The legal wrangling over Purdue Pharma, L.P.’s bankruptcy plan has been splashed over the news. The plan would see Purdue Pharma become a non-profit organization, and the Sackler family that had owned the company would contribute $6 billion to a separate settlement fund. In exchange, the Sackler family would shield itself from liability over pending and future opioid-crisis lawsuits. But can a bankruptcy plan properly require the release of claims against third parties?

The United States Bankruptcy Trustee’s answer was no. The Trustee objected to Purdue Pharma’s bankruptcy plan, arguing that the Sackler family contribution would be inadequate to address the volume of contemplated litigation and would unfairly shield the alleged main culprits of the American opioid crisis. The Bankruptcy Court initially approved the bankruptcy plan; the District Court reversed. The Second Circuit Court of Appeals found that the Bankruptcy Code and circuit precedent permitted the release of claims against the Sackler Family.

The Supreme Court heard arguments about the legality of Purdue Pharma’s plan on December 4, 2023. The Justices appeared deeply conflicted at oral argument. A potential majority signaled that public policy should favor confirmation of the bankruptcy plan. Justice Kagan observed that all 50 states’ attorneys general and a majority of creditors approve the plan. Justice Kagan appeared “troubled” that the federal government wanted to “blow up” Purdue Pharma’s bankruptcy plan. Both Justice Kagan and Justice Kavanaugh cited Respondents’ arguments that this is the best, and only, deal available.

Industry groups, such as the American Bankruptcy Institute, had likewise argued in amicus briefs that invalidating similar reorganization plans would upend complex bankruptcies. Beginning with the Johns-Mansfield asbestos bankruptcy, many courts have permitted third-party releases in bankruptcy plans, including plans approved in recent years for the Boy Scouts of America and Catholic Church.

In contrast, Justices Gorsuch and Jackson indicated that the plain meaning of the Bankruptcy Code seemed to exclude third parties from the reach of bankruptcy courts. If Congress had intended for the Code to reach beyond the debtors and creditors before it, Congress would have said so.

Given the complexity of the issue and the apparent split among the Justices, the Supreme Court’s decision in Purdue Pharma may not come until the end of June.