The Supreme Court’s recent 5-4 decision in the controversial chapter 11 bankruptcy reorganization of opioid-maker Purdue Pharma ends the use of nonconsensual third-party “releases,” which discharge (eliminate) liabilities of nondebtors who may share liability with a corporate debtor. Although the majority opinion is correct that the Bankruptcy Code does not permit this, it failed to recognize the problematic exceptionalism of the lower courts which approved those releases or the “social” qualities of Purdue Pharma’s mass tort liability.
Bankruptcy exceptionalism has been a contested concept since it emerged over fifteen years ago and reflects a willingness to bend the rule of law in order to maximize economic recoveries. But the statutory exceptionalism rejected by the Purdue Pharma majority is not its only form. This Article shows that in bankruptcy, the Court has also tolerated “structural exceptionalism,” a willingness to permit deviations from constitutional rules, standards, norms, and values when in tension with insolvency proceedings that involve significant public interests. Seen this way, Purdue Pharma seemed an ideal candidate for a broadly exceptionalist ruling: the company’s mass torts played a unique role in a public health crisis that has taken hundreds of thousands of lives.
Yet, the significant prebankruptcy misconduct of Purdue Pharma and its insiders who sought the releases created a kind of “social debt,” a subset of mass tort liability reflecting serious misconduct. Although the precise boundaries are unclear, the defining features of social debt are its moral gravity, scale, and public spillovers, here liability for drug-marketing fraud, which translate poorly into dollars. Other examples of social debt include large-scale liability for sexual assault and the crisis of gun violence.
The noneconomic demands of social debt are in tension with the economic aspirations of bankruptcy exceptionalism. The Purdue Pharma majority neither recognized this tension nor ended the use of chapter 11 to resolve mass tort liability, an increasingly attractive but problematic substitute for (an exception to) ordinary litigation. Justice Kavanaugh’s flawed but “emphatic” dissent fully embraced bankruptcy exceptionalism without acknowledging the extraordinary, and problematic, power he would vest in bankruptcy judges to resolve social debt.
The important question is not whether to end bankruptcy exceptionalism—all agree that bankruptcy courts must have some flexibility and can play an important role in resolving mass tort liability—but the ends that it serves. We unpack the Supreme Court’s opinion in Purdue Pharma to anticipate the next points of conflict in mass tort reorganization, with emphasis on the emerging problem of social debt. We offer guidance on ways that courts and Congress can balance economic goals of maximizing recoveries with noneconomic concerns presented in social debt bankruptcies, including on what constitutes “consent” to a third-party release and the problematic incentives of privatized fiduciaries who run these cases.