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This is from the non-Dechert and non-Reed Smith side of the Blog.

We are not bankruptcy lawyers.  So, even though we are discussing a Supreme Court decision on the powers of a bankruptcy court, we are not purporting to be experts in that area.  The decision, of course, is Harrington v. Purdue Pharma L.P., 603 U.S. –, 2024 WL 3187799 (June 27, 2024), and it relates to a bankruptcy pursued in relation to actual and potential liabilities from a range of opioid litigation.  We have discussed opioid litigation quite a bit, within the bounds of frequent disclaimers.  While public discourse about the most recent opioid epidemic in the United States has generally addressed the human cost of opioid abuse and its persistence despite a variety of governmental actions and policy initiatives, our focus has been on the use of public nuisance as the basis for many governmental suits that threatened huge liability for a range of defendants to essentially reimburse governmental entities for expenditures allegedly tied to the epidemic.  After a number of trial courts, including MDL No. 2804, greatly expanded the scope of public nuisance compared to how it had been applied for centuries, the clear trend has been for appellate courts to reverse.  Simply put, a county utilizes tax revenues to provide governmental services, including social services, operating a morgue and coroner’s office, offering emergency medical services, and sometimes offering drug rehabilitation services.  It is not entitled to get reimbursement for its expenditures from a person or entity it claims necessitated them, any more than it would be entitled to the costs of repairing a guard rail or repainting the road after a traffic accident.  Of course, causation is also extremely tricky in part because a large number of criminal actors—from cartels to dealers to those who divert prescription drugs to those who illegally purchase a street drug or a prescription drug without an actual prescription—play a role in the epidemic.  Without arguing for or against the role of any prescription drug manufacturer, any distributor, or any retailer in the epidemic, it is hard to pretend that responsibility for the epidemic writ large, or any small slice of it, is simple.  (We could probably say the same about the crack epidemic or other periods of significant problems in the U.S. with a particular street or diverted drug, none of which led to an attempt by struggling governmental entities to use public nuisance as a means to get at deep pockets.)

This is part of what struck us about the Harrington decision.  The majority opinion used the term “victim” nineteen times in referring to opioid litigation plaintiffs, potential creditors of Purdue, and those who would receive compensation according to the bankruptcy plan that it overturned.  The 184 uses of “victim” in the much longer dissent covered these categories as well as those whose claims might be addressed in the bankruptcy of any entity subject to a mass tort.  By contrast, there was no mention in either opinion of public nuisance, in pari delicto, or any non-bankruptcy decision in connection with opioid litigation.  The majority opinion, in particular, seemed not particularly well-versed in the details of opioid litigation, suggesting that the liability for Purdue and its owners, officers, and directors related to product liability suits by individuals who abused opioids or were affected by the abuse of family members.  Direct product liability actions like that, including a wave against Purdue in the early 2000s related to Oxycontin, have generally been unsuccessful.  As one court put it in granting summary judgment against plaintiffs (previously purportedly on behalf of a class) asserting product liability claims related to Oxycontin, “[t]his Court, however, will not accept the plaintiffs’ ‘victimization’ mentality.”  Foister v. Purdue Pharma, LP, 295 F. Supp. 2d 693, 695 (E.D. Ky. 2003).  The criminal acts of the plaintiffs and their decedents, along with “the warnings and instructions provided by the defendants and by other third party intermediaries” severed any proximate cause for the purported injuries.  They still usually do.  (See here, here, here, here, and more generally here.)

This is why the expanded version of public nuisance was so popular to opioid plaintiffs.  Faced with huge potential liability to governmental entities, the Purdue bankruptcy estate offered to provide compensation for certain individuals who would never have been able to recover directly.  Litigants often settle to avoid the cost and uncertainty of trial.  Litigants who become claimants when the defendant seeks bankruptcy protection may get less than they would have had they won a trial, but they avoid the cost and uncertainty of pursuing a case to a successful trial verdict and possible appeal.  As the Harrington dissent put it,

Bankruptcy seeks to solve a collective-action problem and prevent a race to the courthouse by individual creditors who, if successful, could obtain all of a company’s assets, leaving nothing for all the other creditors. The bankruptcy system works to preserve a bankrupt company’s limited assets and to then fairly and equitably distribute those assets among the creditors—and in mass-tort bankruptcies, among the victims.

2024 WL 318779, *12.  As non-bankruptcy lawyers who defend drug and medical device companies in mass torts and write about developments in the field, this description certainly squares with the practice we have observed.

The primary issue in Harrington was that the bankrupt company that sought protection, Purdue, also sought protection for its primary owners, directors, and officers, collectively “the Sackler Family.”  While there may be some circumstances in this case that set it apart from the usual mass tort bankruptcy discussed by the dissent, the focus on owners, directors, and officers of a business entities as being distinct from the bankrupt company that sought protection seems strange to us.  Absent proof that the corporate veil should be pierced, a lawsuit against a company does not open the door to the assets of its owners.  Also, in product liability and, we suspect, actual public nuisance, it is rare that officers and directors of large corporations have personal liability.  Under Supreme Court authority on personal jurisdiction, which generally respects corporate form (e.g., not inferring a subsidiary’s jurisdictional contacts to its parent), an individual who, for example, lives and works in New York is unlikely to be amenable to suit in Oklahoma, Kentucky, or West Virginia simply because of the contacts of a New York-based company of which she is a partial owner, officer, and/or director.  As both opinions discuss, any claims against the Sackler Family would likely be subject to indemnity from Purdue, so such claims could be seen for bankruptcy purposes as claims against Purdue.  In this way, the majority opinion seems off.

Others will write and have written about the proper interpretation of a bankruptcy court’s authority under 11 U.S.C. § 1123, which the 5-4 majority in Harrington held did not support extinguishing claims against the Sackler Family.  The issue for us is what this decision means for the use of bankruptcy in the mass tort context.  As the dissent noted,

For decades, bankruptcy courts and courts of appeals have determined that non-debtor releases can be appropriate and essential in mass-tort cases like this one. Non-debtor releases have enabled substantial and equitable relief to victims in cases ranging from asbestos, Dalkon Shield, and Dow Corning silicone breast implants to the Catholic Church and the Boy Scouts. As leading scholars on bankruptcy explain, “the bankruptcy community has recognized the resolution of mass tort claims as a widely accepted core function of bankruptcy courts for decades”—and they emphasize that a “key feature in every mass tort bankruptcy” has been the non-debtor release.

Id. at *13 (citation omitted).  Is that all gone after Harrington?  Maybe not. 

After all, there was “nearly universal” support for the plan that discharged the Sackler Family, including “virtually all of the opioid victims and creditors” and “all 50 state Attorneys General . . . a rare consensus.”  Id. at *12.  (DOJ also resolved all of its criminal and civil investigations as to Purdue and civil investigations as to the Sackler Family subject to the bankruptcy court’s approval.)  If the frequent use of the word “victim” were insufficient to show what justices in both camps felt about the underlying litigation, then check out the references to the Sackler Family being responsible for a wide range of harms without specifying legal theories, courts, or other details.  Both opinions also declared that Congress was the appropriate forum for the change in law for which the corresponding adverse opinion allegedly advocated.  (We note that the majority implicitly advocated for an expansion of state tort law, something best left to state legislatures.)  The Court clearly did not view this as a typical mass tort that might lead to a request for bankruptcy protection for a defendant.  In addition, the majority opinion described more than a decade of the systematic transfer of assets from Purdue to the Sackler Family in connection with predicted liabilities from litigation.  We hazard that allegations of fraudulent transfers out of a company that is going bankrupt due to product liability or mass tort litigation are exceedingly rare at a level close to what was alleged here.

Focusing back on the “typical” mass tort that could result in a defendant seeking bankruptcy protection, nothing in Harrington limits the ability of the logical corporate defendant—for example, the entity that designs, manufactures, and sells a prescription medical product—from utilizing chapter 11 for protection for itself.  The change relates to entities or individuals that would not be the petitioner/debtor, but could conceivably have liability in the litigation.  That would include individual or corporate owners—but not random minority shareholders of a public company—directors, and officers.  Except in rare instances where the parent company has no assets except for the debtor company, we do not see many of these individuals or entities choosing to be additional debtors.  Instead, it may be advisable to get rulings that the individuals and entities do not have any liability to the various plaintiffs.  Given the “case or controversy” requirement, such rulings would likely require being added to lawsuits in courts of competent jurisdiction, permitting enough discovery to determine the issues (e.g., following corporate formalities and proper accounting practices to avoid piercing the corporate veil), and getting favorable rulings affirmed on appeal.  If bankruptcy courts cannot do what they have been doing for quite some time in terms of bankruptcies driven by mass tort liability, then there would need to plenty of extra work to get to the same place and avoid second rounds of litigation against targets not covered by the debtor’s plan.