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June 28, 2024

SCOTUS Rejects Proposed Release of Sackler Family From Purdue Pharma Chapter 11 Plan as Not Permitted by the Bankruptcy Code

In Harrington v. Purdue Pharma L.P.,i the Supreme Court of the United States (SCOTUS) reversed the US Court of Appeals for the Second Circuit’s decision and held that the US Bankruptcy Code does not permit a Chapter 11 plan of reorganization to release a nondebtor (someone who has not filed bankruptcy) from a claim unless the claimant has consented. Purdue Pharma—who filed for bankruptcy protection in 2019—proposed a Chapter 11 plan that would release the Sackler family (the owners of Purdue Pharma) from all present and future opioid-related claims in exchange for the Sackler family’s contribution to the plan of reorganization of approximately $5.5 billion of the $11 billion the Sacklers “milked” from Purdue Pharma since the start of the opioid crisis. As a result of the SCOTUS ruling, the current Purdue Pharma Chapter 11 plan of reorganization cannot be approved.

It is now law in all Chapter 11 bankruptcy cases that awarding releases of claims to nondebtors without the consent of the claim holder are prohibited by the US Bankruptcy Code. This will have an immediate and powerful impact in pending mass tort Chapter 11 cases around the country. For example, in the Norwich Diocese Chapter 11 case pending in the United States Bankruptcy Court in Hartford, Connecticut, within hours of the release of the Purdue Pharma opinion, the Diocese withdrew its Chapter 11 plan, which contained nonconsensual nondebtor releases, and replaced it with an amended Chapter 11 plan that did not contain nondebtor releases.

The majority opinion in Purdue Pharma made clear that it is up to US Congress, not the courts, to pass a law that would allow a nondebtor to obtain a nonconsensual release under a Chapter 11 plan. In terms of what happens next in the Purdue Pharma Chapter 11 case, the two most likely options are either: 

  1. holders of claims against the Sackler family—either in a class action or individually—race to pursue judgment and collection against the Sackler family, or 
  2. the Sackler family offers to contribute enough additional funds, resulting in opioid claimants consenting to the requested releases

Although many opioid victims opposed a release of the Sackler family from the proposed bankruptcy plan, many others were hoping that the plan would be approved, thereby allowing billions of dollars to flow to victims and efforts to combat the opioid crisis. The dissenting justices in Purdue Pharma viewed the Sackler settlement embodied in the Chapter 11 plan as a complex deal that was difficult to obtain and would provide some measure of relief to victims. The majority, however, concluded that the Sackler release was simply not permissible under the US Bankruptcy Code no matter the benefits, because the “Sacklers have not filed bankruptcy and have not placed virtually all their assets on the table for distribution to creditors.”ii

Another interesting aspect of the SCOTUS ruling in Purdue Pharma was the atypical mix of justices joining in the majority and dissent. Justice Gorsuch wrote the opinion and was joined by Justices Thomas, Alito, Barrett, and Jackson, while Justice Kavanaugh authored the dissenting opinion, and was joined by Chief Justice Roberts and Justices Sotomayor and Kagan. The unusual mix of justices is emblematic of the difficult and immediately consequential decision SCOTUS faced in Purdue Pharma.

The Thought Leadership Committee of Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts and blogs on an ongoing basis to keep clients, colleagues, and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the author, Ilan Markus, partner, at imarkus@barclaydamon.com; Janice Grubin or Jeff Dove, Restructuring, Bankruptcy & Creditors’ Rights Practices Area co-chairs, at jgrubin@barclaydamon.com and jdove@barclaydamon.com; or Robert Wonneberger, Thought Leadership Committee chair, at rwonneberger@barclaydamon.com.
                                                                                              

iHarrington, United States Trustee, Region 2 v. Purdue Pharma L.P., et al.,i 603 U.S. ___ (2024).
iiSee Purdue Pharma, at p. 7.

 

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