The U.S. Supreme Court on Monday will hear a case with big implications for victims of the opioid epidemic, as well as for corporate bankruptcies.
The court will hear arguments on the legality of a bankruptcy settlement involving Purdue Pharma, the maker of the prescription painkiller OxyContin. The settlement would help compensate victims of the opioid crisis, but gives members of the Sackler family — who previously controlled the company, but did not file for bankruptcy themselves — some broad protections from opioid-related civil claims, including claims that could be brought by people who never agreed to the settlement.
The main issue in the case is whether bankruptcy law allows courts to approve reorganization plans that include such a liability shield for people who did not themselves file for bankruptcy — a question that has divided lower courts.
Critics of the Purdue Pharma settlement say that a green light from the Supreme Court would open the door to widespread abuse of the bankruptcy system, at the expense of people who have legal claims against companies. If the court blocks the agreement, however, it would dismantle a deal that was years in the making, triggering further delays in compensation for victims, hefty costs to pursue a new solution and uncertainty over the ultimate outcome, legal experts say.
The plan would provide billions of dollars to help compensate victims and tackle the opioid crisis by increasing access to treatments for opioid-use disorder and overdose reversal, among other measures. The deal includes up to $ 6 billion in cash from Sackler family members, and in total, Purdue Pharma has said that it could provide more than $ 10 billion in value for opioid-abatement programs across the country. Under the plan, Purdue would be transformed into a new company with a public-focused mission to address the opioid crisis.
The vast majority of creditors who voted on the deal supported the plan, but fewer than 20% of the more than 618,000 eligible claimants actually voted, according to a court filing by the U.S. Trustee, a unit of the Department of Justice that serves as a bankruptcy-system watchdog and that brought the legal challenge to the Supreme Court.
Allowing the settlement to stand “would leave in place a roadmap for wealthy corporations and individuals to misuse the bankruptcy system to avoid mass tort liability,” U.S. Solicitor General Elizabeth Prelogar said in a filing with the Supreme Court.
In the case of Purdue Pharma, “the plan’s release ‘absolutely, unconditionally, irrevocably, fully, finally, forever and permanently release[s]’ the Sacklers from every conceivable type of opioid-related civil claim — even claims based on fraud and other forms of willful misconduct” that they would not be shielded from if they individually filed for bankruptcy, Prelogar wrote.
If the Purdue Pharma plan passes muster at the Supreme Court, “I think any company would look at that and say, ‘Gee, can we use the same strategy?’” William Organek, an assistant law professor at Baruch College’s Zicklin School of Business and managing editor of the Harvard Law School Bankruptcy Roundtable, told MarketWatch.
Purdue Pharma said in a court filing that the liability releases are limited to claims against the Sacklers that legally and factually depend on the conduct of the debtors in the bankruptcy case — Purdue Pharma and certain affiliates — and “are needed to ensure that individual creditors, whose claims are in the trillions, cannot deplete the assets otherwise available for equitable distribution to all creditors by going through the back door. That explains why the creditors themselves insisted on the releases.”
Lawyers for Sackler family members did not respond to requests for comment on the case. One group of Sackler family members said in a court filing that “nothing in the Code or common sense supports the Trustee’s attempt to eliminate a tool that bankruptcy courts nationwide have used successfully for decades to resolve challenging reorganizations.”
The American opioid crisis has spawned massive amounts of litigation. Nearly 280,000 people in the U.S. died from prescription-opioid overdoses between 1999 and 2021, according to the Centers for Disease Control and Prevention.
A Purdue holding company in 2007 pleaded guilty to misbranding OxyContin and acknowledged that it had falsely claimed the drug was less addictive than other pain medications.
Facing a flood of lawsuits, Purdue Pharma filed for bankruptcy in 2019 and had a plan of reorganization approved in 2021, but it was quickly overturned by a federal district-court judge. In May of this year, the plan was upheld by the Second Circuit Court of Appeals, only to be put on hold again in August, when the Supreme Court agreed to hear the case.
Purdue Pharma said in a filing with the Supreme Court that the plan should be allowed in part because Congress gave the courts “catch-all” authority to approve Chapter 11 plans, including “any other appropriate provision” consistent with the law.
But if Congress wants to authorize the type of liability releases included in the Purdue Pharma plan, it should probably do so more explicitly rather than relying on such broad language, Organek said. Congress in the 1990s specifically allowed such liability releases in asbestos cases.
The liability releases are “the backbone of the Purdue settlement,” Sarah Foss, the global head of legal and restructuring at the financial-analysis firm Debtwire, told MarketWatch. If the Supreme Court strikes down the deal, “you’re back to square one,” Foss said. There will be hefty administrative and legal costs to work toward a new settlement, she said, and “it will be an even longer period before anybody sees any money.”
If the Supreme Court allows the settlement to move forward, however, “I think it would make bankruptcy an even more preferred forum” for companies facing massive product-liability litigation, Foss said. “There may be political pressure in Congress to amend the bankruptcy code to not allow for this,” she said.
Some legal experts see a much broader risk.
If people who don’t personally file for bankruptcy can be shielded from liability in this way, that “incentivizes bad conduct by the owners and managers of potentially insolvent companies, not least the diversion of money from the debtors’ estate into the owners’ pockets,” Adam Levitin, a law and finance professor at Georgetown University Law Center, wrote in a friend-of-the-court brief.