SCOTUS Rejects Third Party Releases of the Sackler Family in the Purdue Pharma Bankruptcy Case

In a 5-4 vote, the Supreme Court of the United States (SCOTUS) issued an opinion finding that the bankruptcy court lacked the authority to approve the non-consensual releases of the Sackler family from the legal claims made by opioid victims. The opinion can be found here.

Background

The decision scuttles a roughly $6 billion bankruptcy settlement involving Purdue Pharma, the maker of the powerful and highly addictive pain medication OxyContin and its owners, the Sackler family, who were going to fund the settlement.

In an earlier post (Purdue Pharma: What us a challenging injunction?), I discussed the approach taken by the United States Court of Appeal for the Second Circuit (Second Circuit) in determining whether the inclusion of a channeling injunction prohibiting claims against the Sackler family as part of Purdue Pharma’s Chapter 11 plan was proper in light of jurisdictional and statutory considerations.  

In Purdue Pharma, L.P. v, City of Grand Prairie (In re Purdue Pharma, L.P.), No. 22–110 – Bk (2d Cir. May 30, 2023), the Second Circuit identified and weighed seven (7) factors in considering non-consensual third-party releases and determined that the factors supported the approval of the settlement.

Majority Opinion

Writing for the SCOTUS majority, Justice Neil Gorsuch concluded that the Bankruptcy Code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively grants a discharge of claims against a nondebtor without the consent of affected claimants.

The opinion focuses heavily on the breadth of the bankruptcy court’s authority under Section 1123(b)(6) of the Bankruptcy Code.

The majority opinion states,

While paragraph (6) doubtlessly confers additional authorities on a bankruptcy court, it cannot be read under the canon of ejusdem generis to endow a bankruptcy court with the “radically different” power to discharge the debts of a nondebtor without the consent of affected claimants.

The Court found that the third-party release of the Sacklers was tantamount to a discharge in bankruptcy, which is reserved to a debtor only, and that the Sacklers could only avail themselves of the benefits of a discharge by filing for bankruptcy and subjecting their non-exempt assets to distribution to creditors. The Court observed that the scope of the releases of the Sacklers included claims that might be nondischargeable under Sections 523(a)(2), (4), and (6) of the Bankruptcy Code.

Dissenting Opinion

Judge Brett Kavanaugh dissented and was joined by Chief Justice John Roberts, and Justices Elena Kagan and Sonia Sotomayor. In his dissent, Justice Kavanaugh observed,

[i]n this mass-tort bankruptcy case, the Bankruptcy Court exercised that discretion appropriately—indeed, admirably. It approved a bankruptcy reorganization plan for Purdue Pharma that built up the estate to approximately $7 billion by securing a $5.5 to $6 billion settlement payment from the Sacklers, who were officers and directors of Purdue. The plan then guaranteed substantial and equitable compensation to Purdue’s many victims and creditors, including more than 100,000 individual opioid victims. The plan also provided significant funding for thousands of state and local governments to prevent and treat opioid addiction.

Despite the broad term “appropriate” in the statutory text, despite the longstanding precedents approving mass-tort bankruptcy plans with non-debtor releases like these, despite 50 state Attorneys General signing on, and despite the pleas of the opioid victims, today’s decision creates a new atextual restriction on the
authority of bankruptcy courts to approve appropriate plan provisions.

Justice Kavanaugh noted the authority of the bankruptcy court to approve a plan of reorganization where the plan has the support of a majority, but not all, of the creditors and the propriety of approving non-debtor releases to address collective-action problems in certain complex business cases.

Contrary to the majority opinion, he wrote, “Section 1123(b)(6) provides ample flexibility for the reorganization plan to settle and release creditor claims against non-debtors who are closely related to the debtor.”

Focusing on the use of “appropriate” in Section 1123(b)(6), Justice Kavanaugh cites to SCOTUS precedent defining “appropriate” as a “broad and
all-encompassing term that naturally and traditionally includes consideration of all the relevant factors.”

The catchall authority in Chapter 11 therefore empowers a bankruptcy court to exercise its discretion to deal with complex scenarios, like the collective-action problems that plague mass-tort bankruptcies. Non-debtor releases are often appropriate—indeed are essential—in such circumstances.

Justice Kavanaugh noted that non-consensual third party releases “prevented a race to the courthouse against the Sacklers” and thereby solved two separate problems:

(i) It protected Purdue’s estate from the risk of being depleted by indemnification claims, and (ii) it operated as a settlement of potential claims against the Sacklers and thus enabled the Sacklers’ large settlement payment to the estate. That settlement payment in turn quadrupled the amount in the Purdue estate and enabled substantially greater recovery for the victims.

Expressing concerns over the preservation and depletion of property of the estate, Justice Kavanaugh observed that the “opioid-related claims against the Sacklers could come out of the same pot of Purdue money as opioid-related claims against Purdue” under a 2004 indemnification agreement, pursuant to which “Purdue had agreed to pay for liability and legal expenses that officers and directors of Purdue faced for decisions related to Purdue, including opioid-related decisions.”

Justice Kavanaugh reasoned that the consideration being given by the Sacklers in exchange for the releases not only preserved the estate, which had estimated value of $1.8 billion, but greatly increased it. Absent the Sacklers’ additional consideration, estate assets would be insufficient to pay administrative expenses and the United States’ $2 billion super priority claim.

The dissent disputes the majority’s application of the ejusdem generis argument finding its common thread to be factually wrong and that their common thread ignores the purpose of Section 1123(b).

Justice Kavanuagh concludes his dissent by stating

Opioid victims and other future victims of mass torts will suffer greatly in the wake of today’s unfortunate and destabilizing decision. Only Congress can fix the chaos that will now ensue. The Court’s decision will lead to too much harm for too many people for Congress to sit by idly without at least carefully studying the issue.

In light of the decision, it has been reported that the Sackler family, Purdue Pharma and lawyers for the plaintiffs hope a new settlement might be reached which, presumably, provides for consensual releases.

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