Sacklers’ Fate at Supreme Court Poised to Reshape Bankruptcy Law

The US Supreme Court’s decision to consider whether Purdue Pharma LP’s $6 billion opioid settlement improperly shields Sackler family members from liability tees up a ruling on one of the most debated corporate bankruptcy questions.

The justices will weigh whether the code permits releases of claims against people and entities that have connections to a bankrupt company but aren’t themselves bankrupt—without claimants’ consent.

The case gives the justices the chance to settle an important question that’s been debated for years in bankruptcy law, reshape how large mass tort cases proceed through Chapter 11, and potentially determine the effectiveness of the controversial use of the “Texas Two-Step” bankruptcy strategy.

“This is the most important bankruptcy case to go to the Supreme Court in a very long time—the stakes are enormous,” said David Skeel, a law professor at the University of Pennsylvania.

The court’s decision to review the case affects thousands of opioid victims by adding more delay to the distribution of settlement funds and putting billions of dollars at stake.

‘Big Implications’

The question of whether bankruptcy courts can discharge the debts of those who have not actually filed bankruptcy has divided appeals courts for more than 30 years, said Ralph Brubaker, a bankruptcy professor at the University of Illinois.

“The legality of these non-debtor discharges is one of the most important and consequential issues of bankruptcy law, from both a practical and a fundamental-justice perspective, to ever come before the Supreme Court,” Brubaker said.

The discharges have affected the rights of tens and even hundreds of thousands of claimants in mass tort cases, many of which are ongoing. They’ve been used in cases involving alleged Ponzi schemes. Such discharges also have been big sticking points in other mass torts, such as the Boy Scouts of America case and sex abuse lawsuits that have forced several Catholic dioceses into Chapter 11.

The court is likely to reverse the Second Circuit’s allowance of the releases for the Sacklers and hold that there is no authority for non-debtors to receive non-consensual releases in Chapter 11, said Adam Levitin, a Georgetown University law professor.

Such a ruling would potentially upend other larger mass tort cases, including one involving bankrupt Johnson & Johnson unit LTL Management LLC. Often, a corporate debtor’s insurers are the ones asking for the releases, Levitin noted.

“That means that non-debtors like the Sacklers or J&J won’t be able to piggyback on bankrupt affiliates to get out liability,” Levitin said.

Despite questions about their legality, the releases have become a tool for getting the most money possible to victims, Shuker & Dorris partner R. Scott Shuker said.

The justices Thursday paused the US Court of Appeals for the Second Circuit ruling, stopping the Purdue bankruptcy plan from going into effect until the court issues its opinion, probably sometime next year. Purdue’s Second Circuit win had already deepened a circuit split over the controversial releases.

The Sacklers, in exchange for liability releases from future opioid claims, agreed to pay up to $6 billion and give up their ownership of the company to resolve widespread litigation accusing them of contributing to the national opioid epidemic.

The high court’s decision to hear the case is a “very sad day for the victims,” said Edward Neiger, an ASK LLP co-managing partner who represents about 60,000 opioid victims in Purdue’s case. The Purdue plan was created by victims and creditors to help abate the opioid crisis, he said.

Texas Two-Step

If the Supreme Court rules that non-consensual, non-debtor releases aren’t permitted, they could end debates about the controversial “Texas Two-Step” bankruptcy technique, Skeel said. Without such releases, a lot of the benefit of Two-Steps would disappear, he said.

“This is why they all do it in the first place. Johnson & Johnson doesn’t do the Texas Two-Step unless they think they can get a release at the end of the game,” said Lindsey Simon, a professor at Emory University School of Law.

The exact implications for settled or ongoing cases that use such releases would be determined on a case-by-case basis, Norman N. Kinel, chair of Squire Patton Boggs (US) LLP’s Creditors’ Committee Practice said. But it’s unlikely to change prior rulings, particularly where plans have already been substantially consummated, he noted.

Attorneys and corporations could instead try to obtain consent for bankruptcy plans by offering some form of consideration to third parties who would be providing the releases, Kinel said.

“But practically speaking, they may just disappear and the chips will fall as they may,” Kinel said. “As the US Trustee has argued, parties who are the beneficiaries of such releases—such as the Sacklers—can file for bankruptcy themselves and obtain consensual releases in their own bankruptcy cases or a discharge if they meet the criteria for one.”

But Brubaker said prohibiting the releases won’t prevent large-scale settlement of claims against non-debtors in bankruptcy cases.

“It would simply mean that such settlements cannot be involuntarily imposed upon claimants,” Brubaker said. “And those non-debtors who wish to obtain a release of claims against them would have to offer claimants sufficient compensation to obtain their agreement to settle and release their claims.”

The case is William K. Harrington, United States Trustee, Region 2, Applicant vs. Purdue Pharma L.P., U.S., No. 23A87, order 8/10/23.