Debt-Free Bankruptcy: The Pros and Cons of Litigating Mass Tort Litigation through Bankruptcy

Purdue Pharma is not the first or even the most recent entity to file bankruptcy due to facing thousands of lawsuits alleging credible tort claims or facing judgments and legal fees that would drain the entity of a majority of its assets. Approximately a year before Purdue, the world was shocked with the discovery of sexual abuse within USA Gymnastics at the hands of one of its trusted doctors, all of this brought to light by one of the U.S. famed gymnasts coming forward. Facing unmanageable litigation, USA Gymnastics placed a group of related entities into bankruptcy hoping to equitably deal with Dr. Larry Nassar’s horrible abuse. Similarly, on February 18, 2020, Boy Scouts of America filed for bankruptcy, also facing over a thousand potential claims related to sexual abuse. As recently as July 2022, while not related to sexual abuse litigation, the company Aearo Technologies LLC sought bankruptcy protection claiming the multidistrict litigation it was actively involved in was not working.

Certain recent cases have been widely criticized. But the bankruptcy system has been used as an effective tool for sorting through mass tort litigation for decades. These cases show what works and what does not work when employing the bankruptcy system to handle mass tort litigation.

Historical Bankruptcies Driven by Mass Tort Litigation

In 1981, the onslaught of asbestos-related litigation caused Johns-Manville Corp. to file a voluntary bankruptcy petition. This eventually led to the creation of the Manville Personal Injury Settlement Trust that was supposed to compensate the current and future claimants. While the bankruptcy initially faced various issues, at the end of 2021, the trust held approximately $650 million in assets and had liquidated almost $5 billion in claims. Various other companies followed a similar procedure. These included Celetox Corp., Eagle-Picher Industries, and Keene Corp., which all faced asbestos litigation. Asbestos trusts were eventually even made part of the Bankruptcy Code. A.H. Robins and Dow Corning Corp. are examples of successful reorganizations resulting from non-asbestos-related mass tort litigation. A.H. Robins filed for Chapter 11 after facing litigation related to injuries caused by an intrauterine device, and Dow Corning Corp. filed after a breast implant was found to be defective. All of these reorganizations entailed the formation of trusts, which were put in place to pay claimants, both present and future.

Purdue Pharma, OxyContin, and the Opioid Crisis

Purdue Pharma launched its opioid drug OxyContin in 1996 and engaged in aggressive marketing and promoting. In four years, sales grew from $48 million to almost $1.1 billion. The marketing and promotion contained a “systematic effort to minimize the risk of addiction in the use of opioids for the treatment of chronic non-cancer related pain.” This misbranding led to a guilty plea between an affiliate, three company executives, and the U.S. Attorney’s Office for the Western District of Virginia. While Purdue cannot solely be held responsible for the opioid crisis, by 2002, OxyContin held a large majority share in the sales of oxycodone, largely due to the over-the-top marketing program and concealment of the true dangers of the drug. Purdue conducted over 40 pain-management conferences where physicians, pharmacists, and nurses attended an all-expenses-paid symposium in states such as Florida and California. Sales representatives were given a lucrative bonus system leading to Purdue paying $40 million in sales incentive bonuses in 2001 alone. Purdue also distributed a slew of branded promotional items that even included plush toys.

From 1999 through 2020, more than 560,000 people died from overdoses involving an opioid. It is undisputed that the first wave of opioid-related overdoses began with the overprescription of opioids. In 2019, when Purdue filed its voluntary petition, it faced over 2,600 lawsuits in both state and federal court systems. The majority of those lawsuits were from governmental entities. Purdue was also facing criminal and civil investigations by the U.S. Department of Justice. At the time of filing, Purdue had already paid approximately $63 million for legal representation that year and was projected to pay over $263 million in 2019. This enormous projected cost led Purdue to attempt to settle its litigation, but it faced a big problem—the lawsuits spanned several states and federal districts and was not on one timeline. Enter the bankruptcy system.

Advantages of Resolving Mass Tort Litigation Through Bankruptcy

There are several reasons why the bankruptcy system is an attractive option for companies facing mass tort litigation. The main objective of bankruptcy is equal distribution to similarly situated creditors. Mass tort litigation can often involve a race to the courthouse because there might be a limited amount of resources available to compensate victims. This could lead to the first couple of claimants receiving a full judgment for their injuries while any following claimants with equally valid claims receive nothing. The bankruptcy system aids companies with the challenge of treating present claimants no better than future claimants. The automatic stay and broad federal jurisdiction aid in “(1) giving the debtor a breathing spell from the pressures that precipitated its bankruptcy filing and (2) protecting creditors by promoting the bankruptcy goal of equal treatment.” The broad federal jurisdiction allows for the consolidation of widespread litigation, which can help with global settlement talks. Bankruptcy courts can also help with appointing representation of any future claimants. A Chapter 11 plan can incorporate a company’s future earning capacity so as to compensate both creditors and tort claimants rather than having the company’s assets completely drained by whoever initiated recovery first. It also allows the debtor to compromise claims for less than the entire amount due.

Comparison of Recent Bankruptcies Driven by Mass Tort Litigation

USA Gymnastics and Boy Scouts of America have achieved mostly successful reorganizations. USA Gymnastics filed a plan that proposed to settle hundreds of claims by paying the victims $380 million. The plan was supported by all survivors who filed a vote and was funded largely from insurance proceeds. The plan also provided for the continued maintenance of programs to report abuse and support athletes. The Boy Scouts of America (BSA) proposed a Chapter 11 plan that provided for the creation of a $2.6 billion fund to compensate the tens of thousands of victims while maintaining the organization’s ability to continue operating. The fund is to be paid by a Texas-based BSA, its local councils, settling insurance companies, and troop sponsoring organizations. In exchange, they would receive safety from any future litigation. The debtor itself is to contribute no more than 10 percent of the fund, with the majority coming from the two largest insurers. The proposed plan received 85 percent of the survivors’ support. The Boy Scouts plan entails the same third-party release issue that Purdue does but has not drawn nearly as much resistance from the victims of the debtor.

Purdue entered bankruptcy with a prepackaged plan that it hoped to push through to a fast confirmation. Purdue was able to structure a deal with 23 states and roughly 2,000 local governments that would cause Purdue to file for bankruptcy and pay as much as $12 billion over time, with up to $4.5 billion coming from the Sackler family. Even having reached this deal, Purdue faced large obstacles to confirmation. In exchange for the Sackler family contributing to the plan, they expected third-party releases that insulated them from future liability. To many, this allowed the Sacklers to walk away without having to take responsibility or adequately compensating for any past harm and injuries. This plan went through an 11-day confirmation hearing and was ultimately confirmed over a large number of objections. While the first confirmation order has been on appeal, the debtor and some of the holdout states were able to further negotiate so that the Sackler family was contributing between $5.5 billion and $6 billion into the fund.

A clear trend between both USA Gymnastics and Boy Scouts is the responsibility the organizations have accepted. Throughout USA Gymnastics’s filings and discussions surrounding its reorganization are statements of its deep regret and support for the survivors. In an affidavit filed in support of its first-day motions, the chief financial officer of USA Gymnastics stated, “USAG’s first priority is to ensure that [survivors of Nassar’s abuse] are treated fairly and respectfully.” He continued, “[t]he survivors’ claims, in the aggregate, may exceed the available resources of USAG. USAG submits that this Court is the best forum in which to implement appropriate procedures to equitably determine the rights to and allocate recoveries to survivors who have asserted claims against USAG.” Boy Scouts has been equally apologetic, issuing an open letter to the victims of its organization.

In contrast, Purdue has been less apologetic and seems reluctant to acknowledge any personal harm the corporation has caused. Instead, Purdue claims, “[r]ecognizing the significant public health issue that opioids present, Purdue for a long time has taken substantial steps to reduce the risk of its opioid medications.” Purdue goes on to clarify that no court has found it has caused any of the alleged harms and that these claims are likely subject to a number of defenses that bar or significantly limit them. Purdue underlies the notion that it feels no responsibility to resolve these claims equitably by explaining that the bankruptcy filing needed to happen because Purdue, a relatively small company, could not handle “the sheer number and scale” of the litigation. The lack of remorse was crystalized through the confirmation hearing testimony of the Sackler family. Judge Robert Drain, the presiding bankruptcy judge, stated, “a forced apology is not really an apology, so we will have to live without one.”

The other main difference between the Purdue bankruptcy plan and the other plans is the purpose for which the trusts are set up. The Purdue plan focuses on setting up money to give to states to implement programs to combat the opioid crisis. The trust is not set up to compensate victims and families that have already been injured by the actions of Purdue. This is a stark contrast from both the Boy Scouts and the USA Gymnastic plans, which have a main goal of compensating the victims. This difference likely goes back to the level of responsibility taken on by the debtor and likely directly translates to the public support of the plans. This difference was clearly felt by the victims who served on the creditors committee. One of the members wrote an op-ed for Time, expressing the stark pain the outcome caused the victims. “We were the most deserving and the least protected in this fight. It should be no surprise that we got the short end of the stick, while billions of dollars went to state coffers already flush with unspent funds earmarked for addiction recovery services.”

Other Cases to Watch

While Purdue might have gotten the most notoriety, there are several other bankruptcy cases to watch to determine the path forward for mass tort litigation in bankruptcy. Johnson and Johnson, facing liability stemming from its baby powder and other talc products, assigned the liabilities to a subsidiary and placed that entity into bankruptcy. The 38,000 individual lawsuits that had been filed were all automatically stayed. The presiding judge, Michael Kaplan, found that this was a proper bankruptcy purpose. Certain plaintiffs in the litigation have appealed this decision, and the issue has gone up to the Third Circuit Court of Appeals. Notably, the U.S. trustee recently filed an amicus brief arguing for dismissal.

Aearo Technologies LLC, which had been actively involved in a mass tort multidistrict litigation, made a similar move. It sought Chapter 11 protection claiming that the litigation is “broken beyond repair” and arguing that only a bankruptcy proceeding could deliver a fair outcome for all involved.

InfoWars has been facing defamation litigation from the victims of the Sandy Hook Elementary School massacre. In April, Alex Jones, the owner of InfoWars, put three related business entities into bankruptcy. The families and the U.S. trustee argued in response that the bankruptcy case was brought only to protect Jones’s personal wealth and therefore did not have a proper bankruptcy purpose. The families ended up dropping the entities as defendants in their lawsuit, which, in turn, led to the voluntary dismissal of the bankruptcy cases. Just two months later, facing potentially a $150 million judgment, the InfoWar empire once again filed for bankruptcy. While the litigation is already consolidated against InfoWar, it is an interesting case involving an attempt to use bankruptcy of business entities to shield a principal’s wealth even when there are clearly assets to continue to defend the litigation.

Pharmaceutical companies Teva and Allergen recently announced a tentative joint deal with various different states to settle opioid-related suits. While it is unclear whether this deal contemplates bankruptcy involvement, it could prove to be an interesting test to determine whether the backlash that faced the Purdue plan was a reaction to the proposed plan or a reflection of public opinion of Purdue Pharma, the Sackler family, and their role in the crisis.