Editor’s Note: On December 4, 2023, the Supreme Court heard oral argument in the Purdue Pharma bankruptcy. The Bankruptcy Roundtable has covered this important bankruptcy at length. We have included original works and featured existing works from academics and practitioners across the spectrum, from defenses by the attorneys for Purdue Pharma to some of its most vocal critics. We have also highlighted several of the most important court briefings on each side of the case. You can read our coverage here.
Today we bring you three additional items on this case: a summary of the oral argument written by John Quin (Harvard Law School JD ’24), and some thoughts on the argument by Professors Adam Levitin (Georgetown University Law Center) and Jonathan Lipson (Temple University School of Law). This will be our last post of the semester, and we look forward to resuming posts in January.
Oral Argument Summary
By John Quin (Harvard Law School JD ’24)
On Monday, December 4th, 2023, the legal battle surrounding Purdue Pharma’s bankruptcy plan reached the Supreme Court, with oral arguments made about the scope of nonconsensual third-party releases and its application within the Bankruptcy Code. The central point of contention was the interpretation of 11 U.S.C. § 1123(b)(6), a catchall provision in the Bankruptcy Code allowing for “any other appropriate provision not inconsistent with the applicable provisions of” the Bankruptcy Code to be included in a bankruptcy plan, and whether this provision permitted the use of nonconsensual third-party releases.
Deputy Solicitor General Curtis Gannon, representing the federal government, argued that the releases for the Sacklers exceeded the authorization of Section 1123(b)(6). He contended that nonconsensual third-party releases were not permitted by the Bankruptcy Code, as they extinguished property rights held by nonconsenting victims outside the bankruptcy estate. By contrast, Gregory Garre, representing Purdue Pharma, argued that the broad language of “any” and “appropriate” in the provision indicated flexibility, and third-party releases had been utilized in bankruptcy plans for nearly three decades.
Justice Brett Kavanaugh indicated support for Purdue’s position, emphasizing the term “appropriate” and citing decades of bankruptcy court practice approving similar releases. However, other justices, including Neil Gorsuch and Ketanji Brown Jackson, expressed skepticism. Justice Gorsuch suggested that the term “appropriate” had limits based on the Bankruptcy Code’s structure, historical practice, and constitutional concerns. Justice Thomas probed the difference between consensual third-party releases and nonconsensual third party-releases to ascertain why one might be statutorily or constitutionally permissible while the other is not, and asked questions about their corresponding legal implications.
Justice Jackson questioned Garre about the limits of Purdue’s position, asking if the Sacklers could condition their funding on anything not explicitly barred by the Bankruptcy Code. Garre responded that the plan’s provisions had to be “necessary,” emphasizing that without the releases, Purdue Pharma would have faced liquidation, and victims would have received nothing. However, Justice Ketanji Brown Jackson expressed some skepticism, hinting that the only reason why the release was “necessary” was because the Sackler family had extracted billions of dollars from Purdue Pharma over the years to begin with, leaving Purdue with fewer assets available for victims. Justice Amy Coney Barrett seemed to also appear skeptical of Purdue’s position, making the point that if the Sacklers themselves were to file for bankruptcy, they would not be shielded from liability for claims alleging fraud and willful misconduct, which this nonconsensual third-party release would grant. Aligning with Barrett’s questioning, Gorsuch noted that this release would grant relief unavailable to an individual bankrupt, while also noting that that the releases’ extinguishment of plaintiffs’ Seventh Amendment jury rights would be problematic.
The justices also evaluated arguments pertaining to the practicality of the bankruptcy plan. Pratik Shah, representing a committee of creditors arguing in favor of the plan and the releases, explained that the releases prevented victims from depleting Purdue’s assets through lawsuits against the Sacklers. Furthermore, he argued that it was actually the creditors and victims who had insisted on the release, as otherwise a value-destroying victim-against-victim race to the courthouse could result. Shah’s argument came into tension with an earlier practical contention made by Gannon. Gannon argued that rejecting the use of nonconsensual third-party releases (which would effectively kill the current plan) could give existing victims and creditors more leverage over the Sackler family, enabling them to potentially extract more than $6 billion from the Sacklers. He noted that the Sacklers once refused to contribute any more than $4.2 billion, but their contribution increased after the district court struck down the plan initially approved by the bankruptcy court.
Justice Elena Kagan expressed some skepticism regarding the government’s position, emphasizing overwhelming support for the plan among creditors and victims. Justice Kagan highlighted the fact that over 97% of victims supported the plan, and she questioned the required approval threshold that would be enough. The government debated this contention, explaining that more than half of individual victims did not cast a vote at all.
The justices also delved into the role of the U.S. Trustee, with some questioning the government’s right to challenge the plan. Justices Kavanaugh and Thomas expressed doubts about the U.S. Trustee’s standing. Justice Barrett characterized the U.S. Trustee as representing those creditors who did not represent themselves in the case. Finally, Chief Justice John Roberts also brought up the “major questions doctrine” and asked why the DOJ hadn’t relied on it or why it would not apply in this case to bar nonconsensual third-party releases absent clear, detailed, and explicit guidance from Congress.
The argument highlighted the complex legal and ethical considerations surrounding Purdue Pharma’s bankruptcy plan, with questioning by several justices about what could happen to future mass tort bankruptcies if releases were either permitted or prohibited. Overall, the Supreme Court appeared to be fairly conflicted regarding Purdue Pharma’s bankruptcy plan. The case will likely have far-reaching implications for future bankruptcy cases involving mass torts and third-party releases.
Oral Argument Thoughts 1
By Adam Levitin (Georgetown University Law Center)
Supreme Court augury from the entrails of oral argument is a fraught endeavor. I’ve seen advocates easily “win” oral argument in bankruptcy cases and then lose 9-0 in the opinion. My own less-than-confident prediction is that the Court will reverse the Second Circuit by a vote of 6-3, with the Chief Justice and Justices Thomas, Alito, Gorsuch, Barrett, and Jackson voting for reversal, and Justices Sotomayor, Kagan, and Kavanaugh voting to affirm.
Either way, the die is cast in Purdue Pharma. The real question is what will happen next in bankruptcy practice. I will hazard some predictions based on either possible outcome.
If the Court affirms the Second Circuit, we will see Chapter 11 become the forum for addressing mass torts, and we will see a great deal of concomitant abuse. For all the problems with the current mass tort system, bankruptcy is even less well equipped to handle these cases.
First, even if the Court says that non-debtor releases are for unusual and extraordinary cases, every lower court will view every debtor as unusual and extraordinary, and the Supreme Court’s yard will become a mile. There will not be any meaningful limits on nondebtor releases.
Second, we will also see lots more creative bankruptcy structuring like the Texas Two-Step. If a non-debtor can piggyback for a release, there’s no reason to put the op-co into bankruptcy. Instead, it will just piggyback on a shell debtor (which might merely schedule claims, even if none are filed) and benefit from the stay and then a release based on purposefully concocted intercompany indemnifications.
Third, trials—including bellwethers—will all but disappear in the mass tort system—there won’t be any trials or real fact discovery. At most there will be the quick and dirty of estimation trials. Instead, we will have a settlement system that is not based on past trial data and which will be heavily tilted in favor of defendants because of their ability to simply out wait plaintiffs who need recoveries to pay for medical care, etc.
Fourth, we will see a lot more abusive voting of “junk claims,” which has already been an issue in Boy Scouts and LTL. Debtors will stuff the bankruptcy ballot box through small no-look payments to disallowable claims in the inventory of friendly plaintiffs’ firms.
And this will be only the tip of the iceberg: the venue-shopping abuses that have plagued the bankruptcy system will go on steroids as mass tort cases get steered to those judges identified as most pliable by debtors, and that will, in turn, breed even further abuses, beyond those I can imagine.
What about reversal? Reversal won’t kill off the use of bankruptcy as a tool in the mass torts toolkit. What LTL’s bankruptcies have shown is that bankruptcy is a powerful tool for defendants even without a release: multiple years of litigation stays and increased settlement leverage against plaintiffs because of delay.
Bankruptcy lawyers will get more creative if non-consensual releases are prohibited. We will see all sorts of creativity in coercing “consent” so that releases will be consensual and therefore not covered by the Purdue prohibition. I expect this will lead to more “death trap” plans where consent is produced based on a threat of worse treatment. For example, I expect that Chapter 11 plans will start to be conditioned on consensual release thresholds, much like exit consent solicitations: the plan will only be effective if X% of the claims consent to a non-debtor release. But that conditionality will be coupled with an alternative: if X% of claims does not consent to a non-debtor release, then an alternative, worse plan will become effective. In other words, if you give us a release, we’ll pay you a bit more now, and otherwise we’ll let you sue us, but it’s going to take time before you ever see a penny. Likewise, I also expect to see some creativity about incorporating arbitration clauses into plans: you can sue us, but it will have to be in arbitration…. It’s not a release, but a forum selection clause, so where’s the problem?
In short, we’re going to see the same sort of process that happened after 203 N. LaSalle Street Partnership prohibited new value plans. We started to see other clever attempts to end-run absolute priority: gifting plans, limitations on credit bidding, rights offerings. We’ll see more of the same creativity here.
Regardless of the outcome in Purdue Pharma, bankruptcy will still be a deal-based process, and that deal-based process will continue to display pragmatism, creativity, and, sometimes, overreach.
Oral Argument Thoughts 2
By Jonathan Lipson (Temple University School of Law)
I have a different read of the tea leaves, but agree with many of Adam’s observations. I find it difficult to predict what Alito, Thomas, Sotomayor, Kagan, or Roberts will do based on their questions (by my count, Alito asked only one set of questions). Jackson and Gorsuch were fierce, and made pretty clear where they stood (reversal). I think Kavanaugh was clearest in support of affirmance.
The strongest (or perhaps loudest) claim at argument was Shah’s for the UCC that reversal necessarily results in liquidation (“Without the release, the plan will unravel, Chapter 7 liquidation will follow, and there will be no viable path to any victim recovery.”). That is possible, but improbable. He may come to regret his certainty (or, as Kagan said to laughter, “emphatic” tone). More probable in reversal is what actually happened earlier in this case, after the District Court reversed: notwithstanding the same dire prediction below, a new deal was negotiated, with a different price tag, and somewhat different dynamics. That said, as we saw in Jevic, reversal may result in liquidation, and the most that can be said is that Congress created a process—not a guarantee of a particular outcome.
I think both sides at argument pulled a surprising number of punches. I think the SG’s strongest argument is ultimately about separation of powers, and that Roberts was practically inviting that discussion. I think the Debtors have a stronger statutory argument than they seem to think, via the savings clause in the 1994 legislation (that’s why Wesley concurred, and did not dissent, in the 2nd Circuit opinion). But, this is not my case, so I am loathe to second-guess the litigators’ strategies.
To opponents of the Sackler Release, it may prove to be a small but important mercy that Ellen Isaacs joined as a petitioner. More than one Justice seemed to latch on to her status as an actual economic creditor (though Kagan’s question about a “nut-case holdout” was perhaps unintentionally callous, given the mental health challenges so many survivors face). To proponents, it may help that neither the SG nor Justice Sotomayor seems to understand the concededly murky distinction between direct and derivative claims (though perhaps that was cleared up by the end).
In any case, the claims of “overwhelming support” for the Sackler Release were somehow inconsistent with the very loud demonstrators outside who opposed them (perhaps these are some of Justice Barrett’s “invisible debtors” (though I think she meant “invisible creditors“)). Moreover, the Debtors’ claim that “lives literally will be lost” without the Sackler Release was especially offensive to those who have lost (and/or represented those who lost) loved ones.
There were also important, somewhat technical issues left ignored or addressed only weakly, including that it seems highly improbable that the Sacklers would have any form of claim against the Debtors, for indemnification or otherwise. See 502(d) & 502(e)(1)(B). Gannon (for the UST) made the point, but only reactively, and perhaps underplayed it. There was also the Chief Justice’s confusion about classification. And, of course, the claim that nonconsensual releases have been a feature of practice for 35 years is belied by the Debtors’ claim that they are rare—or the reality that there was a Circuit split. Moreover, and more subtly, I am aware of no case in which a nonconsensual release shielded individuals from liability for fraud or willful misconduct (that is, otherwise nondischargeable debts). As we point out in our brief [editor’s note: the third brief highlighted on this page], neither the Airadigm nor Dow Corning opinions went so far.
On the what’s-next-for-mass-tort-if-reversed-question: I think the “Singapore Sling” is added to the Texas Two-Step, and chapter 15 becomes the focal point.
Readers may have noticed that the LA Times and NY Times have pretty different takes. I don’t think that is evidence of sloppy reporting. I think this is a hard case. I asked a friend supporting the Petitioners a few weeks ago how they were feeling. “Pretty good,” they said. I thought about saying—but did not say—that Hillary Clinton probably felt pretty good, too, on November 6, 2016.
My co-podcaster, Charlotte Bismuth, persuaded me to do a “hot-take” shortly after the argument, which is here for anyone interested.