Rite Aid, Asbestos Cases Hinge on Supreme Court Purdue Ruling

A pending US Supreme Court decision on Purdue Pharma LP’s litigation shield for its Sackler family owners threatens a widely used tool across the bankruptcy spectrum.

The result, no matter where the justices land, is likely to inform a large swath of Chapter 11 cases. Many of them rely on releases to protect parties with close ties to a bankrupt entity from future litigation related to the company’s conduct.

The appeal was brought by the Justice Department’s bankruptcy watchdog, the US Trustee, which called the dispute one of the “most controversial issues in Chapter 11 bankruptcy.”

At stake is whether the Supreme Court, which heard oral arguments on the matter Monday, reverses a Second Circuit opinion upholding releases for Purdue’s Sackler family owners, who have offered roughly $6 billion to a trust for opioid victims in exchange for protection against civil liability from suits related to opioid marketing. The Sacklers, who aren’t themselves in bankruptcy, would benefit from the so-called non-debtor, or third-party, releases.

A finding by the high court scaling back non-consensual third-party releases could affect any case in which a reorganization plan hasn’t yet been confirmed or is pending on appeal, said Ralph Brubaker, a bankruptcy professor at the University of Illinois College of Law.

The decision could also impact the trajectory of Catholic diocese cases, so-called Texas Two-Step cases still pending in the North Carolina bankruptcy courts, and even small business reorganizations, Brubaker said.

“In broad strokes, it’s any case that involves mass torts,” said bankruptcy attorney George Singer of Holland & Hart LLP. “Whatever it rules will be consequential.”

However, Chapter 11 cases with final orders on plans that include releases are likely safe. It would be too late to challenge the scope of a release, regardless of its lawfulness, if it’s embedded in “a final and non-appealable judgment,” Curtis E. Gannon, deputy solicitor general representing the US Trustee, told the Supreme Court in oral arguments Monday.

Below is an overview of notable cases that have relied on non-debtor releases that could be affected by the Supreme Court’s Purdue decision.

Boy Scouts

The Boy Scouts of America emerged from bankruptcy in April, but an amicus brief filed in the Purdue case by the youth organization’s attorneys suggests there’s some concern the high court’s decision could interfere with its reorganization plan.

The core transactions in the reorganization are already complete and “could not possibly be unwound at this stage,” the Boy Scouts said.

Attorneys representing the organization told the justices it’s “critically important” to clarify that however it rules, the Supreme Court’s opinion isn’t intended to disturb effective bankruptcy plans outside of Purdue.

The Boy Scouts bankruptcy plan includes third-party releases for its local councils, chartering organizations, and others that contributed to a $2.46 billion trust for abuse victims. More than 85% of survivor claimants voted in favor of the settlement plan, which was ultimately approved over the objection of others whose personal injury claims were extinguished.

Nonetheless, an appeal in the Boy Scouts case is still pending in the Third Circuit. A group of Boy Scouts sex abuse claimants in August asked the appeals court to pause the bankruptcy settlement plan following the Supreme Court’s decision to hear the Purdue challenge, but the request was rejected.

Catholic Dioceses

The US Conference of Catholic Bishops told the justices that as diocesan bankruptcies have unfolded across the country, non-consensual third-party releases “have proven critical to successful reorganizations.”

Bankruptcy proceedings for Catholic dioceses facing a flood of child sex abuse claims are proceeding in several states, including six in New York—where third-party non-consensual releases are allowed by the Second Circuit—and two in California, where such releases aren’t allowed by the Ninth Circuit.

The liability releases Catholic groups have won in bankruptcy “provide the only viable means for the Catholic infrastructure in many communities to survive what has become decades of mission-crippling litigation,” the conference said.

The bankruptcy of a single diocese is often used to shield related parishes, schools, and other jurisdictional church entities from litigation.

“If third-party releases were not allowed, everyone involved in diocesan bankruptcies would be worse off,” the conference said. “Claimant recoveries would suffer, and third-party parishes, schools, and charities would be driven into separate individual bankruptcies.”

To avoid an outcome that grants unbridled authority to bankruptcy judges or, conversely, completely upends non-consensual releases, the justices could fashion a narrow ruling that permits them in only rare circumstances, said Singer.

“It’s got to be a tailored facts and circumstances approach,” he said. “I can’t imagine it going any other way.”

Rite Aid

Rite Aid Corp. has also proposed a Chapter 11 plan that includes non-consensual third-party releases, calling them an “integral part” of its overall restructuring efforts and “an essential element of the negotiations among” itself and senior noteholders.

The bankrupt pharmacy chain is facing claims it wrongly sold addictive pain killers, and has been given until March 1 to complete its turnaround under a timeline approved by a federal judge.

Endo International Plc, another bankrupt corporation facing a host of opioid-related claims, could also be affected. An agreement the company put forth would create a trust to pay out claims and provide releases to non-bankrupt affiliates and their officers and directors as part of proposed $6 billion sale of the company to senior lenders.

Unsecured creditors who participate in the trust must agree to release their claims as part of the deal. But the US Trustee’s office has pushed back, saying that such non-consensual releases of non-debtors isn’t appropriate in any Chapter 11 case.

Highland Capital

The high court’s decision could also implicate a more narrow but commonly used type of release generally reserved to parties involved directly in a bankruptcy case.

The Supreme Court in January 2023 was asked to consider whether the US Court of Appeals for the Fifth Circuit interpreted bankruptcy law correctly in striking down a type of liability release, called an exculpation, that’s more narrow than those used in Purdue’s case. That limited release has become a point of contention in the 2021 bankruptcy plan for Highland Capital Management LP, a Dallas-based investment firm.

The appeal stems from Highland’s tussle with co-founder and former CEO James Dondero, who has claimed to be a creditor and sought to have a say in the firm’s Chapter 11 case even after he left the company.

On Monday, Justice Sonia Sotomayor asked the government how the court could write its opinion in Purdue so as not to affect the Highland case or any others related to exculpation.

An exculpation is a common type of release in bankruptcy plans meant to reduce liability for those who are involved in the bankruptcy case, such as creditor group members, estate fiduciaries, and their employees and consultants. They generally aim to stop renewed litigation over issues resolved in bankruptcy court.

The Solicitor General in October told the justices that while exculpations in the Highland case differ from Purdue’s releases, they should wait until Purdue is decided to “shed light” on the Highland case because both are third-party releases the bankruptcy code doesn’t authorize without claimants’ full consent.

Highland’s bankruptcy plan provided exculpations to board members and members of an unsecured creditors committee. Some outsiders—including advisers, certain non-bankrupt affiliates, and a trust for creditors’ benefit—also received exculpations.

Asbestos

Cancer victims caught up in asbestos-related bankruptcies asked the high court to steer clear of the one statute which does explicitly permit non-consensual third-party releases: those used in asbestos-related bankruptcies.

Section 524(g) of the bankruptcy code enables the creation of a trust and injunction channeling all current and future asbestos claims against the debtor into the trust for compensation.

The asbestos claimants told the justices in an amicus brief that the high court should “be wary of broad pronouncements on the law’s legality or scope.”

They also said 524(g) violates the Seventh Amendment’s guarantees of a right to a jury trial, and due process rights. Those constitutional issues, while not in question in Purdue’s case, could cut not only against third-party, non-consensual releases but against 524(g) itself.

Meanwhile, attorneys representing three businesses in bankruptcy related to asbestos liabilities, Aldrich Pump LLC, Murray Boiler LLC, and Bestwall LLC, told the justices that they should ignore the claimants’ concerns about 524(g)'s constitutionality and that such asbestos trusts are constitutional.

Attorney Deborah Kovsky-Apap of Troutman Pepper Hamilton Sanders LLP said that 524(g) is a useful model of how mass tort claims can be viewed and dealt with in bankruptcy.

It should make no difference about what specifically harmed mass tort claimants, she said. “There’s no other practical way to deal with this,” she said.