Navigating Bankruptcy Law: Insights from the Supreme Court’s Purdue Pharma Ruling | Business Law Section of the California Lawyers Association

The bankruptcy case of Purdue Pharma and the controversy surrounding the proposed Chapter 11 plan has significant implications for bankruptcy law and legal advocacy. In this blog post, we examine the nuances of the case, highlight the key insights from the Supreme Court’s ruling, and discuss the influential role played by the Amicus Brief submitted by the Insolvency Law Committee (ILC) of the Business Law Section of the California Lawyers Association (CLA) in shaping this outcome.

Background and Context

Purdue Pharma marketed OxyContin for over a decade and the Sackler family withdrew over $10 billion from the company. With remaining assets of $1.8 billion and facing $40 trillion in claims, Purdue Pharma filed for Chapter 11 bankruptcy. The proposed plan included nonconsensual releases of third-party claims against the Sacklers, who would pay $6 billion over nine years. Despite initial disagreement and the vacating of the confirmation order, the Second Circuit Court of Appeals eventually allowed the nonconsensual releases of third-party claims against nondebtors. These releases, termed nonconsensual third-party releases, sparked contentious legal debate as to their validity under the Bankruptcy Code.

On August 10, 2023, the United States Supreme Court granted certiorari to decide the following issue as framed by the Solicitor General: “Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.” The Court set an expedited briefing schedule and heard oral argument on December 4, 2023. On September 27, 2023, the ILC submitted an amicus brief, which urged the Court to decide the case narrowly and in a way that did not inadvertently impact other types of releases that were not at issue. On June 27, 2024, in a 5-4 decision, the Court ruled that the Bankruptcy Code did not authorize the nonconsensual releases of creditors’ direct claims against the Sacklers. In a narrow holding, the majority opinion stated: “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.”

CLA’s Role and Expertise

The ILC is a committee of the Business Law Section  of the CLA. The ILC is comprised of attorneys with expertise in bankruptcy and insolvency-related matters, representing a diverse range of stakeholders. The Amicus Brief emphasized the need for a narrowly drafted decision to avoid unintended consequences for other types of releases not at issue in the case. The Amicus Brief stated that the Court’s decision should be limited to addressing nonconsensual releases of third-party claims against nondebtors where the claims are not vested in the bankruptcy estate, no opt-out right is provided, and the plan ensures no more than fair payment.

The Amicus Brief did not take a position on the ultimate outcome of the case. The Amicus Brief argued against adopting the Second Circuit’s reasoning that § 1123(b)(6) in the Bankruptcy Code is only limited by what it expressly forbids, not what it explicitly allows. The Amicus Brief stated that a Chapter 11 plan provision proposed under § 1123(b)(6) must be appropriate and not inconsistent with the Code. The Amicus Brief described the types of releases that were not at issue in the case, including consensual releases, opt-out releases, releases of so-called derivative claims, nonconsensual releases of claims pursuant to plans that (unlike Purdue’s) provide for full payment to creditors, statutorily authorized releases in securities litigation and asbestos cases, and releases no longer subject to collateral attack after a plan is confirmed.

As urged by the ILC’s Amicus Brief, the majority decision in Purdue confined itself to the type of release presented and did not purport to invalidate other types of releases in chapter 11 plans. In addition, the Court did not adopt the Second Circuit’s statutory analysis of the Bankruptcy Code. As urged by the ILC’s Amicus Brief, the majority opinion focused on the text of the Bankruptcy Code.

You can find the complete ruling here.

“The recent Supreme Court decision reinforces fundamental principles of fairness and accountability in bankruptcy law. The decision also highlights the critical role of advocacy, and I am proud to see the Business Law Section of CLA taking action in clarifying legal boundaries and protecting the rights of all stakeholders involved,” said Betty Williams, President of CLA.

“The Supreme Court’s decision marks a significant step towards ensuring clarity and consistency in bankruptcy proceedings. Our Amicus Brief emphasizes the importance of textual analysis and judicial restraint in deciding the rights of creditors and debtors,” said Leonard Gumport, who served as counsel on the ILC’s Amicus Brief. He emphasized that the brief was the product of efforts by the CLA, BLS, ILC, and members of the CLA’s Amicus Committee.

The Amicus Brief crafted by the ILC not only contributed to the Court’s understanding of the complexities involved but also highlighted CLA’s role as a leading voice in shaping legal precedents that impact businesses, creditors, and the broader legal community.

Implications for Bankruptcy Law

The ramifications of this decision extend beyond the Purdue Pharma case. It sets a precedent clarifying the limits of bankruptcy courts to grant releases that affect parties not directly involved in the bankruptcy process. By restricting nonconsensual third-party releases, the Supreme Court’s ruling reaffirms that creditors’ rights must be respected and that significant legal maneuvers, such as shielding nondebtors from liability, require explicit authorization.

Conclusion

The Supreme Court’s decision in the Purdue Pharma case marks a significant milestone in bankruptcy law, reinforcing the principles of fairness, transparency, and creditor protection. CLA’s proactive engagement through the Amicus Brief reflects its dedication to advancing legal advocacy and upholding the integrity of bankruptcy proceedings. As we navigate the evolving landscape of corporate reorganization and legal precedent, CLA remains committed to providing insightful guidance and shaping future discussions on bankruptcy law and policy. This ruling not only clarifies the boundaries of nonconsensual third-party releases but also emphasizes the critical role of advocacy in safeguarding legal rights and promoting equitable outcomes in complex legal proceedings.

You may find the main document of the brief amicus curiae of the Insolvency Law Committee of the Business Law Section of the California Lawyers Association in support of neither party filed, on the official Supreme Court website here. For more information about the Business Law Section of the California Lawyers Association, visit calawyers.org.