糖心视频

Introductory Note

The U.S. Supreme Court heard oral arguments this morning in a case arising out of the bankruptcy of Purdue Pharma (鈥淧urdue鈥�) on the legal question of whether third-party releases 鈥� which were granted in favor of the now-infamous Sackler family 鈥� are authorized by the Bankruptcy Code. General information about the case, which is styled as聽Harrington v. Purdue Pharma, can be found聽, and an audio transcript of the arguments can be found聽. The Supreme Court鈥檚 forthcoming decision, which we expect in the first half of 2024, may be one of the most significant decisions in the area of bankruptcy law in many years.

By way of background, earlier this year we published a two-part series at the intersection of mass torts and bankruptcy. Part 1 of that series, which can be accessed聽, explored Purdue and 鈥渢hird-party releases鈥� that were granted in favor of the Sacklers, which owned Purdue. Part 1 also explored what 鈥渢hird-party releases鈥� are, why they are used, and the Supreme Court鈥檚 decision to review the case. By contrast, Part 2 of that series, which can be accessed聽, explored a series of other pending high-profile, mass-tort cases. Those cases include Georgia Pacific鈥檚 attempt to address its asbestos exposure through the bankruptcy of Bestwall; Johnson & Johnson鈥檚 attempt to address its talc exposure through the bankruptcy of LTL Management; and 3M鈥檚 attempt to address its earplug exposure with the bankruptcy of Aearo Technologies. Part 2 also explored the 鈥淭exas Two Step鈥� divisional merger strategy that many companies have used to separate good assets from bad liabilities in an effort to protect overall equity and enterprise value. We encourage our readers to review Parts 1 and 2 for general background information on mass torts and bankruptcy.

This note discusses how Purdue got here; our impressions of how the Supreme Court may rule based on our review of the relevant legal pleadings and oral arguments from earlier today; and the broader implications of the Supreme Court鈥檚 ruling.

Brief History of Purdue Pharma Bankruptcy Cases

Purdue, which was once owned by the descendants of Drs. Mortimer and Raymond Sackler, is best known for developing and marketing OxyContin. Many believe that the marketing and sales tactics used for OxyContin contributed significantly to the opioid epidemic in the United States. As a result, both Purdue and the Sackler family have been the subjects of numerous government investigations and have been defendants in a myriad of lawsuits related to OxyContin. Notwithstanding this predicament, over the last 20 years, Purdue distributed approximately $11 billion to the Sacklers and their family trusts, many of which were outside the jurisdictional reach of the U.S. court system.

In late 2019,聽聽to address the morass of litigation and its mounting liabilities. Purdue鈥檚 bankruptcy stayed all litigation against it, and the U.S. Bankruptcy Court for the Southern District of New York (the 鈥淏ankruptcy Court鈥�) extended the automatic stay to halt litigation against the Sacklers as well, even though they did not file their own individual bankruptcy cases.

One of the central pillars of the bankruptcy strategy was to obtain court approval of a global settlement between Purdue and the Sacklers. The settlement was to provide that the Sacklers would contribute a significant portion of their wealth to the Purdue bankruptcy estate in exchange for releases of claims that could be asserted against them by聽both聽(i) Purdue, on the one hand, and (ii) third parties like opioid victims and government entities, on the other hand (known as 鈥渢hird-party releases鈥�). The theory behind the settlement was that the Sacklers鈥� contribution to the Purdue bankruptcy estate would augment the estate鈥檚 size so that significant, incremental value could be distributed to victims and for remediation efforts. The Sacklers ultimately agreed to contribute $4.325 billion in exchange for releases of civil liability against them. The settlement did not absolve the Sacklers of criminal liability.

The Bankruptcy Court approved the third-party release in conjunction with confirmation of Purdue鈥檚 plan of reorganization. The Bankruptcy Court reasoned that, if the settlement was not approved, creditors would have received little to no consideration from Purdue because (1) certain superpriority claims, which would be waived as part of the global settlement, would have priority of payment over victims, and (2) litigation against the Sacklers would prove to be fruitless because their wealth was beyond the reach of U.S. courts.

The Lower Court Appeals

On appeal, the U.S. District Court for the Southern District of New York vacated the Bankruptcy Court鈥檚 confirmation order in December 2021, concluding that third-party releases were not permitted under the Bankruptcy Code. On further appeal, however, a divided panel of the U.S. Court of Appeals for the Second Circuit (the 鈥淪econd Circuit鈥�)聽聽again in May 2023 and upheld the settlement and third-party release.

The Second Circuit reasoned that 搂搂 105(a) and 1123(b)(6) of the Bankruptcy Code provide a statutory basis for third-party releases: that is,聽聽provides that 鈥淸t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code],鈥� and聽聽provides that 鈥渁 [reorganization] plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.鈥� The Second Circuit held that 搂 105(a) (which gives courts broad equitable powers) when coupled with residual powers identified in 搂 1123(b)(6) gives bankruptcy courts broad 鈥渞esidual authority鈥� to modify credit-debtor relationships generally. The Second Circuit concluded that this residual authority includes the power to approve nonconsensual third-party releases.

Interestingly, by the time the Second Circuit ruled, nearly every constituency in the bankruptcy case鈥攊ncluding the debtors, the official committee of unsecured creditors, various ad hoc groups, and most states鈥攕upported the plan and third-party release.聽The only key party opposing the release was the Office of the U.S. Trustee (the 鈥淯.S. Trustee鈥�), which is a division of the Department of Justice that polices bankruptcy cases. The U.S. Trustee has no economic interest in the outcome of the case, yet the U.S. Trustee sought further review from the Supreme Court. The Supreme Court agreed to hear the case in August 2023.

Arguments at the Supreme Court

At the Supreme Court, the U.S. Solicitor General鈥檚 office argued on behalf of the U.S. Trustee. The Solicitor General made a series of arguments as to why third-party releases are not permitted under the Bankruptcy Code, namely that there is no provision of the Bankruptcy Code that expressly allows for third-party releases. In other words, the provisions relied on by Purdue and the Sacklers for the proposition that third-party releases are authorized聽is limited to altering the relationship between a debtor and a creditor, and not between creditors and non-debtors. By contrast, the parties in favor of a third-party releases 鈥撀�this includes nearly every party in interest, like Purdue, the tort victims, and the official committee of unsecured creditors聽鈥� argued that the Second Circuit got it right: that is, 搂搂 105(a) and 1123(a)(6), when read together, gives bankruptcy courts broad latitude to grant third-party releases in limited contexts. In addition, a veritable 鈥榳ho鈥檚 who鈥� of influential lawyers and firms filed an avalanche of amici briefs (friend of the court briefs) on both sides of the debate. All of the briefs are available聽.

At oral argument, which lasted nearly two hours, each Justice demonstrated a strong command of the issues and the implications of its ruling on other mass tort bankruptcies. However, they showed few cards about which way they were ultimately leaning. Chief Justice Roberts, for instance, started by questioning the Deputy Solicitor General why he did not argue the so-called 鈥榤ajor-questions doctrine鈥� with respect to the lawfulness of third-party releases (this doctrine roughly stands for the proposition that courts should not presume Congress meant to address major political or economic questions without expressly stating so). Justice Thomas, for his part, seemed particularly interested in distinguishing between consensual and non-consensual third-party releasees and whether the Bankruptcy Code allows for either kind of release.

Justices Alito and Jackson seemed to be the most skeptical of third-party releases, posing complex questions about the interpretation of 搂 1123(b)(6) and potential constitutional issues tied to third-party releases. Justices Sotomayor, Kagan, and Barrett seemed to take a more balanced approach to questioning, challenging both sides with difficult and nuanced questions. By contrast, Justice Kavanaugh appeared as a potential defender of third-party releases, emphasizing that 搂 1123(b)(6)鈥檚 use of the word 鈥渁ppropriate鈥� was a strong argument for proponents of third-party releases. Justice Kavanaugh also indicated that he thought the argument that the U.S. Trustee did not have standing in the case was strong (this issue was raised when the Court considered whether to grant聽certiorari). In the end, it appeared that it was not lost any Justice that victims might receive little or no recovery if the releases are not upheld, and that 97% of the victims supported the settlement. Some justices seemed more troubled by this than others, though, with at least some accepting the argument made by the Deputy Solicitor General that the Sacklers may just re-cut the deal if they lose.

Thoughts and Takeaways

As discussed in聽聽of our primer, we believe that third-party releases can serve a valid purpose in the context of mass-tort bankruptcies. The alternative is the tort system, which is a fancy way of saying litigation on a case-by-case basis or through multi-district litigation (MDL). But the tort system can be inefficient; destroy value; lead to the proverbial race to the courthouse; implicate the holdout problem; and result in inconsistent judgments. We have few principled issues with third-party releases as a concept, and we think they can make for good policy if (1) the debtor and the party seeking the release have not otherwise abused the bankruptcy process聽and聽(2) creditors and tort victims are ultimately financially better off as a result of the third-party release. This is likely why Purdue鈥檚 plan of reorganization received nearly universal support from all parties in interest.

But what makes for good policy is often an entirely different question than what the law actually permits. We have previously observed that cobbling together various provisions of the Bankruptcy Code鈥攊n particular, 搂搂 105(a) and 1123(b)(6)鈥攖o find statutory support for the proposition that bankruptcy courts have some kind of 鈥榬esidual鈥� authority to approve nonconsensual third-party releases may not be well-received at the Supreme Court. Today鈥檚 arguments demonstrate that the justices have a strong command of the issues, and they fully appreciate how its ruling could impact other mass tort bankruptcies. Nonetheless, our initial assessment has not changed materially, and we continue to believe that proponents of third-party releases likely face an uphill battle, although they may find some support. We expect a decision in the first half of 2024.

Finally, we note that if the Supreme Court holds that third-party releases are unlawful, it could be one of most significant rulings in bankruptcy law in many years, perhaps in a generation. To be sure, it will complicate efforts by companies like Johnson & Johnson and Georgia Pacific to use the bankruptcy process to address talc and asbestos liabilities, respectively. But beyond mass torts bankruptcies, though, such a finding would also have the effect of reordering the expectations of what can be achieved in bankruptcy cases more generally, as parties may no longer be willing to make substantial contributions to a bankruptcy estate (for the benefit of creditors) if they cannot achieve global peace in exchange for those contributions. This is particularly true in cases when portfolio companies go into bankruptcy and non-debtor sponsors often demand releases as part of a global financial settlement to buy peace.