A Deeper Dive Into the SCOTUS Purdue Pharma Opinion

As I wrote in my recent blog post, SCOTUS Rejects Third Party Releases of the Sackler Family in the Purdue Pharma Bankruptcy Case, the United States Supreme Court’s (SCOTUS) opinion in Harrington, United States Trustee v. Purdue Pharma LP, et al has jeopardized a multi-billion dollar settlement in the Purdue Pharma Chapter 11 bankruptcy case that was to be funded by the Sackler family.

As part of the settlement, the Sacklers were anticipated to receive court approved releases of claims held by creditors of Purdue Pharma and other opioid victims, including those who had not agreed to the settlement and release of the Sacklers. Forced releases by third parties are referred to as nonconsensual third party releases and have become a common feature of plans of reorganization in mass tort cases.

SCOTUS concluded that the bankruptcy court lacked the authority to grant nonconsensual third party releases, which releases were a material part of the settlement. Absent such releases, the Sacklers would not proceed with the settlement.

The bankruptcy courts have often been a forum to address mass tort claims as part of a plan of reorganization or liquidation by which finite assets can be marshaled and distributed in an equitable fashion rather than be collected by the first litigant who wins the race to the courthouse.

The majority opinion hinged, in part, on the SCOTUS’ observation that since Congress expressly authorized the granting of such releases in asbestos cases alone in Section 524(g)(4)(A)(ii), it did not intend to confer general authority on the bankruptcy court to grant such relief for other mass torts.

The opinion raises doubts about the administration of numerous other bankruptcy cases involving mass tort claims, such as:

  • Rite Aid – opioid lawsuits compelled its bankruptcy filing in which it seeks third-party immunity;
  • Boy Scouts of America – which has agreed to a deal that would shield insurance companies, schools, churches and other community organizations associated with the nonprofit from future litigation claims in exchange for a $2.5 billion settlement of sexual abuse claims;
  • Corizon – prisoner lawsuits resulted in this correctional health-care company seeking bankruptcy relief;
  • Catholic Diocese – a barrage of lawsuits by childhood victims of clergy sexual abuse against over two dozen Catholic dioceses. including some located in San Francisco, Baltimore, New York, and New Orleans, have sought bankruptcy protection.

Significantly, the majority opinion in Purdue Pharma states:

because this case involves only a stayed reorganization plan, we do not address whether our reading of the bankruptcy code would justify unwinding reorganization plans that have already become effective and been substantially consummated.

Notwithstanding the Purdue Pharma decision, a plan of reorganization that includes nonconsensual releases may not be subject to challenge where: (a) the order approving a settlement or plan reorganization is already final and nonappealable; and (b) all or substantially all of the assets subject to the plan have been distributed.

The majority opinion suggests a recognition by the Court that under various mootness doctrines one cannot put the proverbial genie back in the bottle because afterwards it would be “impossible for [a] court to grant ‘any effective relief whatsoever.’Church of Scientology v. United States, 506 U.S. 9, 12, 113 S.Ct. 447, 449, 121 L.Ed.2d 313 (1992) (quoting Mills v. Green, 159 U.S. 651,653, 16 S.Ct. 132, 133, 40 L.Ed. 293 (1895)). 

Should Congress come to appreciate the broader import of nonconsensual third party releases to plans of reorganization in mass tort cases it can, of course, amend the scope of Section 524(g)(4)(A)(ii) to include other specific mass torts and defined term “mass torts” in Section 101.

Alternatively, Congress could clarify that Section 1123(b)(6) was intended to confer the bankruptcy court with broad powers in effectuating plans of reorganization, including the granting of relief impacting the rights of third-party claimants and non-debtors.