a kind of demand described in such plan is to be paid in whole or in part by a trust described in paragraph (2)(B)(i) in connection with which an injunction described in paragraph (1) is to be implemented, then such injunction shall be valid and enforceable with respect to a demand of such kind made, after such plan is confirmed, against the debtor or debtors involved, or against a third party described in subparagraph (A)(ii), if—

                                              * * *

(ii) the court determines, before entering the order confirming such plan, that identifying such debtor or debtors, or such third partiesy (by name or as part of an identifiable group), in such injunction with respect to such demands for purposes of this subparagraph is fair and equitable with respect to the persons that might subsequently assert such demands, in light of the benefits provided, or to be provided, to such trust on behalf of such debtor or debtors or such third parties; and

(iii) with respect to each third party to which injunctive relief has been imposed pursuant to subparagraph (4)(A)(ii), the court, in addition to having made the determination required by subparagraph (B)(ii), must have considered and made specific written findings with respect to, each of the following factors—

(I) the identity of interest between the debtor and the third party;

(II) the interrelationship between the enjoined claims against the debtor and against the third party;

(III) whether the scope of the injunction if necessary to the plan;

(IV) the importance of the injunction to the success of the debtor’s plan of reorganization;

(V) the value of the assets contributed by the third party to the plan of reorganization;

(VI) the percentage of claimholders voting in favor of the plan of reorganization beyond the minimum required under subdivision (2)(ii)(B)(IV)(bb); and

(VII) whether the plan or reorganization provides fair payment of the enjoined claims.

(iv) No single factor or collection of factors listed in subparagraph (4)(B)(iii) shall be regarded as dispositive of the question of whether to grant third-party injunctive relief under subparagraph (4)(A)(ii).

                                                    * * *

IV. Other Alternatives

A. Consensual Releases and Full-Pay Plans

    If Congress fails to act, the next best, albeit “next” by a longshot, would be to construe the holding in Purdue Pharma as narrowly as reasonably possible. Such an undertaking begins with an emphasis on what the majority opinion in Purdue Pharma did not decide. To start with, Justice Gorsuch’s opinion states quite directly that, “[n]othing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan.”¹⁴⁴ The Court offered no guidance or indication, however, as to what constitutes a “consensual” release, nor did it address whether third-party releases might be permitted in a plan calling for full satisfaction of claims,¹⁴⁵ although exactly what constitutes a “full-pay” plan is something of a mystery.¹⁴⁶

    Finally, Justice Gorsuch made clear that “we do not address whether our reading of the bankruptcy code would justify unwinding reorganization plans that have already become effective and been substantially consummated.”¹⁴⁷ Lawyers for the Boy Scouts of America were quick to pounce on this point in a filing with the Third Circuit, where an appeal is pending on confirmation of its plan of reorganization that went effective more than a year earlier.¹⁴⁸

B. Opt-Out

    The majority opinion in Purdue Pharma left no room for doubt that consensual third-party releases are not off the table, but abjured from offering guidance of any kind over what constitutes assent. Thus, one may fairly assume this is likely, going forward, to be the subject of considerable debate and litigation. One possibility is negative notice. That is to say, to infer acquiescence by a vote to accept or a failure to vote or object. This approach, while adopted in some districts for certain matters by local rule,¹⁴⁹ would rip a rather large hole in the Purdue Pharma holding in a situation like Purdue Pharma where the overwhelming number of tort claimants did not vote on the plan.

    A less draconian model, but one that still placed the burden of taking action on the tort claimants, would be an opt-out approach.¹⁵⁰ This would entail the argument that the releases are consensual in any circumstance where the claimants are provided proper notice and an adequate opportunity to opt out of the releases and chose or are deemed to have chosen not to do so by inaction. Such manifestation of consent through failure to act would apply to any impaired creditors who abstain from voting on the plan, or who vote to reject the plan but do not otherwise opt out of the releases. Certainly, the model is out there in some cases,¹⁵¹ although the issue is not free from controversy.¹⁵² In situations where opt-out is used to obtain consent via implication, the focus is typically on the conspicuousness of the opt-out right. The problem with the opt-out alternative is it may not be particularly helpful or effective in the mass tort context. As the Boy Scouts of American pointed out in their Perdue Pharma amicus, “even a highly conservative estimate of ‘opt-out’ releases ... would leave nondebtors exposed to significant liabilities through the tort system and leave [Boy Scouts of America] without essential revenues to continue operating.”¹⁵³

C. Equitable Mootness

    Of course, implementation of the plan in Purdue Pharma was stayed pending the Supreme Court’s ruling.¹⁵⁴ Had it not been, the outcome might well have been different because of the doctrine of equitable mootness, which is essentially a common law abstention doctrine.¹⁵⁵ Equitable mootness allows appellate courts to dismiss appeals from a bankruptcy court’s confirmation order in certain circumstances.¹⁵⁶ Although the doctrine is meant to be applied sparingly, complex mass tort reorganizations are ideal candidates for its application once the plan has substantially moved forward on the basis that it is simply too late to unscramble the eggs.¹⁵⁷ Although heavily criticized,¹⁵⁸ the doctrine persists in some form within every circuit that has jurisdiction over bankruptcy appeals.  

    The problem with this “solution” is two-fold. First, it makes the decision whether to stay the proceeding pending appeal effectively a decision on the merits of the underlying issue. It is not at all clear that this is a healthy way to address matters of this import. However, even more fundamentally, while it could have an impact on cases in the pipeline, it would be of little utility going forward. Specifically, after Purdue Pharma, it is inconceivable that a bankruptcy court would confirm a plan containing nonconsensual releases unless Congress has, in the interim, taken action. That said, given the uncertainty over what constitutes “consent” to a proposed nondebtor release, it is not out of the realm of possibility a court might confirm a plan as “consensual,” and the ability to obtain a review thereof on appeal blocked by the doctrine of equitable mootness unless a stay is granted.

D. Temporary Releases

    One bankruptcy court has held,¹⁵⁹ and another implied,¹⁶⁰ that Purdue Pharma does not constrain the court from issuing a temporary release. Obviously, a stay of execution is not the same as a grant of clemency. Thus, its utility is limited, and, in both cases, the duration of the relief was quite short.¹⁶¹ Nonetheless, because consensual releases are not forbidden under Purdue Pharma, it keeps the conversation going longer, which can only be a good thing.

    It is also possible that bankruptcy judges, in appropriate situations, might expand on what constitutes “temporary” in this context in a fashion that would promote the chances for a consensual bargain. After all, a temporary pause to permit an orderly process to ensue is what the automatic stay is all about.¹⁶² On the other hand, one might be justifiably and equally concerned about what Purdue Pharma could mean for the longstanding practice of allowing extension of the automatic stay to nondebtors in appropriate cases. Thus, it should be interesting to watch how this line of reasoning develops.

Conclusion

    Too much ink has been spilled in casting the debate about mass-tort reorganization in terms of good and evil. To be sure, there have been some bad actors along the way, doubtless including members of the Sackler family. Mass tort cases present unprecedented issues of amplitude due to the sheer scope and size of liability. Conventional litigation tools have not proved up to the task. Defendants, therefore, have turned to Chapter 11, which does offer a path forward. It is natural to be suspicious of companies that have perpetrated, and in some cases hidden, wrongdoing. This is why emotions run high in mass tort reorganizations. However, whatever the original motive for filing may have been, it recedes into background noise as old management is displaced, and the case proceeds under the neutral and watchful eye of an experienced bankruptcy judge.

    In certain instances, third-party releases can be an appropriate tool in achieving confirmation of a workable and equitable plan of reorganization, as well as in ensuring its success. The Supreme Court has now removed that option from the bankruptcy court’s toolbox. It did so because, other considerations largely aside, Congress did not green light that power in unmistakenly clear terms. Thus, the simple solution is to give the Court what five Justices wanted to see in order to achieve the fair and equitable result that the dissenting Justices felt had been thwarted by the majority opinion.

    In this treatment, I have offered a proposal for doing just that. The fact that some wrongdoers may benefit from this relief is not enough reason alone to deprive both known and unknown victims and victim families a prompt and fair resolution of their claims.

* Dean Emeritus and Mitchell Franklin Professor Emeritus, Tulane Law School and Professor of Legal Practice, Wilmington University School of Law.