The Supreme Court heard the Biden administration’s objections to the bankruptcy plan filed by opioid manufacturer Purdue Pharma, which includes a controversial settlement that would shield the company’s founding family from future opioid-related liability.
The government argued that opioid victims could be shortchanged if the settlement is allowed to stand, a claim the company denied. The Biden administration said in court papers that the settlement as currently constituted would provide “a roadmap for corporations and wealthy individuals to misuse the bankruptcy system to avoid mass-tort liability.”
Earlier this year, the Supreme Court put the settlement temporarily on hold. A lower court previously upheld the settlement, finding that claims against the Sackler family were too closely interwoven with the company to be separated from those claims and that letting lawsuits continue against the family would undercut the company’s push for a bankruptcy settlement.
The justices heard the case, Harrington v. Purdue Pharma LP (court file 23-124), on Dec. 4.
Purdue Pharma, based in Stamford, Connecticut, is accused of playing a major role in fueling the ongoing opioid crisis. The company is said to have engaged in irresponsible marketing practices that contributed to the rise of opioid abuse in the United States.
The company makes oxycodone, marketed as OxyContin and under other names, which is a semi-synthetic narcotic analgesic that serves as a popular painkiller. The drug is said to cause physical dependence and addiction.
The company has also been criminally prosecuted in connection with opioids. Years ago, it promoted OxyContin as nonaddictive.
In a deal made in the company’s bankruptcy proceeding that was initiated in 2019, the Sackler family agreed to kick in about $6 billion to settle future opioid-related lawsuits in exchange for a release from liability in future lawsuits. The total payout to opioid victims, hospitals, and states is expected to exceed that amount, and the reorganized company will focus on dealing with opioid abuse.
The Biden administration opposes the settlement.
The release signed by family members “extinguishes the claims of all opioid claimants except the United States, and therefore applies to an untold number of claimants who did not specifically consent to the release’s terms” and is an abuse of the bankruptcy system, the government said.
The Sacklers themselves didn’t file for bankruptcy. They haven’t been involved in the company’s affairs since 2019.
Although family members deny wrongdoing, they have acknowledged feeling regret that OxyContin “unexpectedly became part of an opioid crisis.” Earlier this year, they said the settlement would yield “substantial resources for people and communities in need.”
Forbes magazine listed the Sacklers in 2016 as the 19th wealthiest family in the United States, with an estimated net worth of $13 billion.
Members of the family took out about $11 billion from the company in the 11 years before it filed a bankruptcy petition, according to the government.
During the oral argument on Dec. 4, U.S. Deputy Solicitor General Curtis Gannon suggested that the Sackler family is getting off too easy.
The U.S. Court of Appeals for the 2nd Circuit approved a Chapter 11 reorganization plan for the company that will release claims the company’s creditors have against nondebtors such as the Sacklers, Mr. Gannon told the justices.
Yet, family members “took billions of dollars from Purdue in the years before Purdue’s bankruptcy ... [and] have not filed for bankruptcy protection themselves and have made only a portion of their assets available to the estate in Purdue’s bankruptcy,” Mr. Gannon told the justices.
The 2nd Circuit “found authority for that release in a catchall provision of Chapter 11 ... but this release goes beyond what the statute authorizes ... and it also conflicts with the basic nuts and bolts of the Bankruptcy Code’s comprehensive scheme.”
The release allows “the Sacklers to decide how much they’re going to contribute,” he said.
”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.
“This court should hold that nonconsensual third-party releases are not authorized by the Bankruptcy Code.”
Justice Brett Kavanaugh said that settlements such as the one arrived at in this bankruptcy case aren’t out of the ordinary.
“Bankruptcy courts for 30 years have been approving plans like this,” the justice said, asking why the Supreme Court should find that the plan here was “categorically inappropriate.”
Purdue attorney Gregory Garre urged the justices to reject the government’s argument “that nonconsensual third-party releases are categorically unauthorized by the code no matter the circumstances.”
The government’s position conflicts with the plain text of the bankruptcy statute, he said.
“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,” he said.
If the government wins this case, “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 code commands that tragic result,” Mr. Garre said.
Justice Neil Gorsuch questioned whether it was constitutional to eliminate the claims of persons not party to the bankruptcy “without consent or any process of court other than ... the procedure here.”
“This would defy what we do in class actions. It would raise serious due process concerns and Seventh Amendment concerns, as the government highlighted,” he said.
Echoing Justice Gorsuch, Justice Elena Kagan also pushed back, suggesting that the Sacklers were getting an unusually good deal.
“In some ways, they’re getting a better deal than the usual bankruptcy discharge because ... they’re being protected from claims of fraud and claims of willful misconduct,” Justice Kagan said.
The Sacklers haven’t put “anything near their entire pot of assets on the table,” she said.
Mr. Garre replied, saying: “The point of this proceeding is not to make ... life as difficult as possible for the Sacklers. It’s to maximize recovery and fairly and equitably distribute it to the victims.”
Justice Kagan suggested that going along with the company’s argument would be an “extraordinary thing” that would “basically subvert” bankruptcy law.
The court is expected to rule on the case by June 2024.
