The legal wrangling over Purdue Pharma, L.P.’s bankruptcy plan has been splashed over the news. In Purdue Pharma’s case, the reorganization plan called for Purdue Pharma to become a non-profit organization, while the Sackler family 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. The United States Bankruptcy Trustee objected to Purdue Pharma’s bankruptcy plan. The Trustee argued that the Sackler family contribution was inadequate to address the volume of contemplated litigation and unfairly shields the alleged main culprits of the American opioid crisis.
On June 27, 2024, the Supreme Court upended decades of Bankruptcy practice by declaring that “non-consensual” third-party releases, such as those sought by the Sackler family, are not permitted under the Bankruptcy Code. The majority examined Section 1123(b) of the Bankruptcy Code to determine what a Trustee may include in the Chapter 11 Plan. Subsection (b)(6) of Section 1123 is a catchall that courts have long used to permit third-party releases. However, the Supreme Court reasoned that legislative catchalls are limited to the context of the surrounding statutory provisions; therefore, nothing in the surrounding statute permits third-party releases.
The Supreme Court went on to examine other provisions of the Bankruptcy Code, including Sections 523, 541, 1123, and 1141. These sections broadly deal with discharge. The Supreme Court held that because the Sackler family is not the Debtor, the Sackler family cannot benefit from a discharge.
The Supreme Court tried to couch its Opinion as a “narrow ruling.” The Supreme Court opined that “consensual” third-party releases were permissible and that previously discharged cases were not affected. It is hard to see lower courts taking this admonition as anything other than dicta. The Court took great pains in this Opinion to show that no aspect of the Bankruptcy Code supports what had been a widespread practice. Most complex bankruptcies see a small group of creditors withhold consent for a plan for various reasons. These include inadequacy of apportioned funds to the class, potential to extinguish class or individual lawsuits, and other reasons.
The Supreme Court’s Opinion opens the floodgates for complex litigation that precedes a bankruptcy filing to continue. The often-used method to provide orderly resolution to potentially hundreds or thousands of claims is now relegated to the dustbin of history. Bankruptcy Courts and practitioners will need to go back to the drawing board to prevent a tide of individual or class litigation from overwhelming the Nation’s federal and state courts.
