In a 5 to 4 ruling, the U.S. Supreme Court today overturned a settlement in the Purdue Pharma bankruptcy case that would release members of the Sackler family from liability for their alleged role in the national opioid epidemic. Victims, including parents of those who overdosed on the drug, can now sue the Sacklers, former owners of Purdue Pharma, as well as other non-debtor parties.
Purdue Pharma manufactured the opioid drug oxycontin. The product was very profitable until the company was beset with hundreds of lawsuits claiming that the drug led to addiction and overdose deaths. The company twice pled guilty to federal criminal violations in connection with its marketing and labeling of the drug. In 2019, Purdue Pharma filed for bankruptcy protection.
In a controversial settlement approved by the bankruptcy court, the company agreed to resolve all current and future tort claims by devoting all company profits to pay victims, and an additional contribution of $6 billion by the Sackler family. In return, the Sacklers and other non-debtors would also be relieved of any liability.
Under bankruptcy law, creditors, including tort victims, vote on a plan of reorganization. In this case, most victims voted in favor of the plan. But some victims wanted their day in court and said that non-debtors, such as the Sacklers, could not be protected from lawsuits without filing their own bankruptcy case. The U.S. Department of Justice supported the victims.1
In the majority opinion authored by Justice Gorsuch, the court said that “nothing in present law authorizes the Sackler discharge.” The court also noted that the plan granted the Sacklers a release from fraud, which not even debtors in bankruptcy can receive. According to the court, “the Sacklers seek to pay less than the code ordinarily requires and receive more than it normally permits.” Justice Gorsuch was joined in the majority by Justices Thomas, Alito, Barrett, and Jackson.
In a spirited dissent, Justice Kavanaugh devoted a significant portion of his argument to policy considerations that favored the Sackler deal. Justice Gorsuch’s opinion responded that “if a policy decision like that is to be made, it is for Congress to make.” The Kavanaugh dissent was joined by Chief Justice Roberts and Justices Sotomayor and Kagan.
This case was closely watched by bankruptcy experts because the holding could have wide-ranging implications. First, the powers of the bankruptcy court were reduced with Supreme Court admonitions that they must adhere more closely to the text of the Bankruptcy Code. This holding may restrict many other bankruptcy practices in both debtor and consumer cases. Depending upon the issue, the requirement to read the law more strictly often may favor creditors.
On the other hand, some companies that have sought global settlements with tort victims have recently preferred to file bankruptcy rather than litigate lawsuits in trial courts. By ruling against involuntary third-party releases, essentially only the debtors receive a discharge of their tort debt in bankruptcy. Under state and federal law, those who hold direct causes of action against related companies or individuals now retain their right to sue those non-debtors. This may complicate future settlements and empower hold-outs who want their day in court.
The case is Harrington v. Purdue Pharma, LP., S.Ct. no. 23-124.
[1] Cliff White, Senior Advisor to AIS, was Director of the Justice Department’s bankruptcy watchdog, the U.S. Trustee Program, when this litigation was commenced. He also oversaw many other legal challenges to the bankruptcy court’s authority to grant third-party releases.