Column: US Supreme Court’s Purdue decision narrows options for mass torts defendants
The opinions expressed here are those of the author, a columnist for Reuters.
By Alison Frankel
June 27 (Reuters) -When a fractured U.S. Supreme Court ruled on Thursday that federal bankruptcy law does not permit members of the billionaire Sackler family to use the Chapter 11 bankruptcy of their company, Purdue Pharma, to avert all lawsuits by opioids plaintiffs, it said nothing about a controversial corporate maneuver known as the Texas Two-Step.
But the court’s Purdue opinion, according to experts I consulted, will force companies facing mass torts liability to think hard about whether it still makes sense to use the tactic, in which thriving parent companies attempt to resolve mass torts claims through the bankruptcy process without actually declaring themselves bankrupt. (The trick: Parent companies cabin their mass torts liability in a subsidiary that enters Chapter 11 bankruptcy, then use the subsidiary’s bankruptcy to propose a global mass torts settlement.)
“This decision will make it more difficult for companies to extinguish claims using the Texas two-step,” said Deepak Gupta of Gupta Wessler, who filed a friend-of-the-court brief in the Purdue case on behalf of plaintiffs whose mass torts claims were shifted out of litigation and into the bankruptcy process when companies took advantage of the maneuver.
The Texas two-step is intended to allow parent companies to avoid the strictures of bankruptcy while still reaping some of the benefits of Chapter 11, such as a stay on pending litigation and an orderly process for evaluating and settling claims. Proponents contend that bankruptcy court is the most efficient and effective forum for plaintiffs and defendants to negotiate global deals to settle claims not just against the bankrupt corporate subsidiary but also the non-bankrupt parent company.
That proposition depends, however, on defendants’ ability to bind plaintiffs to the deal struck in bankruptcy court. And in the Supreme Court’s Purdue decision, the majority held that the bankruptcy code does not allow courts to force unwilling plaintiffs to release their claims against non-bankrupt parties.
In the Purdue case, those parties were Sackler family members who tried to obtain litigation releases through their company's Chapter 11. In the Texas two-step paradigm, the non-bankrupt party is the healthy parent company.
“A bankruptcy court’s powers are not limitless and do not endow it with the power to extinguish without their consent claims held by nondebtors (here, the opioid victims) against other nondebtors,” wrote Justice Neil Gorsuch for the Supreme Court majority, which also included Justices Clarence Thomas, Samuel Alito, Amy Coney Barrett and Ketanji Brown Jackson.
I should pause here for an important caveat. As Gorsuch noted in the majority opinion, Congress enacted special rules for asbestos-related bankruptcies. Those rules do, in fact, allow bankruptcy courts under specified circumstances to force plaintiffs to release claims against non-bankrupt entities.
Most (but not all) of the companies that have proposed Texas two-steps have used the tactic to address asbestos liability. So, in way, I’m writing about how the court’s Purdue decision will impact a phenomenon – Texas two-steps by non-asbestos companies -- that exists more in theory than reality.
To be sure, as my Reuters colleague Dietrich Knauth pointed out in a terrific story on Thursday, the Purdue decision will also make it harder to resolve mass torts through more conventional bankruptcies. Knauth, like Justice Brett Kavanaugh in his dissenting opinion, wrote that outside parties like insurance companies and corporate officers may be reluctant to contribute money to global bankruptcy settlements if they can’t obtain broad releases.
But it’s worth considering the decision’s impact on Texas two-steps for non-asbestos companies because of the attention garnered by the tactic in the last couple of years, with lower courts openly speculating about the prospect of healthy companies using bankruptcy to sidestep mass torts litigation.
Law professor Anthony Casey of the University of Chicago, who co-authored a 2024 law review article, In Defense of Chapter 11 for Mass Torts, that is cited throughout Kavanaugh’s dissent, told me that the Purdue decision makes the two-step a less attractive option for non-asbestos companies.
“The value of bankruptcy has gone down if you can’t use it to [protect] the parent company,” Casey said.
One of the big advantages of the two-step tactic, Casey said, is that companies can use the bankruptcy process to structure a settlement to handle future claims – a particular issue in mass torts involving products alleged to cause diseases that can take years to develop. The Purdue decision, Casey said, casts doubt on bankruptcy deals to resolve future claims, since those yet-unknown claimants can’t consent.
"It really narrows the universe" of cases in which the Texas two-step makes sense, Casey said.
But the tactic might still benefit some non-asbestos companies. The Purdue opinion left open the possibility, for instance, that mass torts defendants can use the two-step to stall litigation against parent companies. Lower courts are divided on whether parent companies that have agreed to indemnify their subsidiaries for liability to mass torts plaintiffs must still face their own cases or whether those cases must be stayed or enjoined when the subsidiary enters Chapter 11. (The issue is shockingly complex!) Companies might try Texas two-steps to obtain at least a temporary respite from litigation.
Defendants might also calculate that bankruptcy court is still the best forum for a global settlement even if they have to obtain consent from plaintiffs. They’d have to obtain the same consent, after all, in a global mass torts settlement in multidistrict litigation. Bankruptcy court could offer a more orderly process than piecemeal agreements with individual plaintiffs and their lawyers.
It may cost defendants more money, after the Purdue decision, to settle mass torts cases through bankruptcy if they have to contribute enough money to win consent from 80 or 90% of claimants. But some companies may decide it’s nevertheless their best option.
“I think this decision has dollars and cents impact,” said law professor Lindsey Simon of Emory University. “I don’t think it will eliminate bankruptcy court as a forum to resolve mass torts liability.”
Read more:
US Supreme Court blocks Purdue Pharma bankruptcy settlement
US Supreme Court Purdue ruling makes mass torts tougher to resolve in bankruptcy
(Reporting By Alison Frankel)
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