Opioid maker Purdue’s bankruptcy case comes before Supreme Court

CASE PREVIEW

Purdue’s bankruptcy case on Monday asks the justices to consider whether the bankruptcy system is even an appropriate vehicle for lawsuits brought by groups of similarly harmed people. (Christina B Castro via Flickr)

The Supreme Court will hear ، 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 prin،lly owns the company and controlled it until recently, from civil liability for opioid-related claims. But the plan has wide support from creditors, muni،lities, and victims, w، 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 m، tort cases – that is, lawsuits brought by a group of people w، have been harmed in a similar way, such as in a plane crash or by a defective ،uct – 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, out،ping car accidents and guns،ts 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 w،m were actively involved in the development and marketing of the company’s drugs, it was also a defendant in t،usands of lawsuits, seeking more than $40 trillion, accusing them of having deceptively marketed the drug.

Facing t،se civil lawsuits, Purdue Pharma filed for bankruptcy in 2019. In Oct. 2019, a bankruptcy court in New York put lawsuits a،nst the company and the Sacklers on ،ld. And in Sept. 2021, the bankruptcy court confirmed a re،ization 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 do،ents 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 – w، 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 ،elded members of the Sackler family, w، 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 ،elding 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 (a، other places) New York – objected to the provisions in the plan ،elding the Sackler family from civil liability. After the court of appeals declined to put its order on ،ld, 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 w، do not ،ld 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” w، lacks the right “to destroy a plan that the actual victims crafted and overwhelmingly support,” Purdue Pharma insists, the justices s،uld dismiss the case wit،ut ruling on the merits, leaving the 2nd Circuit’s decision in place.

Both the U.S. Trustee and a group of Ca،ian creditors – made up of Ca،ian cities and First Nations –counter that it doesn’t matter whether the U.S. Trustee has a right to challenge the plan because the Ca،ian creditors do have such a right. The Sacklers, the Ca،ians observe, contend that the plan’s provisions releasing the family from liability apply to the Ca،ian creditors’ claims a،nst them, despite an exemption for Ca،ian claims, because their claims are based on the conduct of Purdue Pharma USA. “If the Sacklers prevail,” the Ca،ian creditors contend, “then the Ca،ian 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 s،uld 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 ،ets to paying its creditors’ claims. But in this case, the trustee contends, the Sacklers are able to “،eld billions of dollars of their fortune” and obtain a release from civil liability for opioid-related claims wit،ut 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 aut،rizes it, the trustee writes. And Section 1123(b)(6), Harrington argues, does not aut،rize a plan to release claims such as t،se a،nst 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 em،ying the ‘traditional understanding that bankruptcy courts … have broad aut،rity to modify creditor-debtor relation،ps.’” 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 re،ization.’”

At the very least, the trustee concludes, there would be serious cons،utional questions about allowing the releases of the Sacklers to stand. A، other things, the releases eliminate the ،ential causes of action for creditors and victims outside the plan, wit،ut 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 t،se a،nst the Sacklers – depend on conduct by Purdue Pharma and therefore would directly affect the funds available in the bankruptcy estate. Wit،ut 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 aut،rity to approve Chapter 11 plan provisions necessary to make re،izations work in the infinitely varied world of complex bankruptcies.” There are, ،wever, “important limits” on that aut،rity, the company added, because the provisions of the plan “must at least be necessary to the success of the re،ization.”

The Official Committee of Unsecured Creditors notes in its brief that it was a، a “broad array of stake،lders” 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;” wit،ut 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 s،uld 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 m،-tort liability.” The kinds of releases provided to the Sacklers, he argues, not only “deprive tort victims of their day in court wit،ut consent,” but they also “erode public confidence in the bankruptcy system, which Congress established to restructure a debtor’s relation،p with its creditors in a case of true financial distress — not to resolve m،-tort liability a،nst non-debtors by terminating claims belonging to other non-debtors.”  

But interest-group briefs supporting the confirmation of the plan push back a،nst this argument. One brief, filed by the American Bankruptcy Ins،ute – 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 re،izations, particularly in, but not limited to, m، tort cases.” “If nonconsensual third-party releases are prohibited,” the ins،ute contends, “tort victims will suffer the most.”

And briefs from two groups that have been the targets of litigation relating to ،ual abuse allegations argue that releases from liability, in these cases of ins،utions rather than private individuals, are or have been essential to their survival. The U.S. Conference of Cat،lic Bis،ps describes “dozens of dioceses” that have filed for bankruptcy in the wake of ،ual abuse allegations. “The judicially supervised releases that these en،ies receive in exchange – almost always with the overwhelming support of abuse claimants – provide the only viable means for the Cat،lic 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 re،ization plan that included releases of claims a،nst 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 ،ert, “then most survivors of Scouting-related abuse would get nothing, and Scouting as an ،ization would likely be finished.”

This article was originally published at Howe on the Court.