Supreme Court Hears Oral Argument in Purdue Pharma Case

On September 27, 2023, the Insolvency Law Committee filed an amicus brief in the United States Supreme Court in William K. Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P. et al., No. 23-124 (Purdue 4). Leonard Gumport, counsel on that brief, describes the recent oral argument in Purdue 4.  

SUMMARY 

The chapter 11 plan of debtors Purdue Pharma L.P. (“Purdue”), its general partner, and 22 subsidiaries (collectively, “Debtors”) contains nonconsensual releases of creditors’ claims against third parties. The claims extinguished by the releases include creditors’ disputed claims against certain Sackler family members (the “Sacklers”) for fraud and willful misconduct. Several creditors and the United States Trustee for Region 2 (the “UST”) objected to the releases.

On May 30, 2023, the United States Court of Appeals for the Second Circuit decided that the Bankruptcy Code authorized the plan’s nonconsensual third-party releases. Purdue Pharma, L.P. v. City of Grande Prairie (In re Pharma L.P.), 69 F.4th 45, at 56, 58-63 (2d Cir. 2023) (Purdue 3), cert. granted sub nom. Harrington v. Purdue Pharma L.P., 2023 U.S. LEXIS 2872 (Aug. 10, 2023).    

On August 10, 2023, in Purdue 4, the United States Supreme Court granted certiorari to resolve a circuit split on this issue: “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 claimant’s consent.”

On December 4, 2023, the Court heard oral argument from: (1) Deputy Solicitor General Curtis E. Gannon on behalf of the UST, (2) Gregory G. Garre on behalf of Debtors, and (3) Pratik A. Shah on behalf of The Official Committee of Unsecured Creditors of Purdue Pharma L.P., et al. (the “OCC”).

The oral argument reflects that the central issue is whether subsection 1123(b)(6) of the Code, 11 U.S.C. § 1123(b)(6), authorizes the nonconsensual third-party releases in Debtors’ plan. Subsection 1123(b)(6) provides: “Subject to subsection (a) of this section, a plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.”

On the UST’s behalf, Mr. Gannon argued that subsection 1123(b)(6), read in context, does not authorize such releases. On Debtors’ behalf, Mr. Garre argued that “any” and “appropriate” are broad terms that authorize such releases. On the OCC’s behalf, Mr. Shah argued that creditors, except for the United States, will recover nothing if the Court invalidates Debtors’ plan and its releases.

During Mr. Garre’s argument, Justice Kavanaugh, who seemed to support a construction of subsection 1123(b)(6) that would authorize the releases in Debtors’ plan, described one of the interpretive issues: “On the statutory point of the term ‘appropriate,’ which, to me, is key, in isolation, that’s a broad term and really helps you, but, as the Chief Justice said in his first question, we, in interpreting statutes like that that assign broad authority to usually regulatory agencies, here, the bankruptcy court, we’ve been cautious, especially in recent years, about reading those to give too much authority, [e.g., the] major questions doctrine, elephants in mouse holes.” [Trans., pp. 84-85.]

During Mr. Gannon’s argument, Justice Jackson, who seemed doubtful that subsection 1123(b)(6) authorized the releases in Debtors’ plan, described another one of the interpretive issues: “Can you speak to the Respondents’ suggestion that the only way something is inconsistent with the Bankruptcy Code is if it directly contradicts a provision of the [C]ode? Is that the [G]overnment’s understanding of ‘inconsistent’?” [Id. at 31-32.]    

At oral argument, the Justices seemed divided about the validity of the releases in Debtors’ plan. The argument transcript (“RT”) can be found at  https://www.supremecourt.gov/oral_arguments/argument_transcripts/2023/23-124_h315.pdf (last visited Jan. 14, 2024).

FACTS

Purdue is indirectly owned by the Sacklers through trusts and other affiliates. During approximately 1993-2018, various Sacklers were officers or directors of Purdue. In 1996, after obtaining approval from the FDA, Purdue began marketing OxyContin. In 2004, Purdue agreed to indemnify its officers and directors, subject to a narrow carveout for bad faith misconduct. Starting in 2007, the Sacklers anticipated that they would be impacted by OxyContin-related litigation against Purdue. During 2008-2016, Purdue distributed more than $10 billion to trusts and holding companies owned by the Sacklers. Purdue 3, 69 F.4th at 56, 58-59.

In 2019, Debtors filed chapter 11 petitions in the United States Bankruptcy Court for the Southern District of New York. Debtors’ assets had an estimated value of $1.8 billion. The claims against Debtors and the Sacklers were estimated at more than $40 trillion. There were nearly 3,000 lawsuits pending against Debtors, and there were over 400 OxyContin-related lawsuits pending against the Sacklers. In 2019, the Bankruptcy Court stayed the litigation against the Sacklers. Id. at 60.

In 2020, Purdue entered into an agreement with the United States Department of Justice (“DOJ”) to plead guilty to violations of the federal anti-kickback statute. Purdue agreed to give the DOJ a $2 billion forfeiture judgment that would have a super-priority in Purdue’s bankruptcy case. The DOJ agreed that it would release $1.775 billion of its claim if Purdue reorganized pursuant to a plan that established an opioid abatement trust for the public benefit. Id. at 59-60.

During 2021, Debtors proposed a chapter 11 plan and a related settlement with the Sacklers and their affiliates. Debtors’ proposed plan and settlement provided that the Sacklers and their affiliates would fund Debtors’ plan by contributing approximately $4.325 billion over a nine-year period. The plan included nonconsensual releases of Debtors’ creditors’ claims against the Sacklers and their affiliates. Those nonconsensual third-party releases, if approved, would extinguish creditors’ disputed claims against the Sacklers for fraud and other misconduct. In addition, the plan and settlement included consensual releases of Debtors’ and their estates’ claims against the Sacklers. See Purdue 3, at 60-63.   

On June 3, 2021, the Bankruptcy Court approved Debtors’ disclosure statement (“Disclosure Statement”). It represented that, under Debtors’ proposed plan and settlement with the Sacklers, approximately $5 billion would be provided to trusts having a mission to abate the opioid crisis. In addition, between $700 to $750 million would be provided to a trust (the “PI Trust”) to compensate personal injury claimants. Subject to deductions, holdbacks, and possible delays, the PI Trust would distribute between $3,500 to $48,000 per eligible personal injury claimant. In the Disclosure Statement, Debtors stated that their creditors had timely filed approximately 614,000 proofs of claim. In re Purdue Pharma L.P., U.S.B.C. No. 19-23649-SHL, ECF No. 2983, pp. 11-34 (Discl. Stmt., pp. 2-25).  

During June-July 2021, approximately 120,000 creditors voted on Debtors’ proposed plan. Of the creditors who voted, the overwhelming majority voted in favor of the plan. In Classes 10(a) and (b), there were approximately 137,021 personal injury claims. Of those claims, approximately 62,433 (45%) voted. In Class 10(a), 98.08% of the votes were in favor of the plan (4,237 for and 83 against). In Class 10(b), 95.72% of the votes were in favor of the plan (58,196 for and 2,600 against). In re Purdue Pharma L.P., U.S.B.C. No. 19-23649-SHL, ECF No. 3372, pp. 4-5, 10 (8/2/21 Decl. of C. Pullo, pp. 4-5 and Ex. A).    

During September 2021, after the plan’s releases were limited to claims based at least in part on Purdue’s conduct, United States Bankruptcy Judge Robert D. Drain confirmed Debtors’ plan, approved Debtors’ settlement with the Sacklers, and overruled objections of the UST and various creditors. Judge Drain decided that the Bankruptcy Code authorized the plan’s nonconsensual third-party releases of creditors’ claims against the Sacklers. See Purdue 3, at 61-62; In re Purdue Pharma L.P., 633 B.R. 53, 100-06 (Bankr. S.D.N.Y. 2021) (Purdue 1).

Judge Drain determined, based on the ballots cast by creditors, that they overwhelmingly approved Debtors’ plan. Purdue 1, 633 B.R. at 61 (citing 11 U.S.C. § 1126). Judge Drain found that, although the Sacklers were worth approximately $11 billion, they had possible defenses and their assets were largely unreachable because they were held in spendthrift trusts and offshore accounts. If the plan was not confirmed, then the Sacklers could shield much of their wealth and creditors’ recovery would be extremely limited due to the DOJ’s $2 billion super-priority claim. Purdue 1, at 84, 108-09; Purdue 3, at 63.

The UST and others filed appeals to the United States District Court for the Southern District of New York. In December 2021, United States District Judge Colleen McMahon vacated the confirmation order. Purdue, 69 F.4th at 65-66; In re Purdue Pharma, L.P., 635 B.R. 26 (S.D.N.Y. 2021) (Purdue 2). Judge McMahon decided that the plan’s nonconsensual third-party releases were inconsistent with the Code in that they discharged creditors’ direct claims for fraud and other intentional misconduct that Congress specifically said could not be discharged in bankruptcy. Id. at 106 (citing 11 U.S.C. §§ 523(a)(2), (4), and (6)). In addition, Judge McMahon decided that the Code did not impliedly authorize a court to grant nonconsensual third-party releases. Id. at 110 (citing Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 465 (2017) (Jevic)).

After Purdue 2, Judge McMahon certified her judgment for interlocutory appeal, and Debtors, the OCC, and others appealed to the United States Court of Appeals for the Second Circuit. During those appeals, the Sacklers agreed to increase their settlement payments by more than $1 billion. As a result, various holdouts, including multiple States, withdrew their objections. The UST, several individual personal injury claimants (including Ellen Isaacs), and certain Canadian entities (including the City of Grande Prairie), continued to oppose the releases in Debtors’ plan. Purdue 3, 69 F.4th at 67-68.   

On May 30, 2023, in Purdue 3, the United States Court of Appeals for the Second Circuit decided that the releases in Debtors’ plan were valid. In the majority opinion, United States Circuit Judge Eunice C. Lee wrote that subsection 1123(b)(6) “is limited only by what the Code expressly forbids, not what the Code explicitly allows.” Purdue 3, at 73-74 (citing United States v. Energy Resources Co., Inc., 495 U.S. 545, 549 (1990) (Energy Resources)). The releases were valid because they satisfied a non-exclusive seven-factor test. Among those factors were the Sacklers’ indemnity rights against Purdue, creditors’ overwhelming support for Debtors’ plan, and the fairness of the settlement amount. Purdue 3, at 77-82. The releases did not grant the Sacklers a discharge “because the releases neither offer umbrella protection against liability nor extinguish all claims.” Id. at 71. United States Circuit Judge Richard C. Welsey wrote that he “reluctantly” concurred in the judgment, which he viewed as compelled by Second Circuit precedent. Id. at 85. Judge Wesley doubted that the Code authorized the releases, stating “nowhere . . . does the Code authorize” nonconsensual releases, except in asbestos-related bankruptcies. Id. at 85-86. Judge Wesley wrote: “At bottom, if Congress intended so extraordinary a grant of authority, it should say so.” Id. at 90 (citing Jevic, 580 U.S. at 465).

On July 28, 2023, the UST applied to the Supreme Court for a stay. Debtors, the OCC, and others filed opposition. On August 10th, the Court granted certiorari and stayed the Second Circuit’s mandate. During September-November, numerous briefs were filed by the parties and amicus curiae, including the ILC.

HIGHLIGHTS OF ORAL ARGUMENT

On December 4, 2023, in Purdue 4, the Court heard oral argument from counsel for the UST, Debtors, and the OCC. The Court permitted each counsel to begin with a short uninterrupted statement. Those statements are quoted in full.   

[1] The UST: Mr. Gannon’s argument began: “[¶] The court of appeals approved a Chapter 11 reorganization plan that will release claims that Purdue Pharma’s creditors have against other nondebtors, principally, the Sackler family members who took billions of dollars from Purdue in the years before Purdue’s bankruptcy but have not filed for bankruptcy protection themselves and have made only a portion of their assets available to the estate in Purdue’s bankruptcy. [¶] The court of appeals found authority for that release in a catchall provision of Chapter 11. Section 1123(b)(6) says that a plan may include any other appropriate provision not inconsistent with the applicable provisions this title. [¶] But this release goes beyond what the statute authorizes as construed in its context, and it also conflicts with the basic nuts and bolts of the Bankruptcy Code’s comprehensive scheme. 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, the creditors’ state law chose[s] in action, that do not belong to the bankruptcy estate. 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. [¶] This Court should hold that nonconsensual third-party releases are not authorized by the Bankruptcy Code.” [RT 4-6.]

Justice Thomas asked what provision of the Code authorizes consensual third-party releases. Mr. Gannon said that such releases are acceptable because they come from the parties’ agreement. Justice Thomas stated that subsection 1123(b)(6) “seems pretty broad” and asked how Mr. Gannon would “narrow” it. Mr. Gannon responded: “Well, we think that you should construe it in context, and we think it’s important that the enumerated provisions [in subsections 1123(b)(1)-(5)] are all limited to what this Court has repeatedly said the Bankruptcy Code is about, which is the relationship between creditors and debtors.” Mr. Gannon said that construing subsection 1123(b)(6) to authorize nonconsensual third-party releases “is inconsistent” with the Code, including its discharge provisions: “It’s inconsistent with the idea that the debtor’s supposed to be contributing all of its assets with, you know, a handful of exemptions[,] to be property of the estate, and that’s not what the Sacklers are doing here.” [RT 6-9.]

Chief Justice Roberts stated that section 1123(b) consists of “a series of provisions focused on particular issues that arise in the context of the bankruptcy and then you have a general catchall talking about appropriate provisions not inconsistent[.] [I]t seems to me that that’s a fairly clear case for the application of what is called our major questions doctrine.” The Chief Justice asked: “[I]s there a reason you didn’t cite any of those precedents?” Mr. Gannon stated that it was unnecessary to use that doctrine: “If you look at [Jevic], the Court just used regular principles of statutory construction. [Jevic] did cite the principle that we don’t think that Congress hides elephants in mouseholes. And so, to the extent that your impulse is getting at that issue, we tend to agree with it.” [RT 10.]

Justice Alito asked whether Mr. Gannon agreed that the Sacklers’ funds in spendthrift trusts overseas are unreachable and, if so, “is this the best deal that’s available for the creditors?” Mr. Gannon stated that he thought that spendthrift trust assets in the United States “are reachable” and that this issue “could be explored if there were a bankruptcy with Sacklers.” Mr. Gannon stated that it was “important” that, after Judge McMahon decided Purdue 2, the Sacklers “were able to produce 39 percent more money, 1.675 billion dollars.” Justice Alito asked what a bankruptcy court should do in a situation where the third parties’ funds are unreachable. Mr. Gannon responded: “[T]hat’s . . . something that the bankruptcy court can’t dispose of. But, you know, we think that that principle applies on both sides of the deal.” [RT 12-14.]  

Justice Sotomayor asked about consents in mass tort cases: “Is an opt-out consent? How do you get it?” Mr. Gannon stated the UST’s position, which is that opt-in consents are valid but that a failure to opt-out is not a valid consent. Justice Sotomayor stated that requiring opt-in consents seemed unworkable. Mr. Gannon replied that an opt-in procedure was used in the PG&E case in the Ninth Circuit, “which doesn’t permit nonconsensual releases.” [RT 15-16.]

Justice Kavanaugh stated that the word “appropriate” in subsection 1123(b)(6) is the “key term” and is “broad.” Justice Kavanaugh stated that, “in thinking about what’s appropriate, we have 30 years of bankruptcy court practice that have approved releases of this kind in certain narrow circumstances where the parties are, for example, as here, officers or directors of the company, where they’re indemnified, meaning that the claims against them are in effect claims against the company, and where the officers and directors have made  contributions,” and “where – you know, your – your opening never mentioned the opioid victims. The opioid victims and their families overwhelmingly approve this plan because they think it will ensure prompt . . . payment.”  Justice Kavanaugh stated: “I’m trying to figure out, with all that practice under the judiciary’s belt, why we would say it’s categorically inappropriate when the statutory term ‘appropriate’ is one that takes account usually of all the facts and circumstances.” Mr. Gannon responded that it was not appropriate to “simply take property rights” that “aren’t accessible to the estate in bankruptcy.” Mr. Gannon stated that the releases went beyond the parties entitled to indemnification and that the Sacklers might not be entitled to indemnification. Justice Kavanaugh stated that the UST, “with no stake in this at all,” was objecting to distributions to programs and victims “for this somewhat theoretical idea that they’ll be able to recover money down the road from the Sacklers themselves.” [RT 18-21.]

After Mr. Gannon mentioned that 2600 claimants voted against Debtors’ plan, Justice Kagan stated: “I mean, it’s 3 percent. You know, what if it were 1 percent, or .1 percent? And your – your position would still say, well, no, the Trustee can come in here and blow up the deal and should blow up the deal.” Mr. Gannon stated: “[O]ur position is that if you can get 99 percent, you’re going to have a deal.” Justice Kagan stated that the support for the plan was “overwhelming.” Justice Kagan asked whether the UST contested “the finding [in Purdue 1] that this provision [in Debtors’ plan] was necessary for the reorganization?” Mr. Gannon replied: “I think that [finding in Purdue 1] was falsified by the fact that it got renegotiated as soon as the district court ruled [in Purdue 2].” Justice Kagan stated that the UST’s position “rests on a lot of sort of hifalutin principles of bankruptcy law,” but “another hifalutin principle of bankruptcy law is you’re supposed to maximize the estate, and you’re supposed to do things that will effectuate successful reorganizations.” [RT 21- 23.]  

Justice Barrett asked whether, if the UST won, “[w]ould you assert [the DOJ’s $2 billion super-priority] claim, or would you withdraw that and allow the opioid victims to recover some [of] what’s left in Purdue’s estate?” Mr. Gannon stated: “[I]f the plan doesn’t get confirmed, [Purdue] doesn’t need to go through with the guilty plea. And we might not have the $2 billion judgment.” [RT 25.]

Justice Kavanaugh stated that, if Purdue liquidated, “everyone’s left with a lottery ticket to try to get something . . . in litigation years from now.” Mr. Gannon stated: “[T]he Sacklers are saying that they want global peace, but I don’t think that that means they wouldn’t pay a lot for 97.5 percent peace.” [RT 26.]

The Chief Justice asked whether the UST’s argument was that Debtors’ plan should be invalidated “because there’s going to be a better deal down the road?” Mr. Gannon stated: “That’s not what we’re saying.” The Chief Justice asked whether the UST would be making the same argument if only a single creditor objected. Mr. Gannon stated: “[T]o the extent their claim is not property of the estate, it can’t be forcibly extinguished by the bankruptcy court.” [RT 27-28.].  

Justice Jackson stated: “Justice Kavanaugh brought up appropriateness, and I’m just trying to understand if that’s the hook that the [UST] is resting on or [if] the [UST] is making the argument about inconsistency.” Mr. Gannon stated: “I think we’re making both arguments.” Justice Jackson stated: “I mean, if we’re just talking about ‘appropriate’ in the sort of general sense of people agree with it and many people would like it to happen, then I guess you don’t get ‘appropriate.’ [¶] But, if we’re . . . looking at ‘appropriate’ and ‘inconsistent’ relative to the overall purposes of the Bankruptcy Code, the various provisions that you’ve pointed out, then I suspect that you do.” Justice Jackson asked whether the UST agreed “that the only way that something is inconsistent with the Bankruptcy Code is if it directly contradicts a provision of the Code?” Citing cases, including Jevic, Mr. Gannon stated that the Court had ruled that some things were impermissible under the Code even though it did not expressly prohibit them. Mr. Gannon stated: “[H]ere, we would draw an inference from the idea that in [subsection 1123(b)(3)(A)], you can settle claims that belong to the estate. That doesn’t mean that you can settle claims that don’t belong to the estate.” [RT 29-33.]

Justice Thomas asked why a consensual third-party release is consistent with the Code. Mr. Gannon stated: “We think that it’s consistent because it is not extinguishing a property right without the property owner’s consent.” Justice Thomas asked “what exactly is the interest” of the UST in “undoing this?” Mr. Gannon replied that the UST has “a watchdog role.” Justice Thomas stated: “I’m just wondering what exactly is that role and why it is that you’re able to come and undo something that has such overwhelming agreement.” Mr. Gannon stated: “Well, we’re able to come in because Congress specifically said under Section 307 that the Trustee . . . can raise and may appear and be heard on any issue in a case” under the Code.” [RT 33-35.]

Justice Alito asked: “You argue that we should adopt your interpretation because it avoids a difficult constitutional question. Are you willing to express a view whether this is constitutional?” Mr. Gannon stated: “[T]hat there’s not even an opt-out release means that there’s a due process problem under – under the way this Court has dealt with class action cases where the Court has said that plaintiffs have a due process right to remove themsel[ves] from a class. [¶] And there is [an] enforceable extinguishment of property rights.” [RT 36-37.]

Justice Sotomayor stated: “[I]t appears you want a broad ruling that all third-party releases, unless they’re consensual, are not permitted. [¶] So how do we write this not to affect [exculpation clauses?].” Mr. Gannon stated: “Exculpation clauses, depending on how they’re written, may overlap a lot with this.” He suggested possible ways to distinguish exculpation clauses and said that the Court might “leave that for another day if you need to.” [RT 37-39.]

Justice Kagan said: “[O]ne of the stronger arguments you make in your brief is that this upsets the basic quid pro quo of bankruptcy law, which is you put all your assets on the table and then you get a discharge. [¶] But suppose, in fact, that the Sacklers had put all their assets on the table. Why shouldn’t that change the analysis under your own theory?” Mr. Gannon replied that “then that would feel different” but the Sacklers would still need to go through a process to get the release. Justice Kagan stated: “I guess I’m wondering why one nut-case hold-out should hold up something like this.” Mr. Gannon stated: “If it’s a significant claim and somebody doesn’t want to waive it, we think that you don’t have to consider that person a nut case to say that it’s their right to decide whether or not they get to waive their person property rights.” [RT 40-41.]

Justice Gorsuch asked: “Even if they [i.e., the Sacklers] put all their assets on the table, they still wouldn’t get a release for fraud, right?” Mr. Gannon stated: “[N]ot if somebody were willing to pursue that claim after the bankruptcy.” Justice Gorsuch asked whether Mr. Gannon saw any error in the amicus briefs that argued that the plan’s releases deprived nonconsenting creditors of their Seventh Amendment right to jury. Mr. Gannon replied: “No, this is . . . we think that there are private claims here that the Seventh Amendment would apply to.” [RT 42-44.]

Justice Kavanaugh stated: “Your [position is] like there’s no amount that [the Sacklers] could [put in], but your rhetoric’s been they haven’t put in enough.” Mr. Gannon stated that “nothing in bankruptcy would let somebody say, you know, I’m insolvent because I have decided that only a certain portion of my assets should be used to pay my debt.” Justice Kavanaugh stated: “I think the problem and maybe the disconnect between you and the opioid victims is you’re implying or even saying, oh, if you can – reject this plan, there’s going to be more money available down the road from the Sacklers.” Mr. Gannon stated that “the record shows that what the best deal is here depends in large part on what negotiating leverage they have. [¶] And if the Court says that nonconsensual releases aren’t part of that, the deal may change.” Justice Kavanaugh stated that the UST appeared to be saying that the views of the opioid victims and their families did not matter. Justice Kavanaugh stated that the releases helped to protect the res because the Sacklers had indemnification rights such that “a suit against the Sacklers would be a suit against Purdue.” Mr. Gannon stated that the Sacklers’ indemnification rights were contractually limited and could be disallowed or subordinated under sections 502 and 510 of the Code. [RT 44-49.]

Justice Barrett asked what indemnification rights the Sacklers would have if Debtors reorganized before judgments were entered against the Sacklers. Mr. Gannon stated that the answer depended partly on whether the Sacklers sought indemnification on pre- or post-petition claims and whether the good-faith exception in the indemnification agreement applied. Justice Barrett stated: “[B]ut I’m just saying that, to the extent that they say this affects the size of the res, it doesn’t really affect the size of the res that would be distributed during the bankruptcy proceedings so far as I can tell.” Justice Barrett asked what the effect on other cases would be if the Court prohibited nonconsensual third-party releases. Mr. Gannon noted that Congress had created a statutory exception in section 524(g) for asbestos cases. Justice Barrett stated: “And maybe that would be a good solution given the complexities, to have Congress do it rather than bankruptcy courts trying to stretch the [C]ode?” Justice Barrett stated: “[T]here were hundreds of thousands of victims that didn’t respond, that just – are those the ones that you are concerned about?” Mr. Gannon stated: “Yeah. We’re concerned about the entire process. We don’t think that there’s meaningful consent when somebody just didn’t vote. . .. [¶] The 97 percent in favor figure depends in part on a high, you know, nonvoting percentage.” [RT 50-56.]

Justice Jackson asked about the history of nonconsensual third-party releases. Mr. Gannon stated that “there’s a really small amount of history that’s been put on the table by the other side.” Justice Jackson stated: “And, just conceptually, I guess I’m trying to understand why this would be laid at the feet of the one nut-case holdout, as Justice Kagan puts it. [¶] . . . . It’s the – the Sacklers’ insistence on getting releases from every single person that’s causing this problem, correct?” Mr. Gannon stated: “That’s correct.” [RT 57-59.]

[2] The Debtors: Mr. Garre’s argument began: “[¶] This Court should reject the Trustee’s [i.e., the UST’s] argument that nonconsensual third-party releases are categorically unauthorized by the [Bankruptcy Code] no matter the circumstances. I’d like to begin with three points. First, the Trustee’s position is irreconcilable with the plain text of Section 1123(b)(6). Congress’s use of ‘any’ and ‘appropriate,’ terms of breadth and flexibility, refute the Trustee’s position that third-party releases are never authorized in any circumstances. [¶] Second, this case illustrates how third-party releases can and do directly advance the core objectives of bankruptcy in appropriately limited circumstances. [¶] Because of the inextricable relationship between Purdue and the Sackler directors and officers of Purdue, victims have filed identical claims against Purdue and the Sacklers for the same injuries based on the same conduct. [¶] Everyone agrees that the claims against Purdue can be channeled to the creditor trusts. The releases simply prevent creditors from jumping the line and depleting the estate through the back door by suing the Sacklers for the same injuries based on the same exact conduct involving Purdue. That explains why the creditors and victims themselves insisted on and have overwhelmingly approved the releases. [¶] And, finally, third-party releases have been used in limited circumstances for more than three decades, nearly the life of the current [Bankruptcy Code], to resolve some of the most important and complex bankruptcies. [¶] Equity has likewise enjoined third parties in analogous circumstances for centuries. Adopting the Trustee’s categorical rule would radically disrupt that longstanding practice to the detriment of victims. [¶] If the Trustee succeeds here, the billions of dollars that the plan allocates for opioid abatement and compensation will evaporate. Creditors and victims will be left with nothing, and lives literally will be lost. Nothing in the [Bankruptcy Code] commands that tragic result.]” [RT 60-62.]

Justice Thomas stated: “[The UST] treats consensual agreements and nonconsensual releases differently. [¶] How would you respond to that?” Mr. Garre stated that “the most telling point” in the UST’s argument “was that he didn’t point to the text of” of subsection 1123(b)(6). Mr. Garre stated: “The only basis for that authority comes from 1123(b)(6), and that doesn’t draw a distinction between consensual and nonconsensual [releases].” Justice Thomas asked whether Debtors’ argument would change if there was no indemnification agreement. Mr. Garre stated that Debtors’ argument would not change because the released claims “must include” Purdue’s “own conduct” and, unless released, “would inundate and overwhelm Purdue and deplete the res, and that’s – that’s the simple fact due to the nature of these claims.” [RT 62-63.]

Justice Kagan asked: “[W]hy should [the Sacklers] get the 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?” Mr. Garre stated: “[T]hey’re not getting a discharge. They’re getting a release. And there’s a fundamental difference between that.” Justice Kagan stated: “[I]n some ways, they’re getting a better deal than the usual bankruptcy discharge because, as Justice Gorsuch indicated, they’re being protected from claims of fraud and claims of willful misconduct. [¶] So, yeah, they’re getting not quite as much, but in some ways, they’re getting much more. . .. And, again, without putting what I take to be, you know, anything near their entire pot of assets on the table.” Mr. Garre stated: “[I]n this reorganization proceeding, the focus is on maximizing the estate and equitably distributing it to all the victims. And what the Trustee proposes here is fundamentally at odds with that core objective of bankruptcy.” [RT 64-66.]

Justice Jackson asked why the releases were appropriate when “most of the assets we’re talking about were originally in the company and . . . [the Sacklers] actually took the assets from the company, which started the set of circumstances in which the company now doesn’t have enough money to pay the creditors. [¶] So 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?” Mr. Garre stated that “40% of that money went to paying taxes. Of what’s left, 97 percent of that is in the $6 billion that’s in this settlement. [¶] The . . . bankruptcy court here made careful finding that . . . this contribution not only was substantial and fair, but it was the best that was available for the victims.” Mr. Garre stated that even if creditors prevailed on their claims, there would be “serious issues about being able to collect on that at the end of the day.” Justice Jackson stated: “Only because the Sacklers have taken the money offshore, right?” [RT 66-68.]

Justice Barrett stated: “I take your point about 40 percent of the money that they took from the corporation going to the payment of taxes, but, as Justice Jackson rightly points out, the – the 97 percent of the money after tax that they’re contributing is all money that they took out of the corporation. [¶] And to your point to Justice Kagan about, well, this is a corporate restructuring and so that provision doesn’t apply, I take Justice Kagan’s point to be, but if the Sacklers went into individual bankruptcy, which is what this is saving them from, those fraud exceptions would apply.” [RT 68-69.]

Justice Gorsuch stated: “So we’re being asked to interpret 1123(b)(6), and you’d agree that the term ‘appropriate’ doesn’t mean anything goes, right?” Mr. Garre agreed. Justice Gorsuch stated: “When we look at the background structure of the Bankruptcy Code, it has a couple of important provisions, right? One is you[‘ve] got to put everything on the table, as we’ve been discussing, right?” Mr. Garre stated: “Yes, when you’re in doubt.” Justice Gorsuch stated: “[W]hen we look at historic equity practice, I think you’ve got a couple of cases from the 1600s and a couple of district court cases more recently and pretty much nothing else.” Justice Gorsuch stated: “And then, on the constitutional question, we have serious questions. We don’t normally say that a nonconsenting party can have its claim for property eliminated in this fashion without consent or any process of court other than, you know, what – you know, the procedure here. 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.” Mr. Garre stated that “bankruptcy is different for starters,” and the claimants, who had submitted proofs of claim, did not have a right to jury trial and did not own derivative claims because “those claims are taken away from the creditors” and put into Debtors’ bankruptcy estates. Mr. Garre stated that, in Energy Resources, “this Court recognized that 1123(b)(6) applied in the context where what the release did was discharge the liability of a nondebtor, the officer of the company, to another nondebtor, the IRS.” Mr. Garre stated that, “if these constitutional concerns are real, then [section] 524(g) is unconstitutional, and this Court, frankly, is going to take a wrecking ball to” the Bankruptcy Code. [RT 71-76.]

Justice Sotomayor asked about the distinction between direct and derivative claims. Justice Sotomayor stated: “I always thought that any release in bankruptcy could stop suits for derivative claims, correct?” Mr. Garre stated: “So that’s correct.” Justice Sotomayor stated: “I haven’t understood why the personal injury claims are – are not derivative claims also because, generally, these pills were sold by the corporation, not by individuals.” Mr. Garre stated: “[O]ne of the reasons why it’s confusing is that because any direct claims that are subject to the releases here are functionally indistinguishable from the derivative claims for this reason,” because they “only apply to claims that are dependent on Purdue’s own conduct.” Justice Sotomayor stated: “[T]hat’s not a definition in my mind.” Mr. Garre stated: “[N]o one has ever really identified the direct claim that’s dependent on Purdue’s conduct that would be released here.” [RT 77-80.]

Justice Jackson asked why the plan’s releases were necessary. Mr. Garre stated: “In this case, they were necessary because of the direct threat to the res posed by these parallel exact same claims that would be . . . brought against the Sacklers and trigger indemnification, contribution, and insurance right[s], as well as inundate the company through litigation.” Further, “there is a $2 billion [super-priority claim], and I hope the government’s response gave you as much discomfort as [it did to me].” The “bankruptcy court was right that we will have a liquidation with no one recovering anything.” [RT 80-84.]

Justice Kavanaugh stated that the word “appropriate” in subsection 1123(b)(6) is “key” and, when read “in isolation,” is a “broad” term. Justice Kavanaugh asked whether “appropriate” should be narrowly construed by reason of the major questions doctrine and the principle that Congress does not hide elephants in mouse holes. Mr. Garre stated that the major questions doctrine applied to delegations to administrative agencies, not courts. Mr. Garre stated that “appropriate” is a term of “classic breadth.” Mr. Garre stated that subsection 1123(b)(6) “is not a mouse hole” and the power to grant the releases was “not an elephant, particularly not when you consider the fact that everyone agrees that the derivative claims, including the intentional fraud claims, can be taken from third parties” and settled. Justice Kavanaugh stated that he thought there was “a strong argument” that the UST lacked standing. Justice Kavanaugh asked: “But Ellen Isaacs would have standing. So do we need to get into the U.S. Trustee’s standing given that Ellen Isaacs would have standing?” Mr. Garre stated that Ms. Isaacs hadn’t identified that she had a direct claim and the UST “comes in here as an interloper with absolutely no financial stake in this resolution[.]” [RT 84-88.]   

Justice Barrett asked: “So, if 1123(b)(6) is as broad as you say, did Congress need to enact 524(g) to give bankruptcy courts special authority to handle these problems in the asbestos context?” Mr. Garre stated that section 524(g) was necessary “particularly because of the unique problem presented there with respect to future claimants, so it enacted that special set of rules. [¶] And then it said in a separate act of Congress, hey, don’t infer from this special scheme that the authority didn’t already exist.” [RT 88-89.]

Justice Jackson asked: “If (b)(6) is as broad as you say it is, then what are (b)(1) through (5) doing there?” Mr. Garre stated: “[Y]ou could ask that question about any catchall provision, Your Honor. The point is that Congress said these are the things that we want to say you can do, but we want to be extra clear. We want to make clear the Court has all the power to do the things it needs to do as long as they’re appropriate and not inconsistent.” Justice Jackson stated: “[H]aven’t we normally said in our jurisprudence with respect to statutory interpretation that a catchall that ends after a list is sort of like in the same nature of the list? It can’t be just a totally different, huge thing.”  Mr. Garre stated: “The other provisions of (b) work directly with (b)(6) here. I mean, for example, (b)(3)(A) gives the estate the authority to settle the estate’s claims. [¶] The releases here were necessary to the settlement of those claims, the bankruptcy court found at – at JA 400.” Justice Jackson asked: “[C]an a plan provision that conflicts with the principles underlying the Bankruptcy Code be inconsistent, or is it your view that it has to be inconsistent with a particular provision?” Mr. Garre stated: “I think the text answers that, Your Honor. It says inconsistent with applicable provisions.” Mr. Garre also stated: “And in fact, the only other provision of the [C]ode that specifically addresses third-party releases allows it while telling courts not to infer from that that the authority doesn’t already exist.” [RT 90-92.]

[3] The OCC: Mr. Shah’s argument began: ‘[¶] The [UST] does not speak for the victims of the opioid crisis. Quite the opposite, the [UST] appointed the official committee, my client, as the fiduciary representing their interests. Every one of the creditor constituencies in this case comprising individual victims and public entities harmed by Purdue overwhelmingly supports the plan. [¶] Indeed, it was the creditors that insisted on the release of the creditor claims against the Sacklers for the same injuries to avoid a value-destroying victim-against-victim race to the courts that would result in no recovery for virtually all except the United States. [¶] That unrebutted finding grounded in a massive record built on years of creditor victim-led efforts refutes the [UST]’s eleventh-hour speculation of some magic alternative permitting an equitable victim recovery. [¶] That is why the fact-finder relied on Section 1123(b)(6)’s broad terms to approve the tailored release as essential to restructuring the debtor-creditor relationship in this case on which lives literally depend.” [RT 92-94.]

Justice Thomas asked what would what happen if the Sacklers filed bankruptcy. Mr. Shah stated: “It would take years, probably decades if you talk to bankruptcy lawyers, for a victim to see a cent from that hypothetical bankruptcy.” Because the Sacklers’ family trusts were not eligible to file bankruptcy, “the bankruptcy-eligible assets are about a billion dollars of the Sacklers. That’s far less than the 6 billion that’s put on the table.” [RT 94-96.]

Chief Justice Roberts asked whether personal injury claimants could force commercial claimants to release their claims against third parties. Mr. Shah stated: “[I]f the release tried to get rid of everything, but you had any class that didn’t have a supermajority, that would almost certainly fail the Second Circuit’s own test” in Purdue 3. The Chief Justice asked whether there is something that requires a supermajority. Mr. Shah stated: “Courts for 35 years have given content to ‘appropriate.’ One of the factors that virtually all of the courts have pointed to is supermajority approval of the creditors.” [RT 96-98.]

Justice Kagan commented: “Mr. Gannon suggests that if we rule for him, it actually gives victims greater leverage in this kind of situation.” Mr. Shah stated: “If there’s one thing you take away from my argument today, it is this, and let me be crystal-clear: Without the release, the plan will unravel, Chapter 7 liquidation will follow, and there will be no viable path to any victim recovery.” Mr. Shah stated that the Bankruptcy Court made “unrebutted findings that there is no other – forget a better deal – there is no other deal.” Without the settlement, the DOJ’s $2 billion super-priority claim would leave “zero dollars to victims” in the bankruptcy estate. The $2 billion super-priority claim “is not contingent on anything” and “will gobble up the entire estate.” In a liquidation, a bankruptcy trustee wouldn’t “have any assets to litigate with, and he has to litigate that in competition with all those direct creditor claims that the release isn’t preventing.” In addition, “If even one of those direct claims, creditor claims, gets to judgment, that could wipe out all of the collectible Sackler assets.” [RT 100-03.]   

Justice Sotomayor asked whether there were any direct claims (as opposed to derivative claims). Mr. Shah stated that the consumer protection claims by the States were direct claims and that the States’ willingness to settle was conditioned on a release that binds everyone. [RT 104-07.]

Justice Kavanaugh asked: “Individual suits against the Sacklers, why is that not an available path?” Mr. Shah stated: “[T]here are about $40 trillion in estimated claims. [¶] As soon as one plaintiff is successful, that wipes out the recovery for every other victim. That is why the victims insisted on this release. . .. That is why 97 percent of the victims agreed to this nonconsensual release. They have no love lost for the Sacklers.” Justice Kavanaugh asked Mr. Shah to describe the abatement programs provided for in Debtors’ plan. Mr. Shah stated: “The vast majority of the $6 billion that the Sacklers have contributed and the $1.8 billion that’s in the Purdue estate, $7 plus billion, the vast majority of that is going to go to abatement.” Mr. Shah stated: “It’s not only legally improper, but it’s irresponsible for the Trustee now to suggest that there’s some secret path to recovery for the victims. [There] just isn’t. It’s basic economics. It’s collective action.” Mr. Shah stated: “You can ask Mr. Gannon on rebuttal to point where there is the evidence in the record that shows there is a better deal to be had. It does not exist.” Justice Kavanaugh asked about the meaning of “appropriate” in subsection 1123(b)(6) and commented that the United States does not ordinarily interpret that word narrowly. Mr. Shah stated: “I think, if you read 1123(b)(6), if textualism matters, it says it has two limitations: It has to be appropriate. It can’t be inconsistent with applicable provisions of the [C]ode.” Mr. Shah stated: “It doesn’t say inconsistent with general principles of the [C]ode.” [RT 108-11.]

Justice Jackson asked about mass tort bankruptcy cases in circuits that do not permit nonconsensual third-party releases. Mr. Shah stated that the PG&E case had a “far, far, far smaller body of claimants.” The “true mass tort bankruptcies,” like the Dalkon Shield case, “are only possible with third-party releases.” Justice Jackson asked why creditors would recover nothing from the Sacklers’ assets without the releases. Mr. Shah stated that the states’ direct claims “are multi-billion dollar claims.” Justice Jackson asked whether a similar settlement could be made without bankruptcy. Mr. Shah stated: “You can’t get the third-party release outside of bankruptcy, which is why, for 35 years, courts have been doing it in mass tort bankruptcies like Dalkon Shield, like breast implants, like abuse cases, in order to make it happen.” [RT 113-19.]  

[4] UST’s Rebuttal: Mr. Gannon argued four points in his rebuttal. First, Ellen Isaacs had objected to the release on behalf of herself and her son, who died from an overdose. “We think there is no doubt that she has standing here.” Second, Ms. Isaac’s claim was a direct claim, not a derivative claim. “Purdue doesn’t take over personal injury claims. Those are not brought on behalf of the corporation.” The consumer protection claims of the States were also direct claims. Third, “[t]he court can’t just do whatever it takes to make this deal possible.” Mr. Gannon stated: “[W]e don’t think the court can just say, you know, the Sacklers, we think it would be better if you put in $15 billion here if it’s not money that is otherwise part of the estate.” Fourth, “[m]y friend on the other side says the bankruptcy court made findings about this, that this was the best possible deal, that this release had to happen for that particular deal. That was a $4.2 billion deal. That finding was immediately falsified after the district court’s opinion here [in Purdue 2].” The DOJ’s $2 billion super-priority claim is “part of a non-final plea” that is contingent upon both “the finalization of the criminal judgment and the confirmation of the plan,” and “we think it’s speculative to say that the $2 billion is going to eat up the entire estate.” Mr. Gannon concluded: “[W]e do hope that there is another deal at the end of this because this is something that needs to be worked out, but it doesn’t necessarily have to be a deal with nonconsensual releases. And we think that the dealing [sic] should not proceed on the premise that nonconsensual releases are permissible under the Bankruptcy Code.”  [RT 119-123.]

AUTHOR’S COMMENTS

Please appreciate the extremely skillful arguments by all three advocates on an important bankruptcy issue that has divided the circuits and resulted in forum shopping and the non-uniform administration of the Bankruptcy Code.  

These materials were written by Leonard L. Gumport of Gumport Law Firm, PC in Pasadena (lgumport@gumportlaw.net). Editorial contributions were provided by the Hon. Meredith Jury, Ret. (majury470@gmail.com).