When Purdue Pharma filed for Chapter 11 bankruptcy in 2019, it had over a billion dollars in the bank and owed no money to lenders. But it also had the Sacklers, its owners, who were eager to put behind them allegations that they played a leading role in the national opioid epidemic.
The United States Supreme Court is now considering whether the bankruptcy system should have given this wealthy family a permanent shield against civil liability. But there is a bigger question at stake, too: Why is a company with no lenders turning to the federal bankruptcy system in response to accusations of harm and misconduct?
The maker of OxyContin is one in a long line of companies that have turned Chapter 11 into a legal Swiss Army knife, tackling problems that are a mismatch for its rules. Managing costly and sprawling litigation through bankruptcy can be well intentioned. But Chapter 11 was designed around the goal of helping financially distressed businesses restructure loans and other contract obligations.
If companies instead turn to bankruptcy to permanently and comprehensively cap liability for wrongdoing — the objective not only of Purdue Pharma but also of many other entities over recent decades — they can shortchange the rights of individuals seeking accountability for corporate coverups of toxic products and other wrongdoing. And in a country that relies on lawsuits and the civil justice system to deter corporate malfeasance, permanently capping liability using a procedure focused primarily on debt and money could be making us less safe.
In 1978, a bipartisan group of lawmakers enacted sweeping reforms to American bankruptcy law. To enhance economic value and keep viable businesses alive for the benefit of workers and other stakeholders, these changes gave companies more protection and control in bankruptcy. This new bankruptcy code also made it easier to alter the legal rights of creditors during and after bankruptcy without their consent.
To provide more sweeping protection to a distressed but viable company, the new bankruptcy laws also expanded the definition of “creditor” to include people allegedly injured by the business. Yet the rules governing Chapter 11 were drafted primarily with loans and contracts, not large numbers of harmed individuals, in mind.
When this bankruptcy law expansion dovetailed with the rise of high-volume asbestos litigation, creative lawyers started a trend that bankruptcy code drafters did not anticipate: using Chapter 11 to manage widespread allegations of coverups and harm to individuals. The former Fortune 500 company Johns Manville, an asbestos manufacturer, filed for bankruptcy in 1982, arguing that being a defendant in so many lawsuits made it eligible for Chapter 11.
The company promoted a broad reading of bankruptcy’s scope: to save the business, it needed protection not only from injured people already pursuing the company but also from those who might discover how asbestos harmed them much later in the future. In exchange, a trust would be set up to compensate claimants. Federal court orders put these ideas into effect, and Congress eventually passed a law authorizing asbestos bankruptcies if structured like Manville’s.
When the pharmaceutical and consumer products company A.H. Robins demanded even more bankruptcy protection than Manville, it set the stage for strategies like the one Purdue Pharma would adopt. After A.H. Robins’s Dalkon Shield birth control device triggered a host of medical problems for hundreds of thousands of women around the world, including spontaneous septic abortion, loss of fertility and death, the company filed for Chapter 11 in 1985. The resulting court orders not only granted its requested relief and set up a trust for injured women but also shielded its owners, members of the Robins family, who were accused of fraudulently concealing the Shield’s hazards.
The use of Chapter 11 to permanently cap liability for a range of potentially liable parties attracted the attention of the Catholic Church. Since the 2000s, 35 dioceses have filed Chapter 11 in response to allegations of child sex abuse and coverups. So have organizations like U.S.A. Gymnastics and the Boy Scouts of America. Illustrating how bankruptcy makes strange bedfellows, the U.S. Conference of Catholic Bishops filed a Supreme Court brief to support the protection of the Sacklers in the Purdue Pharma bankruptcy.
Some companies facing tens of thousands of lawsuits are too well off for bankruptcy yet are determined to access the system’s benefits. In a maneuver often called the Texas two-step, financially healthy companies have created special non-operating subsidiaries to send into Chapter 11. By doing so, the hope is to permanently shield the entire corporate enterprise against liability for wrongdoing, in exchange for a fixed financial contribution to compensate claimants now and in the future.
The two-step provokes costly and time-consuming legal challenges, and even if they succeed, the bankruptcy filing typically results in the cancellation of scheduled jury trials in other courts in the meantime — to the companies’ benefit. The corporate giant Johnson & Johnson has already filed two two-step bankruptcies in its effort to cap liabilities for accusations that it ignored alleged cancer risks stemming from its talc-based personal hygiene products. Although both attempts were eventually dismissed because the entity was not in financial distress, Johnson & Johnson is planning to file a third time.
Some academics, and even more bankruptcy lawyers, believe Chapter 11 can be useful to manage a wide array of mass tort litigation, at least in some instances. The 1997 report of a federal commission concluded that the bankruptcy system had features well suited to managing mass tort liabilities if substantial guardrails were put in place (but Congress did not enact those guardrails).
The trade-off for overriding some laws and procedures was promoting equal treatment of similarly situated claimants, including those who discover harm long in the future who could not readily collect from the pot under other dispute resolutions systems, while saving otherwise viable organizations to the benefit of workers and other stakeholders. Supporters often say Chapter 11 is more efficient than civil litigation, which can translate into higher compensation for injured people.
Unfortunately, bankruptcy has a rocky track record in delivering its hoped-for financial benefits. While Manville lived on, the trust created by its bankruptcy swiftly ran out of money and slashed recoveries to even the most severely ill claimants. And asbestos cases continue to generate underfunding and inconsistent payouts. People have received vastly different recoveries depending on when they got sick. Concerns that asbestos trusts shortchanged people with severe injuries while potentially overcompensating others fueled several (ultimately unsuccessful) congressional efforts to move asbestos claims out of court systems altogether.
Recent non-asbestos cases reinforce that one cannot rely on organizations’ predictions of how and when injured people will be compensated. The opioid maker Mallinckrodt reduced the funding for opioid claimants by $1 billion in the year following the conclusion of negotiations and court approval of the company’s bankruptcy plan. The Boy Scouts of America predicted full compensation for survivors of child sex abuse when it sought approval of its Chapter 11 plan. Yet it was later made clear that survivors almost certainly will not recover at that level. To ensure the trust does not run out of money and shortchange later claimants, initial payouts to Boy Scouts survivors are set at just 1.5 percent of claim values; claimants should collect more later, but no one can say how much more or when.
Any system that undercompensates for serious harm implicates more than claimants’ wallets. It undercuts a key objective of our justice system: deterring bad behavior.
Although bankruptcy advocates tend to focus on financial compensation, other issues are also at stake. Injured people in pursuit of accountability for organizational wrongdoing have found their diversion to the bankruptcy system frustrating and unfair, more business than justice. The perception of unfairness is especially strong in Texas two-step cases. Earlier this year, a bipartisan trio of senators and 24 states and the District of Columbia unsuccessfully implored the Supreme Court to override the Fourth Circuit decisions that enable profitable and thriving companies to keep personal injury claimants, some of whom are severely ill and dying, from pursuing their claims in other courts.
The Supreme Court’s examination of Purdue Pharma’s case also presents an opportunity to consider how expansive use of the national bankruptcy system can create tension with constitutional principles. For example, some experts worry that these cases insufficiently protect the due process of people who discover harm long after a bankruptcy case has changed their rights. Using bankruptcy to shift control away from claimants and halt lawsuits also has implications for federalism. Federal bankruptcy filings of dioceses and other organizations have impeded state initiatives, such as New York’s Child Victims Act, which reopened state courts to adult survivors of child sex abuse and included special procedures and trauma-related training.
Overall, these cases pose challenges bigger than the matter the Supreme Court must decide in Purdue Pharma. The looming question remains whether we the people may be at greater risk — monetarily, bodily, constitutionally — when a system designed for restructuring the debt of financially distressed companies is retrofitted for other policy problems.
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