The Moral Limits of Bankruptcy Law

When Purdue Pharma filed for Chapter 11 bankruptcy in 2019, it had over a billion dollars in the bank and owed no money to lenders. But it also had the Sacklers, its owners, who were eager to put behind them allegations that they played a leading role in the national opioid epidemic.

The United States Supreme Court is now considering whether the bankruptcy system should have given this wealthy family a permanent shield against civil liability. But there is a bigger question at stake, too: Why is a company with no lenders turning to the federal bankruptcy system in response to accusations of harm and misconduct?

The maker of OxyContin is one in a long line of companies that have turned Chapter 11 into a legal Swiss Army knife, tackling problems that are a mismatch for its rules. Managing costly and sprawling litigation through bankruptcy can be well intentioned. But Chapter 11 was designed around the goal of helping financially distressed businesses restructure loans and other contract obligations.

If companies instead turn to bankruptcy to permanently and comprehensively cap liability for wrongdoing — the objective not only of Purdue Pharma but also of many other entities over recent decades — they can shortchange the rights of individuals seeking accountability for corporate coverups of toxic products and other wrongdoing. And in a country that relies on lawsuits and the civil justice system to deter corporate malfeasance, permanently capping liability using a procedure focused primarily on debt and money could be making us less safe.

In 1978, a bipartisan group of lawmakers enacted sweeping reforms to American bankruptcy law. To enhance economic value and keep viable businesses alive for the benefit of workers and other stakeholders, these changes gave companies more protection and control in bankruptcy. This new bankruptcy code also made it easier to alter the legal rights of creditors during and after bankruptcy without their consent.

To provide more sweeping protection to a distressed but viable company, the new bankruptcy laws also expanded the definition of “creditor” to include people allegedly injured by the business. Yet the rules governing Chapter 11 were drafted primarily with loans and contracts, not large numbers of harmed individuals, in mind.