Prof. Tony Casey Speaks Up on Purdue Pharma

Prof. Anthony J. Casey
University of Chicago

As the bankruptcy of Purdue Pharma heads to the United States Supreme Court, the bankruptcy world is once again in a frenzied debate about “third-party” or “nondebtor” releases. This debate often devolves, unfortunately, into one of rhetoric producing, as they say more heat than light.

It can be difficult to address all the nuances in short form. I have laid out a long-form academic argument in favor of nondebtor releases elsewhere. And I have addressed some of the policy considerations here and here. But it may be useful to use this space to counter two of the weaker arguments against nondebtor releases. The first is that releases let wrongdoers escape consequences. The second is that the Bankruptcy Code prohibits nondebtor releases. Neither of these arguments stands up to scrutiny.

  1. Releases do not let wrongdoers escape consequences.

Nondebtor releases of the type found in Purdue are not“rare and controversial” provisions that let wrongdoers get off nearly scot-free. In the first place, it should be obvious to anyone with even a basic understanding of bankruptcy law that these releases have no effect on criminal prosecutions. No bankruptcy proceedings can have such an effect. Any decision to go (or not go) after the Sacklers criminally was—or will be—made by government actors independent of any authority of the bankruptcy court.

More importantly, nondebtor releases are granted in exchange for substantial contributions from the released parties. They are only approved when the releases are deemed essential to reorganization and supported by overwhelming majorities of claimants, and when the contributions make those claimants better off.1 In this form, they have become fundamental tools for resolving exceptionally complex mass tort cases that involve thousands of claimants.

Indeed, for decades nondebtor releases have played a critical role in some of the most important bankruptcy settlements in the United States. For example, when Dow Corning faced thousands of lawsuits related to defective breast implants, nondebtor releases facilitated a negotiated resolution that had failed several times without them. In exchange for a settlement of claims against them, solvent shareholders agreed to contribute to a settlement fund. The overwhelming majority of claimants (94%) supported the deal. But what about that last 6%? The court had a choice: use releases to force the 6% to go along or let things drag on for years or decades in uncertain litigation. The court chose the former in order to get desperately needed money to the victims.

This was the right choice. As one prominent scholar noted in describing the releases in Dow Corning, “The whole point of bankruptcy is to find the fairest deal possible for everyone involved,” and a resolution supported by an overwhelming majority of victims is “a good thing that deserves praise.”

Similarly, in Purdue over 95% of the 120,000 voting claimants approved the releases in question. Yet, the bankruptcy judge in that case was unfairly vilified for even considering these releases as part of a multibillion-dollar global settlement. In particular, he was subjected to the absurd suggestions by academics (some of whom previously praised the Dow settlement) and politicians that he was approving the settlement in a competition to attract future cases to his courtroom even thoughthe majority of federal courts (and many courts abroad) allow nondebtor releases in the same circumstances.2

To be clear, Dow and Purdue are not outliers. Nondebtor releases have facilitated settlements in dozens of mass tort bankruptcies, including those of A.H. Robins and Johns-Manville. Indeed, the more general idea of coordination in favor of the collective good is a core feature of the bankruptcy process.

  1. The text of the Bankruptcy Code does not prohibit nondebtor releases.

A new sort of faux textualism has arisen in the recent bankruptcy debates. Critics who normally shy away from the label of textualist have now adopted refrains about nondebtor releases violating the sacred text of the Bankruptcy Code.

I have never considered myself much of a strict textualist, but the textual argument for nondebtor releases is far stronger than any argument against. As the Second Circuit noted, the Bankruptcy Code expressly provides in § 1123(b)(6) that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.” And, indeed, no other provisions of the Code prohibit nondebtor releases.

Courts and litigants often talk about this in terms of equitable judicial authority. But this framing misses the point. Section 1123 is a clear statutory grant of authority to a debtor3 in writing a plan. The Code then provides in § 1129 that bankruptcy courts shall confirm plans that complies with § 1123 (and all other provisions of the Code). It is not textualism to prohibit a court from approving what the text says it can and shall approve. And only a faux textualist—worried more about constraining courts and debtors than enforcing text—would argue that we must limit a textual grant of authority simply because it is stated in broad terms. This is a dangerous path of interpretation that would draw into question decades of judicial interpretation of other broad phrases in the Code like “fair and equitable” and “for cause.”

Some of these textualists look for support in the limiting principles the Supreme Court announced in Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017). These arguments get things backward. The message in Jevic was that debtors cannot evade the requirements of Chapter 11. The main feature of Chapter 11 is that it includes a specific set of protections for the plan confirmation process. These protections include the best interest of creditors test, the absolute priority rule, and a good faith requirement. That is exactly why the broad language of § 1123 is found in Chapter 11 of the Code and stated in terms of what a plan can do. Because these releases are not otherwise available, § 1123 ensures that the releases will require approval by vote and full judicial review.

The new textualists make other arguments based on negative inferences from § 524(g), which allows for nondebtor releases in asbestos cases. As others have pointed out, these arguments are foreclosed and belied by the text of the legislation itself, the legislative history, and the Supreme Court’s bankruptcy jurisprudence. They are also inconsistent with common sense. One would have to believe that Congress observed the success of settlement innovations in one category of mass torts settlements, decided to bless that innovation with §524(g), and then simultaneously decided to prohibit all similar innovations for mass tort cases.

One can doubt how serious these critics really are about statutory text. After all, many of them support the dismissal of the bankruptcy of LTL Management (the Johnson & Johnson Talc case). The Third Circuit dismissed that case on the grounds that the debtor was not in imminent financial distress. In short, J&J and LTL were acting in bad faith because they had made too much money available to cover potential liabilities.

That is a perverse outcome. Especially when one considers that, no matter how many times you read the Bankruptcy Code, you cannot find the provision that requires imminent financial distress. One might expect the new textualists to point this out and object to the Third Circuit’s ruling. They have not, likely because their objections are not really about text. For what it’s worth, my own view is that the Third Circuit ruling in LTL is wrong not because it lacks textual support (even though it does) but because it is a judge-made rule that simply makes no sense.

In the end, there is always a balance. Text matters and laws should make sense. Things can get difficult if those principles conflict. Fortunately, here and in other large mass tort cases like LTL, text and common sense both point to the same outcomes. Bankruptcy law should and does provide the necessary tools for global settlement of mass torts when those settlements are fair and broadly supported. It would be unfortunate if the Court holds otherwise in this case.

Copyright © 2023 Creditor Rights Coalition. All rights reserved.

1 These protective requirements have been applied by most courts. But the Second Circuit in Purdue announced a particularly exacting fact-intensive seven-factor test for the approval of nondebtor releases. Moreover, the court announced that a bankruptcy court’s application of that test is always subject to full de novo review by the district court. This ruling further narrows the universe cases in which nondebtor releases will be granted in the future.

 2 It is not just courts that think these releases are appropriate. In 2014, an American Bankruptcy Institute reform commission made up of some of the country’s most respected bankruptcy lawyers, judges, and academics concluded that “a blanket prohibition on third-party releases was inadvisable” and that a debtor “should be permitted to seek approval of third-party releases.”

3 Or anyone else entitled to propose a plan.