The Purdue Pharma Dissent

The following is one of multiple ebulletins about Harrington v. Purdue Pharma, L.P., 603 U.S. __, 2024 U.S. LEXIS 2848 (U.S., June 27, 2024) (Purdue 4), a case in which the ILC filed an amicus brief on September 27, 2023. This ebulletin by Meredith Jury, U.S. Bankruptcy Judge (Ret.) and Maggie Schroedter of Robberson Schroedter LLP discusses the dissent opinion in Purdue 4.       

To read the decision, click here.

Summary

Justice Kavanaugh authored the dissent, joined by Chief Justice Roberts and Justices Sotomayor and Kagan.  Justice Kavanaugh respectfully but “emphatically” dissented, concluding that the majority opinion was wrong on the law and its effect is “devastating for more than 100,000 opioid victims and their families.”  He characterized the Court’s decision as rewriting the text of the Bankruptcy Code and restricting “the long-established authority of bankruptcy courts to fashion fair and equitable relief for mass-tort victims.”  2024 U.S. LEXIS 2848 at *33.  The primary and recurring theme of the dissent is that the bankruptcy system was designed to “solve a collective-action problem and prevent a race to the courthouse by individual creditors….”  Id.  The Court’s decision upended that goal, removing the discretion of bankruptcy judges to approve “appropriate provision[s]” in chapter 11 plans which would allow third-party releases where necessary to support the best possible recovery for victims and governmental units which would benefit from such releases. The dissent finds its authority for such provisions in 11 U.S. C. § 1123(b)(6).

The dissent is organized in four parts: (I) Part I discusses why non-debtor releases can be appropriate and necessary, particularly in mass-tort cases; (II) Part II explains why such releases are appropriate in the Purdue bankruptcy; (III) Part III “engages the Court’s contrary” legal arguments; and (IV) Part IV concludes with a summary.  This review will follow a similar format after highlighting the facts which the dissent emphasized, and the majority opinion overlooked.

Facts

In the early 2000’s, multiple governmental and individual lawsuits were filed against Purdue to recover damages caused by Oxycontin.  In 2007, Purdue settled “large swaths” of those claims and pled guilty to felony misbranding of the drug.  The next wave of lawsuits filed by victims, their families, and state and local governments named as defendants Purdue as well as members of the Sackler family.  The plaintiffs asserted more than $40 trillion in damages.  Id. at *58. 

Then, the federal government filed federal criminal and civil charge against Purdue, but to date, has not brought any criminal charges against any of the Sackler family.  Purdue pled guilty to federal felonies and agreed to a $2 billion judgment to the federal government that would be allowed superpriority claim status in any bankruptcy case.  Id.  at *58-59.  In 2019, Purdue filed a chapter 11 bankruptcy petition.

After extraordinarily complex discovery and negotiation, most victims and state and local governments arrived at a settlement, which was incorporated into Purdue’s plan of reorganization.  Under the plan, the Sacklers, in exchange for the third-party releases, would contribute $5.5 – $6.0 billion, a number which would quadruple the funds available to pay creditors and victims.  After ongoing negotiations, the Sacklers’ $7 billion contribution would result in distributions to victims of approximately $700 to $750 million, with individual compensation ranging from $3,500 to $48,000.  The contribution would also allow for billions of dollars of distributions to communities for treatment programs and addiction prevention.  Id. at *60-61.  In contrast, the Purdue estate alone was valued at less about $1.8 billion, which amount which would be insufficient to satisfy the government’s superpriority claim, and would result in no distribution to any other creditor class.  Id. at *59-60. 

The bankruptcy court’s extensive findings after a six-day trial emphasized that proving claims against the Sacklers individually would not only be time-consuming and costly, but also be fraught with legal and tactical hurdles which would make obtaining judgments of liability uncertain, at best. Moreover, even if the victims obtained judgments, involuntary collection from Sackler assets would be exceedingly difficult because of the layers of entities holding them and the international nature of their holdings.  Id. at *68-69.

In 2004, pursuant to an indemnification agreement, Purdue had agreed to pay for liability and legal expenses that Purdue officers and directors faced for decisions related to the business, including opioid-related decisions.  The indemnification agreement covered both legal expenses and judgments and would apply to all involved members of the Sackler family.  Id. at *62.

Reasoning

Part I

One of the goals of bankruptcy law is to address the collective-action problem—in other words, to defeat the race to the courthouse that can occur when an entity is not paying its debts when due.  That race can mean that only the earliest creditor or victim may recover from limited debtor assets, with the others left unsatisfied.  The bankruptcy system, particularly after the enactment of the Bankruptcy Code of 1978, leant itself remarkably well to addressing the collective-action problem in mass-tort cases.  Id. at *42-26. 

In that pursuit, seeking contributions from nondebtor third parties was seized upon as a way to enhance otherwise limited bankruptcy estates.  In exchange, the debtors, largely with creditor and victim support, offered third-party releases to the contributors through provisions of the chapter 11 plans.  This combined tool—contributions of non-estate assets in exchange for third-party releases—has been adopted in chapter 11 plans for decades.  Id. at *46-47.  The tools have been utilized in the A. H. Robbins Dalkon Shield cases, providing funds to more than 200,000 victims which were contributed by third parties in exchange for releases.  Similarly, third-party releases were also used in the Dow Corning silicone breast implant cases and for victims of sexual abuse in Catholic diocese cases and for the Boy Scouts case. 

11 U.S.C. § 1123(b)(6) provides authority for the inclusion of third-party releases in chapter 11 plans. That section allows a chapter 11 plan to include “any other appropriate provision not inconsistent with the applicable provisions of” the Code.  The dissent quoted the Supreme Court’s own case for defining the term “appropriate” as a “broad and all-encompassing term that naturally and traditionally includes consideration of all the relevant factors.”  Michigan v. EPA, 576 U.S. 743, 752 (2015).  This provides flexibility and makes the term “inherently context dependent.”

The dissent noted that, over decades of practice, appellate courts have developed and applied numerous factors for determining whether a third-party release is “appropriate” in a given case.  It favorably cited Second Circuit cases which over time had developed a logical list of these factors, factors which were applied in its ruling on Purdue below.

Part II

The dissent focused on the specific facts discussed above, the background of the extensive litigation, the involvement of the Sacklers, and why this particular mass-tort case was well-suited to receive huge outside contributions in exchange for third-party releases.  This provision in the plan prevented a race to the courthouse against the Sacklers and also solved “two separate collective-action problems that dogged Purdue’s mass-tort bankruptcy: (i) it protected Purdue’s estate from the risk of being depleted by indemnification claims, and (ii) it operated as a settlement of potential claims against the Sacklers and thus enabled the Sacklers’ large settlement payment to the estate.”  Id. at *61-62.  The dissent then discussed the effect of the indemnification provision, which in essence made claims against the Sacklers the same as claims against Purdue.  As to the second factor, the dissent reasoned that without the Sackler contribution, Purdue’s estate was worth less than $2 billion and would be wiped out by the superpriority claim of the federal government.  The third-party releases allowed the Sacklers to contribute almost $6 billion to the plan, much of which would be distributed to victims.

On this point the dissent was highly critical of the majority opinion.  The Bankruptcy Court, after a 6-day trial with 41 witnesses, had “found that the settlement provided the best chance for the victims and creditors to ever see any money from the Sacklers…Indeed the Bankruptcy Court found that the victims and creditors would be unlikely to recover from the Sacklers by suing the Sacklers directly due to numerous potential weaknesses in and defenses to the victims’ and creditor’s legal theories.”  Id. at *68-69.  In the words of Justice Kavanaugh, “[t]hat is a critical point that the Court today whiffs on.”  Id.

The dissent emphasized that the vast majority of opioid victims, state and local governments, and creditors supported both the plan and the third-party releases.  Opposition to the plan was limited to a sole individual and a few Canadian creditors.  Id. at *74.  For all these reasons, the use of the releases to ensure the voluntary $6 billion contribution by the Sacklers was exactly the type of “appropriate provision” contemplated by § 1123(b)(6).

Part III

As an overview, the dissent attacks the majority opinion’s conclusion that third-party releases are categorically impermissible under the Bankruptcy Code.  If the majority believes the amount contributed by the Sacklers, who had drained $11 billion from the debtor leading up to the bankruptcy filing, was an insufficient amount to be “appropriate,” it urged a remand on that issue alone.  It emphasized the broad discretionary language in § 1123(b)(6), which required the bankruptcy court to weigh and consider the effect of the indemnification agreement and the need to address the collective-action problem of a race to the courthouse.  Considering this, the blanket prohibition lacks a statutory footing.

Addressing the majority opinion’s legal framework, the dissent rigorously questioned the majority opinion’s reliance on the canon of ejusdem generis in its interpretation of the statute.  This principle “limits general terms that follow specific ones to matters similar to those specified.”  The majority opinion focused on the types of plan provisions addressed in §§ 1123(b)(1) – (b)(5), noting they addressed specific plan provisions that “concern the debtor – its rights and responsibilities, and its relationship with its creditors.”  The majority then concluded that the third-party releases did not “concern the debtor.”  The dissent demonstrated why this conclusion was factually incorrect and defied the “evident purpose” of the statute.  Id. at *81.  In great detail it examined why the third-party releases did concern the debtor and its right and responsibilities and manifestly affected Purdue’s relationship with its creditors, many of whom were victims.

Notably, here the dissent highlighted other kinds of “non-debtor releases that are ‘commonplace, important to the bankruptcy system, and broadly accepted by the courts and practitioners as necessary and proper’ plan provisions,” including consensual nondebtor releases, full-satisfaction nondebtor releases, and exculpation clauses.  Id.  at *86 (internal quote from brief for Amicus American College of Bankruptcy).  These are all “non-controversial and widely accepted”, yet not specifically authorized by the Bankruptcy Code.  The dissent implied that the majority opinion did not intend to bar the use of third-party releases in those circumstances.

The dissent also disagreed with the majority opinion’s arguments under §§ 524(g), 524(e), and 524(a) that the releases improperly grant discharges to nondebtors who have not surrendered all their assets to the administration of a bankruptcy estate.  It submits that the releases do not operate as discharges at all.  The releases apply only to certain claims against the Sacklers, “namely those that arise out of or relate to Purdue’s bankruptcy.”  And in exchange for these limited releases, they have contributed a large portion of their worth to the plan and the victims.  The Bankruptcy Code does not prohibit that exchange.

Part IV

“Today’s decision makes little sense legally, practically, or economically…. Now the opioid victims and creditors are left holding the bag, with no clear path forward.”  Id. at *104.  The reality means the race to the courthouse will resume.  The collective-action problem kicks back into gear.

Closing words: “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.”  Id. at *108.

Author’s Comments

The dissent is substantially longer than the majority opinion.  With all due respect to a Supreme Court justice, it is repetitious; it pounds again and again on its theme that bankruptcy “seeks to solve a collective-action problem and prevent a race to the courthouse.”  But I believe there is a calculated purpose in that repetition.  It posits that the majority forgot, overlooked, or disregarded why so many mass-tort cases over the last 40 years have used bankruptcy to stop the race to the courthouse.  They did so because it worked.  Debtors have worked with creditor bodies to achieve settlements which rely largely on sources of money from outside the direct bankruptcy estate, including insurance proceeds and contributions from insiders who have been or are likely to be sued by the same victims.  And the quid pro quo for those sources to contribute funds has been third-party releases.  Bankruptcy judges around the country have exercised their discretion to approve those releases because they were mandatory for the system to solve these “collective-action problems.”  

To be clear, the dissent is focused only on the Purdue case and the Sackler family.  It does not hint at opining on the Texas two-step cases or other bankruptcy cases with mass-tort victims which have found ways to not offer all the assets of an otherwise profitable corporation into a bankruptcy estate.  I see those cases as distinct and different and the dissent does not go in that direction.

Three things strike me about the dissent.  First, it goes out of its way to mention that consensual third-party releases, full satisfaction releases, and exculpation clauses are not specifically authorized by the Bankruptcy Code but widely utilized and, in its words, are “non-controversial.”  (I cannot say that I fully agree on exculpation clauses, which have been attacked on some fronts recently.)  I wonder if there was an internal discussion on whether the majority opinion would also ban approval of the use of these other releases with the result silence by the majority and this comment by the dissent. 

Second, as the dissent says, the Court’s ruling does leave potential chaos “with no clear path forward” and it urges Congressional action.  Historically, Congress has rarely acted expeditiously on bankruptcy issues; only if big donors pound on their representatives for change do I see a solution coming from that front anytime soon. Finally, it saddens me that of $7 billion, only $750 million goes directly to victims, with individual recoveries as little as $3500 and a maximum of $48,000.  Yes, the prevention and treatment programs will assist communities, but the past victims will not benefit from that use of the funds.  I do wonder what the federal government will do with its $2 billion.  My experience as a former judge and current mediator tells me it will just go into the general fund unless it was earmarked for a specific use.

These materials were written by Meredith Jury, U.S. Bankruptcy Judge (Ret.), with editorial contributions by Maggie Schroedter, Partner at Robberson Schroedter LLP and Chair of the Publications Committee (maggie@theRSfirm.com).

Thank you for your continued support of the Committee.