Justices Appear Divided Over Purdue Pharma Bankruptcy Deal

WASHINGTON — The Supreme Court appeared divided on Monday over a bankruptcy deal struck by Purdue Pharma that would immunize the Sackler family, its one-time owners, from civil lawsuits for their role in the opioid crisis. 

The closely watched case is considered to be among the most consequential of the high court’s current term and will likely determine how businesses and other entities use the nation’s bankruptcy process to resolve mass injury claims.

As a result of the opioid crisis, thousands of lawsuits have flooded the nation’s courts, leading to tens of billions of dollars in payouts and settlements.

In 2019, under the weight of thousands of those lawsuits claiming its aggressive marketing of OxyContin fueled the opioid crisis, Purdue Pharma filed for bankruptcy.

As part of its bankruptcy reorganization, the drug maker agreed to settle the lawsuits it faced, in a deal valued by the company at $10 billion, and said it would provide money to states to help combat the drug crisis.

As part of the plan, members of the Sackler family would give up ownership of the company, and Purdue Pharma would release more than 30 million documents that are sure to reveal much more than is currently known about their marketing of the painkiller OxyContin. 

The Sackler family members initially agreed to contribute up to $4 billion to the settlement in exchange for immunity from current and future civil lawsuits.

In 2021, a New York bankruptcy judge approved the deal, but several states and the U.S. Trustee objected — objections that ultimately got the Sacklers to agree to pay up to $6 billion over 18 years.

It was then U.S. District Judge Colleen McMahon’s turn to object, this time due to her belief that the bankruptcy code does not allow for non-debtor releases. 

Earlier this year, a federal appeals court overturned her decision, ruling the releases were permissible and needed to ensure equitable resolution of the complex mass litigation. 

Though an overwhelming majority of Purdue Pharma’s creditors voted to approve the settlement, the Biden administration and a small group of creditors expressed grave concerns about the ruling.

That set the stage for the Supreme Court to put the deal on hold until it had a chance to consider the long-controversial practice.

During nearly one hour and forty-five minutes of oral argument on Monday, the justices expressed a range of concerns over the case.

Justice Brett Kavanaugh, for instance, expressed the view that objections to the proposed settlement went against the grain of more than three decades of bankruptcy law, during which time courts routinely approved such releases.

In an extended exchange with Curtis Gannon, the deputy solicitor general arguing on behalf of the government, Kavanaugh suggested that a “disconnect” existed between the administration and opioid victims.

“You seem to be implying that if they can … reject this plan, there’s going to be more money available down the road from the Sacklers,” the justice said. “And I don’t think you’re accounting for the uncertainty of liability, first of all, the uncertainty of the indemnification, insurance, contribution claims, and the uncertainty of recovery.”

Later, Kavanaugh revisited the idea that views of the vast majority of opioid victims who are parties to the settlement — 97% by his estimate — diverge significantly from those of the government. 

“Are you saying the views of the opioid victims and their families don’t matter?” Kavanaugh asked.

“I’m not saying it doesn’t matter,” Gannon began to reply.

“I think you are,” Kavanaugh interrupted. “I think your position is saying it doesn’t matter.”

“Our position is saying that there are other opioid victims with also heart-breaking and tragic losses that are saying we are not consenting to have our property rights forcibly extinguished in this way,” Gannon said. “They are saying, ‘We are not comfortable with being part of this proceeding as you have designed it.’”

But Kavanaugh appeared not to be swayed. 

“What the opioid victims and their families are saying is you, the federal government, with no stake in this at all, are coming in and telling the families, no, we’re not going to give you prompt payment for what’s happened to your family, and … the federal government is not going to allow all this money to go to the states for prevention programs to prevent future overdoses and future victims … in exchange for this somewhat theoretical idea that they’ll be able to recover money down the road from the Sacklers themselves.” 

But Gannon stood firm by his opening argument, namely that the court of appeals erred in approving the reorganization plan, basing its decision on a “catchall provision” of Chapter 11 and going way beyond what the statute in question, Section 1123(b)(6), actually authorizes.

“It also conflicts with the basic nuts and bolts of the Bankruptcy Code’s comprehensive scheme,” he said. “It permits the Sacklers to decide how much they’re going to contribute. It grants the Sacklers the functional equivalent of a discharge — what they might get if they themselves were in bankruptcy — though even such a discharge would not extend as this one does to claims involving fraud and willful misconduct and even though Section 524(e) expressly provides that the discharge of a debtor does not affect the liability of any other entity.

“This release extinguishes personal property rights,” Gannon continued. “That result is not supported by any historical analogue in equity, and it raises significant constitutional questions that should be avoided in the absence of a clear command from Congress.”

But Kavanaugh’s view was far from universally held by his fellow justices.

Justice Neil Gorsuch said the case raised “serious questions.”

“We don’t normally say that a nonconsenting party can have its claim for property eliminated in this fashion without consent. … This would defy what we do in class action contexts. It would raise serious due process concerns and seventh amendment concerns, as the government highlighted; you’re normally entitled to a jury,” Gorsuch said in an exchange with attorney Gregory Garre, who represented Purdue Pharma at Monday’s hearing.

Justice Ketanji Brown Jackson focused on allegations that some Sackler family members took billions from Purdue Pharma before its bankruptcy filing, leaving it unable to litigate the cases or pay the victims if they prevailed.

“Even if there was a world in which, categorically, we wouldn’t say you can never do these kinds of releases, why wouldn’t this be a clear situation in which we would not allow it?” Jackson asked.

Justice Elena Kagan wanted to know why the Sacklers should get the kind of discharge that “usually goes to a bankrupt person once they’ve put all their assets on the table, without having put all their assets on the table?” 

“The point of this proceeding is not to make life as difficult as possible for the Sacklers,” said Garre. “It’s to maximize recovery and fairly and equitably distribute it to the victims.”

“Right,” said Kagan. “But I guess what I’m suggesting is that this is a fundamental principle of bankruptcy law, and when we’re trying to read this provision and figure out what powers it gives to the bankruptcy court and what not, it would be a kind of extraordinary thing if we gave the power … to basically subvert this basic bargain in bankruptcy law.”

“And that goes to my second point,” Garre said. “Which is that they’re not getting a discharge.

They’re getting a release. And there’s a fundamental difference between those two things. A discharge under bankruptcy law is essentially immunity from all claims except for narrow exceptions, whereas the releases here apply only to one set of claims … creditors based on the debtor’s own conduct.

“This is not a discharge,” Garre insisted.

“I mean, in some ways, they’re getting a better deal than the usual bankruptcy discharge because … they’re being protected from claims of fraud and claims of willful misconduct,” Kagan said. “So, yeah, in some ways, they’re getting not quite as much, but in some ways, they’re getting much more.” 

A decision in the case, Harrington v. Purdue Pharma L.P., is expected by the end of the court’s term in late June.

Dan can be reached at [email protected] and @DanMcCue