The End(s) of Bankruptcy Exceptionalism: The Future of Mass Tort Reorganization After Purdue Pharma
By Jonathan C. Lipson (Temple University - James E. Beasley School of Law) and Pamela Foohey (University of Georgia School of Law)
Introduction
The Supreme Court’s recent opinion in Purdue Pharma [1] ends the use of controversial nonconsensual third-party releases. It also ends a form of “bankruptcy exceptionalism” that has troubled observers for many years.
In 2008, one of us published a paper arguing that the Court’s approach to Congress’ bankruptcy power reflected a kind of “structural exceptionalism”, an operating principle by which the Court would permit exceptions to constitutional rules, standards, norms, and values around matters such as the power of Article I courts, due process, and state sovereign immunity in insolvency cases [2]. More recently, a debate has emerged about bankruptcy’s methodological exceptionalism, i.e., its tendency to tolerate off-label innovations such as the third-party release at issue in Purdue Pharma through exceptionally broad equitable powers [3].
Whether one is “for” [4] or “against” [5] bankruptcy exceptionalism in either form, the Court’s opinion in Purdue Pharma would end statutory exceptionalism. It is less clear whether it ends structural exceptionalism, however. Justice Gorsuch’s careful statutory analysis for the unusual majority he cobbled together (he was joined by Justices Alito, Barrett, Jackson, and Thomas) correctly does away with nonconsensual third-party releases as exceeding section 1123(b)(6)’s catchall provisions. But it does not go very far, because it fails to engage the serious due process and related concerns just below the surface in Purdue Pharma, the threat of the Sackler Release to “silence victims,” as one of us has put it elsewhere [6].
Meanwhile, Justice Kavanaugh wrote an emotional (“emphatic”) dissent joined by an equally unusual group (Justices Kagan and Sotomayor, and Chief Justice Roberts). Justice Kavanaugh embraced bankruptcy exceptionalism in everything but name, devoting twice as much text to policy and pragmatic arguments for the Sackler Release as Justice Gorsuch did to the statute’s failure to condone it. In the process, Justice Kavanaugh made some surprising assertions—he apparently forgot how joint and several liability and corporate indemnification work, for example. To the dissent, the ends in the case seemingly justified its exceptional, and exceptionalist, means.
Although it is easy to decry exceptionalism, in truth we are all exceptionalists to some extent. No one seriously argues that bankruptcy courts lack equitable discretion or that common law courts lack the power to make reasoned incremental innovation. The important question is not whether to end bankruptcy exceptionalism, but instead the ends that exceptionalism serves.
Viewed in this light, the Purdue Pharma decision was remarkable and somewhat surprising. It was remarkable because on the surface, the ends seemed laudable: Who doesn’t want to take some money from the Sacklers to fund opioid abatement? Who doesn’t want to see survivors and their families receive at least some compensation, sooner or later?
Yet, the deeper implications were potentially devastating. The problem in Purdue Pharma was that, to any close observer of the case, it appeared that one of the primary goals—perhaps the goal—from the perspective of the Sacklers and their designees was to shield the Sacklers from public scrutiny of their role in the opioid crisis. This is because the Sacklers—who had been draining the company of assets for years after the first (2007) criminal plea—only agreed to put the company into bankruptcy after they had lost motions to dismiss direct suits against them, litigation that would have produced discovery which, we suspect, the Sacklers were willing to pay dearly to avoid.
To give them the release they sought, however, would set a disastrous precedent. Rather than use bankruptcy to provide a more efficient distributional scheme after a neutral determination of liability—bankruptcy’s proper role—the Sacklers (and all who would follow its blueprint) would treat bankruptcy as an option to disable judicial determinations of liability, no matter how grave, exercisable at the will of insiders of the corporate tortfeasor. Thus, bankruptcy would become an exception not only to ordinary remedial mechanisms (i.e., collection through state court), but to the fundamental, liability-determining role that civil courts play in our system.
At the same time, it was surprising because the Court has historically tolerated structural exceptions to constitutional rules, standards, norms, and values when presented in insolvency cases involving significant public interests. Thus, as one of us (with David Skeel) has shown in forthcoming work [7], the railroad receiverships of the late 19th century tolerated exceptions to judicial integrity in the name of the public interest in keeping the railroads running. In Amchem and Ortiz, in the 1990s, the Supreme Court self-consciously recognized that bankruptcy was a “special remedial scheme,” positing that it might be an exception to due process values forbidding mandatory class action personal injury suits [8]. Justice Kagan candidly conceded in her 2020 opinion in Allen v. Cooper that bankruptcy was “exceptional” in its abrogation of state sovereign immunity [9]. These examples suggest that the Court has been willing to tolerate structural exceptionalism when massive insolvency is coupled with credible claims that the restructuring process is advancing the public interest.
Viewed this way, Purdue Pharma seemed a strong case for bankruptcy exceptionalism. Proponents routinely argued that the Sackler Release was necessary to their effort to abate the opioid crisis, a public health crisis in which they and their company played a singular role. Moreover, the dominant creditors in the case were public actors, state, local, and federal governments (indeed, the federal government effectively ended up on both sides, since the DOJ settlement of Purdue’s criminal charges was the “poison pill” [10] that made the releases irresistible to the bankruptcy court, yet the US Trustee was the successful petitioner in the Supreme Court).
While the majority opinion in Purdue Pharma ends statutory exceptionalism in bankruptcy (for now), its failure to address deeper questions of structural exceptionalism is problematic. Third party releases were hardly the only trick in the mass tort reorganization playbook. Gamesmanship over what constitutes “consent,” seemingly endless preliminary injunctions, indifference to future claimants, and the uncertain allegiances of the privatized fiduciaries who run these cases all remain ways to silence victims.
Justice Kavanaugh’s dissent, meanwhile, is a cri-de-coeur for those who would ask Congress to amend the Bankruptcy Code to create a kind of “asbestos 2.0”—expanding the use of third-party releases in section 524(g) from that limited context to all mass tort reorganizations.
While bankruptcy can play a special role in mass tort reorganization [11], it should not be a free-roving exception to foundational structural protections, such as the right to a neutral adjudication of the merits of serious wrongdoing. Bankruptcy should not be the exception that threatens to swallow the rule of law in cases involving widespread harm. While nonconsensual third-party releases are off the menu, the mass tort reorganization buffet remains open for business, and with it questions about the deeper structural limits of bankruptcy.
* Originally produced for the Harvard Law School Bankruptcy Roundtable and reprinted with permission here.
[1] https://www.supremecourt.gov/opinions/23pdf/23-124_8nk0.pdf.
[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=975978.
[3] https://www.yalelawjournal.org/forum/shocking-business-bankruptcy-law#_ftnref1.
[4] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4370819.
[5] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4263006.
[6] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4365005.
[7] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4760736.
[8] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4355666.
[9] https://www.supremecourt.gov/opinions/19pdf/18-877_dc8f.pdf.
[10] https://www.nytimes.com/2020/12/05/opinion/sackler-purdue-pharma-doj.html.
[11] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4355666.