SCOTUS 23-124: 5-4 Dissenting

Does Chapter 11 of the Bankruptcy Code Authorize Non-consensual Non-debtor Releases? This case concerns OxyContin

The Supreme Court has rejected a nationwide settlement with OxyContin maker Purdue Pharma that would've shielded Sackler family members who own the company from civil lawsuits over the toll of opioids but also would've provided billions of dollars to combat the epidemic.

Facts of the Case

The Sackler family, who purchased Purdue Pharma in the 1950s, heavily influenced the company’s direction and was instrumental in the development and marketing of OxyContin. Despite initial claims of low addiction risk, growing evidence of widespread abuse led to legal battles across the United States, with multiple stakeholders including individuals, state governments, and federal agencies suing Purdue. In 2004, the board of Purdue entered into an expansive Indemnity Agreement to protect its directors and officers from financial liability related to lawsuits. This protection was especially broad, extending even after their official tenure at Purdue, but contained a bad faith carveout. From 2007 onwards, the Sacklers began shielding assets, anticipating litigation against them personally. By 2019, Purdue faced weakened financial prospects, and the Sacklers had stepped down from the board.

In the same year, the DOJ brought criminal and civil charges against Purdue, resulting in a plea agreement in 2020 that prioritized the DOJ’s claims in Purdue’s bankruptcy proceedings. The plea stipulated a $2 billion forfeiture judgment but allowed for the release of $1.775 billion if certain conditions were met. Although Purdue declared bankruptcy in 2019, the Sacklers did not, and litigation against both parties was temporarily halted. The estate of Purdue is estimated to be around $1.8 billion, while claims against both Purdue and the Sacklers are estimated to exceed $40 trillion.

The U.S. Bankruptcy Court for the Southern District of New York confirmed a proposed bankruptcy plan on September 17, 2021. This plan included a “shareholder release” that, in effect, permanently enjoined certain third-party claims against the Sacklers. Several parties objected to the plan, but the bankruptcy court rejected their claims. On appeal to the U.S. District Court for the Southern District of New York, the district court overturned the bankruptcy court's confirmation, holding that the Bankruptcy Code does not allow for the forced release of direct claims against non-debtors. The U.S. Court of Appeals for the Second Circuit reversed the district court’s order holding that the Bankruptcy Code does not permit nonconsensual third-party releases of direct claims, and affirmed the bankruptcy court’s approval of the plan.

Question

Does the Bankruptcy Code authorize a court to approve releases, as part of a plan of reorganization under Chapter 11, that extinguish claims held against non-debtor third parties without the claimants’ consent?

Syllabus

HARRINGTON, UNITED STATES TRUSTEE, REGION 2

v. PURDUE PHARMA L. P. ET AL.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT

No. 23–124. Argued December 4, 2023—Decided June 27, 2024

Dissenting Opinion Delivered by Gorsuch

As important as the question we decide today are ones we do not. Nothing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan; those sorts of releases pose different questions and may rest on different legal grounds than the nonconsensual release at issue here. See, e.g., In re Specialty Equipment Cos., 3 F. 3d 1043, 1047 (CA7 1993). Nor do we have occasion today to express a view on what qualifies as a consensual release or pass upon a plan that provides for the full satisfaction of claims against a third-party nondebtor. Additionally, 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. Confining ourselves to the question presented, we hold only that the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants. Because the Second Circuit ruled otherwise, its judgment is reversed and the case is remanded for further proceedings consistent with this opinion.

It is so ordered.

Kavanaugh Dissenting with Roberts, Sotomayor, Kagan

The Court’s decision today jettisons a carefully circumscribed and critically important tool that bankruptcy courts have long used and continue to need to handle masstort bankruptcies going forward. The text of the Bankruptcy Code does not come close to requiring such a ruinous result. Nor does its structure, context, or history. Nor does hostility to the Sacklers—no matter how deep: “Nothing is more antithetical to the purpose of bankruptcy than destroying estate value to punish someone.” A. Casey & J. Macey, In Defense of Chapter 11 for Mass Torts, 90 U. Chi. L. Rev. 973, 1017 (2023). Gutting this longstanding bankruptcy court practice is entirely counterproductive, and simply inflicts still more injury on the opioid victims. 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. I respectfully dissent.