By Marshall S. Huebner and Marc J. Tobak (Davis Polk & Wardwell LLP)
[Editor's Note: The authors, along with other attorneys at Davis Polk & Wardwell LLP, represent Purdue Pharma L.P. and various affiliated debtors in connection with their ongoing bankruptcy proceedings.]
For decades, third party releases have been the cornerstone of mass tort bankruptcies that have resolved previously intractable litigation and provided meaningful compensation to victims who might well have otherwise recovered nothing. In cases such as Johns-Manville (asbestos), A.H. Robins (Dalkon Shield), Dow Corning (silicone breast implants), Mallinckrodt (opioids), and Boy Scouts of America, courts concluded, on a developed factual record informed by pre-bankruptcy litigation history, that value-maximizing settlements and plans of reorganization were viable only by providing settling parties paying into the estate third party releases of appropriate scope. The alternative to these broadly and deeply supported settlements, many in the billions of dollars, was years of costly and uncoordinated litigation in scores of fora and resulting in greatly diminished victim recoveries.
Critiques of third party releases often argue that these releases are in some way unfair to the parties subject to the release, or that third party release cases privilege monetary recoveries over nonmonetary goals. This article aims to address these issues and refocus the debate on the importance of third party releases in achieving and maximizing monetary and nonmonetary goals of victims in mass tort bankruptcies.
First, we canvass the overwhelming judicial consensus that the Bankruptcy Code (including sections 105 and 1123) authorizes third-party releases and channeling injunctions where important or essential to a value-maximizing reorganization, meet additional limiting tests, and are within the court’s jurisdiction. We highlight that a thorough examination of United States v. Energy Resources Co., 495 U.S. 545 (1990), demonstrates that the Supreme Court specifically affirmed the power of bankruptcy courts to confirm plans of reorganization that nonconsensually adjust rights and liabilities among third parties when such adjustments enable a successful reorganization.
Second, we examine how existing law—properly applied—appropriately limits third party releases to circumstances in which they maximize value for, and are broadly supported by, victims and other creditors. Proponents of a third party release plan must not only convince the court that it is objectively superior to the alternatives; in addition, the parties directly affected by the release must vote in favor of the plan by an “overwhelming” margin. Unsurprisingly, such plans are often crafted by creditors and debtors together, ensuring that they reflect victims’ monetary and nonmonetary goals.
Finally, we consider how mass tort resolutions would necessarily change if third party releases were to become unavailable. We note that recent legislative initiatives to categorically ban third party releases outside the asbestos context would make mass tort victims far worse off without achieving countervailing benefits. We recommend that legislative efforts directed at third party releases instead subject them to uniform procedures and standards. Such legislation would address valid critiques of overused third party releases while ensuring that they remain available, under uniform standards, in cases in which they are indispensable.
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Note: This is the Harvard Law School Bankruptcy Roundtable's last scheduled post for the fall of 2022. The BRT intends to resume posting around mid-January, 2023. The BRT wishes all its readers an enjoyable holiday season!