CASE PREVIEW

Opioid maker Purdue’s bankruptcy case comes before Supreme Court

The Supreme Court will hear oral arguments on Monday in one of the highest-profile bankruptcies in recent memory: Harrington v. Purdue Pharma, a challenge to the approval by the U.S. Court of Appeals for the 2nd Circuit of a multi-billion-dollar bankruptcy plan for Purdue Pharma, the maker of the opioid OxyContin. A division of the Department of Justice objects to provisions in the plan that release members of the Sackler family, which principally owns the company and controlled it until recently, from civil liability for opioid-related claims. But the plan has wide support from creditors, municipalities, and victims, who see it as the only way to ensure that they will receive compensation and funding for opioid recovery projects from the family.

At the same time, the dispute also raises broader questions about whether and when it is appropriate to resolve mass tort cases – that is, lawsuits brought by a group of people who have been harmed in a similar way, such as in a plane crash or by a defective product – through the bankruptcy system.

Purdue Pharma’s blockbuster opioid OxyContin first came on the market in 1996. The company conducted an aggressive marketing campaign for the drug, selling it as a relief option for a broad array of pain, from cancer to long-lasting sports injuries, and generating some $35 billion in revenue. The company suggested that because the drug was made with an outer coating to slowly release its active ingredient, it was less susceptible to abuse. But OxyContin proved to be highly addictive, leading to a serious public health crisis. Between 1999 and 2019, nearly a quarter-million people died from overdosing on prescription opioids like OxyContin, outstripping car accidents and gunshots as the leading cause of accidental death in the United States.

Purdue Pharma has twice pleaded guilty to federal criminal charges relating to its marketing of OxyContin. Along with members of the Sackler family, some of whom were actively involved in the development and marketing of the company’s drugs, it was also a defendant in thousands of lawsuits, seeking more than $40 trillion, accusing them of having deceptively marketed the drug.

Facing those civil lawsuits, Purdue Pharma filed for bankruptcy in 2019. In Oct. 2019, a bankruptcy court in New York put lawsuits against the company and the Sacklers on hold. And in Sept. 2021, the bankruptcy court confirmed a reorganization plan that would remake the company as a nonprofit devoted to addressing the public-health problems created by the opioid epidemic – by, for example, funding the development of an OTC nasal spray to treat opioid dependence, as well as a drug to reverse opioid overdoses. The company also agreed to create a public repository of documents related to its sales and marketing practices, and the Sacklers agreed to stay out of the opioid business going forward.

Members of the Sackler family – who had taken pre-tax distributions of $11 billion from Purdue Pharma between 2008 and 2016 – agreed to contribute up to $6 billion to the plan. In exchange, the plan contained provisions that shielded members of the Sackler family, who have not filed for bankruptcy, from future civil liability relating to the opioid crisis. U.S. Bankruptcy Judge Robert Drain called the settlement a “bitter result” but noted the costs and risks of continuing to litigate rather than settle the disputes.

In Dec. 2021, a federal district court in New York vacated the bankruptcy court’s decision confirming the plan. It ruled that nothing in the Bankruptcy Code allows the kind of protection from liability that the plan provides to the Sacklers.

On appeal, the 2nd Circuit reversed. It held that when read together, two provisions of the Bankruptcy Code give bankruptcy courts the power to approve the kind of nonconsensual third-party releases found in the Purdue Pharma plan. First, the court of appeals explained, 11 U.S.C. § 105(a) provides that the bankruptcy court can issue “any order, process, or judgment that is necessary to carry out the provisions of” the Bankruptcy Code. Second, the court noted, 11 U.S.C. § 1123(b)(6) – known as the “catch-all” provision – indicates that a bankruptcy plan may “include any other appropriate provision not inconsistent with the applicable provisions of” the Bankruptcy Code. Moreover, the court of appeals concluded, the provisions shielding the Sacklers from civil liability were appropriate in this case.

But U.S. Trustee William Harrington – a Department of Justice official appointed by the attorney general to oversee bankruptcy cases in (among other places) New York – objected to the provisions in the plan shielding the Sackler family from civil liability. After the court of appeals declined to put its order on hold, Harrington came to the Supreme Court, which agreed to stay the implementation of the plan and weigh in.

There are two main questions before the Supreme Court. The first is whether Harrington, as the U.S. Trustee, and the federal government have a right to challenge the confirmation of the plan at all. Purdue Pharma and the Official Committee of Unsecured Creditors, a committee appointed by the trustee to represent the interests of creditors who do not hold a share of Purdue Pharma’s property, insist that they do not. The trustee, Purdue Pharma writes, has “zero concrete stake in this bankruptcy” and therefore has “nothing to lose if he destroys the plan.” Because the trustee is merely an “interloper” who lacks the right “to destroy a plan that the actual victims crafted and overwhelmingly support,” Purdue Pharma insists, the justices should dismiss the case without ruling on the merits, leaving the 2nd Circuit’s decision in place.

Both the U.S. Trustee and a group of Canadian creditors – made up of Canadian cities and First Nations –counter that it doesn’t matter whether the U.S. Trustee has a right to challenge the plan because the Canadian creditors do have such a right. The Sacklers, the Canadians observe, contend that the plan’s provisions releasing the family from liability apply to the Canadian creditors’ claims against them, despite an exemption for Canadian claims, because their claims are based on the conduct of Purdue Pharma USA. “If the Sacklers prevail,” the Canadian creditors contend, “then the Canadian creditors will lose valuable property rights to some or all of these claims.” But at the very least, they “will have to spend time and money litigating that disputed question.”

In any event, the U.S. Trustee adds, he has a right to challenge the plan because Congress gave him the power to “raise” and “be heard” on any issue – including, he says, the right to object to a plan’s confirmation.

The second question before the court centers on the legality of the plan itself. Arguing that the plan should not have been confirmed, the U.S. Trustee characterizes bankruptcy as a “basic quid pro quo”: In exchange for getting virtually all of its debts cleared, the bankrupt debtor complies with a variety of obligations – for example, to disclose information regarding its creditors and its income, and to dedicate its assets to paying its creditors’ claims. But in this case, the trustee contends, the Sacklers are able to “shield billions of dollars of their fortune” and obtain a release from civil liability for opioid-related claims without having to personally declare bankruptcy.

Moreover, the trustee continues, except for a single provision (that is not relevant to this case because it deals with asbestos), nothing in the Bankruptcy Code suggests that courts have the power to provide the Sacklers with releases from personal liability to creditors and victims. One of the provisions on which the 2nd Circuit relied, Section 105(a) of the Bankruptcy Code, does not, standing alone, allow third-party releases unless another provision of the Bankruptcy Code authorizes it, the trustee writes. And Section 1123(b)(6), Harrington argues, does not authorize a plan to release claims such as those against the Sacklers but is instead a “catchall” that allows “the inclusion of ‘any other appropriate provision not inconsistent’” with the Bankruptcy Code. The Supreme Court, the trustee says, has interpreted the provision “as embodying the ‘traditional understanding that bankruptcy courts … have broad authority to modify creditor-debtor relationships.’” If the 2nd Circuit’s interpretation of these two provisions were correct, the trustee warns, courts could grant sweeping relief under the guise of a bankruptcy plan – anything from post-conviction relief to corporate officers in prison to rewriting “a property settlement agreement in a divorce pending in state court, so long as it found such actions to be ‘appropriate’ in ensuring the debtor’s successful reorganization.’”

At the very least, the trustee concludes, there would be serious constitutional questions about allowing the releases of the Sacklers to stand. Among other things, the releases eliminate the potential causes of action for creditors and victims outside the plan, without giving them a chance to either affirmatively agree to the releases or opt out of them.

Purdue Pharma counters that all of the claims released by the plan – including those against the Sacklers – depend on conduct by Purdue Pharma and therefore would directly affect the funds available in the bankruptcy estate. Without the releases, the company emphasizes, as the bankruptcy court found, there probably would not be a settlement, and many victims probably would not recover anything. By contrast, the company stresses, “[w]hen the plan takes effect, over $1.3 billion will be disbursed immediately.”

While the U.S. Trustee argues that nothing in the Bankruptcy Code permits the releases of the Sacklers, Purdue Pharma argues that nothing in the code prohibits such releases. Section 1123(b)(6), it reasons, allows a bankruptcy plan to include “any other appropriate provision” as long as it is “not inconsistent” with other provisions of the Bankruptcy Code. In enacting this provision, the company writes, “Congress unambiguously gave courts the catchall authority to approve Chapter 11 plan provisions necessary to make reorganizations work in the infinitely varied world of complex bankruptcies.” There are, however, “important limits” on that authority, the company added, because the provisions of the plan “must at least be necessary to the success of the reorganization.”

The Official Committee of Unsecured Creditors notes in its brief that it was among a “broad array of stakeholders” that “painstakingly negotiated” the plan, which had “historic” support from creditors. The creditors wanted the liability releases at the center of this case, the committee explains, “to ensure that no creditor could recover disproportionately at the expense of others;” without the third-party releases, they argue, the plan would fall apart, leaving everyone but the federal government with “substantially less (if anything) years later (if ever).”

Like Purdue Pharma, the Official Committee maintains that the plan should be confirmed. The Supreme Court’s bankruptcy cases, the committee writes, give courts “comprehensive power to deal efficiently and expeditiously with all matters connected to the bankruptcy estate.” At the very least, the committee continues, liability releases like the ones provided to the Sacklers are appropriate when “(as here) the overwhelming majority of creditors agrees (and the court finds) that it presents the only viable path to a fair, meaningful, and timely recovery.”

Harrington criticizes the plan more broadly as “a roadmap for corporations and wealthy individuals to misuse the bankruptcy system to avoid mass-tort liability.” The kinds of releases provided to the Sacklers, he argues, not only “deprive tort victims of their day in court without consent,” but they also “erode public confidence in the bankruptcy system, which Congress established to restructure a debtor’s relationship with its creditors in a case of true financial distress — not to resolve mass-tort liability against non-debtors by terminating claims belonging to other non-debtors.”  

But interest-group briefs supporting the confirmation of the plan push back against this argument. One brief, filed by the American Bankruptcy Institute – which spent two years studying possible changes to the Bankruptcy Code – tells the justices that releases like the ones provided to the Sacklers drive “settlements essential to complex reorganizations, particularly in, but not limited to, mass tort cases.” “If nonconsensual third-party releases are prohibited,” the institute contends, “tort victims will suffer the most.”

And briefs from two groups that have been the targets of litigation relating to sexual abuse allegations argue that releases from liability, in these cases of institutions rather than private individuals, are or have been essential to their survival. The U.S. Conference of Catholic Bishops describes “dozens of dioceses” that have filed for bankruptcy in the wake of sexual abuse allegations. “The judicially supervised releases that these entities receive in exchange – almost always with the overwhelming support of abuse claimants – provide the only viable means for the Catholic infrastructure in many communities to survive what has become decades of mission-crippling litigation,” the conference writes.

Similarly, the Boy Scouts of America recently emerged from bankruptcy with a reorganization plan that included releases of claims against third parties, such as local Boy Scout councils, that contributed to the settlement. If the trustee’s “reading of the Bankruptcy Code had been applied in the BSA bankruptcy,” the Boy Scouts assert, “then most survivors of Scouting-related abuse would get nothing, and Scouting as an organization would likely be finished.”

This article was originally published at Howe on the Court.