Supreme Court blocks OxyContin bankruptcy plan

Office building at night

The former Purdue Pharma headquarters in Stamford, Conn. The justices threw out the company’s bankruptcy deal on Thursday. (Greg Patton via Shutterstock)

The Supreme Court on Thursday ruled that a multi-billion-dollar bankruptcy plan for Purdue Pharma, the maker of the opioid OxyContin, cannot move forward. By a vote of 5-4, the justices granted the federal government’s request to block the plan on the ground that it shields members of the Sackler family, which principally owns the company and controlled it until recently, from liability for opioid-related claims even though they did not declare bankruptcy.

Writing for the majority, Justice Neil Gorsuch contended that federal bankruptcy laws do not allow the plan to release the Sacklers from liability without the consent of creditors and opioid victims. Gorsuch acknowledged the government’s argument that its decision could cause the plan to “unravel” by exposing the Sacklers to a wide range of lawsuits. But such questions, Gorsuch concluded, are best left to Congress, rather than the courts.

In a lengthy dissent, Justice Brett Kavanaugh contended that, without releasing the Sacklers from liability, “there is no good reason to believe that any of the victims or state or local governments will ever recover anything.”

Purdue Pharma filed for bankruptcy in Sept. 2019, more than 20 years after it first introduced OxyContin to the market. The company aggressively marketed OxyContin for a wide array of pain and as being less susceptible to abuse, but the drug ultimately proved to be highly addictive. From 1999 to 2019, nearly a quarter-million people died from overdosing on prescription opioids. As a national public health crisis developed, thousands of lawsuits were brought against Purdue Pharma and the Sackler family, charging them with having deceptively marketed the drug.

Two years later, a bankruptcy court confirmed a plan that would remake Purdue Pharma as a nonprofit dedicated to addressing the public-health problems created by the opioid epidemic. Provisions in the plan shielded members of the Sackler family from civil liability for opioid-related claims. In exchange, family members – who had taken pre-tax distributions of $11 billion from the company in recent years – agreed to contribute up to $6 billion to fund the plan.

A federal district court in New York struck down the bankruptcy court’s ruling, but the U.S. Court of Appeals for the 2nd Circuit reinstated it. The appeals court pointed to a federal bankruptcy law providing that bankruptcy plans may “include any other appropriate provision not inconsistent with the applicable provisions of” the Bankruptcy Code.

The Department of Justice came to the Supreme Court last year, asking the justices to put the implementation of the bankruptcy plan on hold to give the Supreme Court time to take up its appeal. The justices granted that request and heard oral arguments in the case in December.

In a 20-page opinion joined by Justices Clarence Thomas, Samuel Alito, Amy Coney Barrett, and Ketanji Brown Jackson, Gorsuch first explained that the text of the federal bankruptcy law at the center of the case does not permit the kind of nonconsensual releases from liability that the Sacklers, as nondebtors, seek.

Purdue Pharma relies on a provision that outlines the contents of a bankruptcy reorganization plan, ending with a “catchall” provision indicating that a plan may “include any other appropriate provision not inconsistent with” other bankruptcy laws. But that “catchall” provision does not give bankruptcy courts broad powers, Gorsuch reasoned. Instead, he wrote, it must be interpreted as applying only to scenarios that are similar to the ones that precede it – all of which involve debtors. The “catchall” provision, Gorsuch wrote, “cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a nondebtor without the consent of affected nondebtor claimants.”

The broader context of the bankruptcy code also supports the conclusion that the “catchall” provision does not authorize the nonconsensual release of liability for nondebtors, Gorsuch continued. Among other things, he observed, bankruptcy laws do allow such releases in one specific circumstance: asbestos-related bankruptcies. The bankruptcy code’s grant of such authority for asbestos-related bankruptcies “makes it all the more unlikely” that the “catchall” provision can be interpreted to give bankruptcy courts the power to approve such releases in all scenarios.

In a 54-page dissent joined by Chief Justice John Roberts and Justices Sonia Sotomayor and Elena Kagan, Kavanaugh described Thursday’s ruling as “wrong on the law and devastating for more than 100,000 opioid victims and their families.”

Federal bankruptcy law, Kavanaugh explained, gives bankruptcy courts “broad discretion to approve ‘appropriate’ plan provisions.” It does so, he reasoned, to ensure that a bankrupt company’s assets are distributed fairly among its creditors – and, if necessary, its victims – rather than going to whoever can file a lawsuit first. And because a bankrupt company like Purdue often agrees to pay for claims against company officials, like the Sacklers, Kavanaugh continued, it makes sense to shield those officials from liability as part of the bankruptcy plan as well, particularly when the officials are willing to contribute money to settle the bankruptcy.

“Given the broad statutory text — ‘appropriate’ — and the history of bankruptcy practice approving non-debtor releases in mass-tort bankruptcies,” Kavanaugh concluded, “there is no good reason for the debilitating effects that the decision today imposes on the opioid victims in this case and on the bankruptcy system at large.”

Thursday’s decision sends the case back to the 2nd Circuit. In a statement, Purdue Pharma indicated that although it was disappointed with Thursday’s decision, it would continue to seek a settlement with its creditors.

This article was originally published at Howe on the Court.

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