Purdue Pharma Bankruptcy Deal Ruling Is Taking Courts by Storm

The US Supreme Court’s decision striking down Purdue Pharma’s bankruptcy settlement is already being craftily applied by lawyers looking to push its authority as far as possible and carefully parsed by judges interpreting the extent of its impact.

The high court, in rejecting liability releases for members of the billionaire Sackler family who owned Purdue, found they were illegal because they were given without the consent of some people who sued the family over its opioid sales tactics.

The long-awaited ruling in Harrington v. Purdue Pharma was bound to shake up the bankruptcy world, which has relied on litigation shields to protect people and companies that aren’t bankrupt—such as the Sacklers—against legal claims related to an underlying Chapter 11 case. In the month since it came down, lawyers have started testing how the guidance can be used to benefit their clients, despite the Supreme Court’s insistence that its decision wasn’t intended to be wide-ranging.

The 5-4 decision has quickly made the rounds in complex corporate bankruptcy cases, including cases involving electric scooters and genetic tests, with lawyers and judges alike applying it to restructuring plans and temporary restraining orders.

The ruling has also popped up in at least one surprising place. In her dismissal of the classified documents case against Donald Trump, Judge Aileen Cannon cited statutory interpretation guidance from the Purdue case.

Still, the high court’s intention to keep its decision narrow means clever lawyering might not get very far, Vanderbilt University bankruptcy law professor Nicole Langston said.

“People are trying to use this Purdue sword in many ways and I don’t think anyone is going to have much success,” Langston said.

A New Tool for the US Trustee

The Justice Department’s bankruptcy watchdog, which brought the Purdue case over the nondebtor—or third-party—releases all the way to the Supreme Court, was quick to draw its new sword.

The US Trustee on July 15 challenged the validity of medical genetic testing company Invitae Corp.'s requirement that creditors check a box on its bankruptcy ballot to indicate that they want to opt out of the releases. That requirement makes the releases nonconsensual because it binds some voters who didn’t provide a response, the US Trustee argued.

After Purdue, “it is clear that merely voting for a plan” doesn’t qualify as consent, the US Trustee said. The judge overseeing Invitae’s case hasn’t ruled on the proposed plan.

The US Trustee tried to apply the ruling slightly differently in the bankruptcy of SVB Financial Group, the former parent of Silicon Valley Bank. The company’s plan created nonconsensual releases for third parties when it added a group of senior noteholders to its list of released parties after other creditors had submitted their votes for the plan, the US Trustee said in an objection.

However, SVB Financial amended the provision to resolve the issue quickly, meaning a judge likely won’t consider the argument.

Which Shields Count?

At least two bankruptcy judges have considered how the Purdue opinion applies to temporary litigation shields—which are different from the permanent shields the Sacklers sought—for nonbankrupt entities. Companies that file for bankruptcy get automatic protection from lawsuits, but judges can extend that protection to affiliates and other related parties.

The Purdue ruling doesn’t prevent bankruptcy courts from temporarily blocking litigation against third parties, Judge Craig T. Goldblatt of the US Bankruptcy Court for the District of Delaware ruled this month. It does, however, affect how courts should analyze the likelihood of a company successfully reorganizing, which is a factor in the analysis for issuing temporary restraining orders for nonbankrupt entities, Goldblatt said. His ruling came in the bankruptcy of Parlement Technologies, the former parent of social media platform Parler.

Courts can no longer consider the chance that permanent third-party releases could be forced upon creditors when they decide whether to grant temporary ones, Goldblatt wrote. Instead, that calculation must now incorporate the odds of a debtor and its creditors negotiating consensual releases.

“Provided the injunction is only through the case and not permanent, it does not run afoul of Purdue,” bankruptcy attorney Megan Murray of Underwood Murray PA said in an email.

In the Northern District of Illinois, Judge Jacqueline P. Cox ruled that short-term litigation shields protecting Coast to Coast Leasing LLC’s principals and two affiliates are different from those rejected by the high court.

Unlike the Sacklers, the tractor and trailer financer’s principals and affiliates didn’t seek a permanent release of all claims against them. They’re only seeking a pause on certain litigation until Aug. 13, she noted.

Elsewhere, personal injury claimants have used the Purdue decision to challenge other kinds of liability shields. A bar order preventing scooter-riding claimants in Bird Global’s bankruptcy from suing municipalities where scooter accidents occurred amounts to a nonconsensual release, tort claimants argued.

Bird, however, said its plan is different from Purdue’s because it will pay the tort claims in full—a factor the Supreme Court didn’t address.

“The Supreme Court was very clear that it was a very narrow decision based on nonconsensual third party releases,” Langston said.

Bankruptcy Court Power

Though the Purdue decision was meant to be narrow, its rejection of a broad interpretation of bankruptcy court power could have lasting effects, University of Arkansas at Little Rock law professor Josh Silverstein said.

The high court rebuffed an expansive reading of Section 1123(b)(6) of the US Bankruptcy Code, which says that a bankruptcy plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.”

Purdue had argued that section conferred bankruptcy courts with the authority to grant third-party releases. The court rejected that argument, echoing previous skepticism of bankruptcy court authority.

“I would be shocked if lawyers didn’t use this argument to try to make other claims about how 1123(b)(6) is limited,” Silverstein said.

The high court’s ruling means that provision can only be used if related to the debtor, he said.

But Langston, who previously worked at Latham & Watkins and Kirkland & Ellis, said creditors may not prevail if they seek to use the 1123(b)(6) analysis to limit other creative moves by debtors.

“That’s a losing argument for a bankruptcy judge,” she said.

Courts are generally reluctant to stand in the way of what a company says is necessary for its reorganization, Langston said.

Third Circuit, Trump Judge

The US Court of Appeals for the Third Circuit appears also poised to shape the Purdue fallout, including related issues that the Supreme Court didn’t address, when it considers releases in two bankruptcy plans that aim to resolve litigation over widespread sex abuse.

An insurer in the Diocese of Camden, New Jersey’s case said the plan to compensate abuse claims should be reconsidered in light of Purdue. The circuit also asked the Boy Scouts of America for briefing on how Purdue affects third-party releases in its $2.5 billion sex abuse litigation settlement.

The Boy Scouts’ plan went into effect last year, meaning the appeals court will have to determine if Purdue can be applied to a deal that’s already been “substantially consummated.”

The Supreme Court’s reading of the 1123(b)(6) provision has also been used beyond bankruptcy—notably, in the high-profile criminal case accusing Trump of illegally keeping classified documents after he left the White House.

Cannon, the judge who dismissed the Trump documents case, cited the high court’s guidance that “catchall” phrases like 1123(b)(6) shouldn’t be interpreted broadly when she rejected special counsel rules that ultimately doomed the case.