Supreme Court rejects the controversial Purdue bankruptcy plan

The Supreme Court on Thursday rejected a controversial bankruptcy deal in which the owners of Purdue Pharma sought to contribute up to $6 billion in exchange for immunity from further lawsuits. The ruling means the company and its creditors — numerous states, cities and counties, as well as Native American governments — will have to negotiate a new settlement.

The 5-4 decision was a rebuke to members of the Sackler family, who control the company and insisted on the legal shield in return for contributing to the settlement even though, as individuals, they did not file for bankruptcy. The immunity had been a huge sticking point and prevented the deal, which was first approved by a bankruptcy judge three years ago, from being finalized.

Purdue was accused of downplaying the risks of OxyContin and improperly persuading physicians to prescribe the addictive painkiller. And after facing a growing number of lawsuits filed by state and local governments seeking restitution from the fallout of the long-running opioid crisis, the company subsequently sought bankruptcy protection.

The immunity became a highly contentious issue, though. The U.S. Trustee, whose office oversees the administration of bankruptcy cases for the Department of Justice, had consistently objected to the proposed settlement over concerns that the legal shield was too broad. A U.S. District Court judge agreed, but was overturned by a federal appeals court, setting the stage for the Supreme Court decision.

In explaining its decision the court wrote that “the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11 (bankruptcy reorganization) effectively seeks to discharge claims against a non-debtor without the consent of affected claimants.”

Justice Neil Gorsuch authored the majority opinion, which was joined by Justices Clarence Thomas, Samuel Alito, Amy Coney Barrett, and Ketanji Brown Jackson. Justices Brett Kavanaugh, John Roberts, Sonia Sotomayor, and Elena Kagan dissented.

“The Sacklers have not filed for bankruptcy, nor have they placed virtually all their assets on the table for distribution to creditors. Yet, they seek an order discharging a broad sweep of present and future claims against them, including ones for fraud and willful injury. In all of these ways, the Sacklers seek to pay less than the code ordinarily requires and receive more than it normally permits,” Gorsuch wrote for the majority.

The families of the late Mortimer Sackler and the late Raymond Sackler, two of three brothers who turned Purdue into a marketing golaith, said they “remain hopeful about reaching a resolution that provides substantial resources to help combat a complex public health crisis. The unfortunate reality is that the alternative is costly and chaotic legal proceedings in courtrooms across the country. While we are confident that we would prevail in any future litigation given the profound misrepresentations about our families and the opioid crisis, we continue to believe that a swift negotiated agreement to provide billions of dollars for people and communities in need is the best way forward.”

The case has been closely watched for two key reasons.

For one, there was ongoing anger that members of the Sackler family may never be served with a lawsuit over OxyContin marketing. Other manufacturers also marketed opioids inappropriately, but Purdue was arguably the most aggressive in attempting to sway doctors and patients. As a result, Purdue became a poster child for a crisis that led to nearly 645,000 deaths, including from prescription and illicit opioids, from 1999 to 2021.

“This decision is a definitive rebuke of the Sackler family’s abuse of the bankruptcy code,” said Connecticut Attorney General William Tong. “The U.S. Supreme Court got it right — billionaire wrongdoers should not be allowed to shield blood money in bankruptcy court. In practical terms, this sends us back to bankruptcy court, where I expect we will re-enter mediation.”

The process of negotiating a new settlement is expected to be unpredictable, especially if the Sackler family members balk at new terms that are proposed.

“The race is on,” said Ryan Hampton, an activist who is recovering from opioid addiction and was co-chair of the unsecured creditors committee in the Purdue bankruptcy. “There’s an ability now to go after members of the Sackler family for individual liability. And it’s now up to individual state attorneys general and the creditors and the bankruptcy court to work as quickly as humanly possible to come up with new allowable plan. They’ve got to get dollars in the ground and not leave out victims who, at this point, need to come first.”

As for Purdue, the company released a statement saying the ruling is “heart-crushing because it invalidates a settlement supported by nearly all of our creditors – including states, local governments, personal injury victims, schools, and hospitals – that would have delivered billions of dollars for victim compensation, opioid crisis abatement, and overdose rescue and addiction treatment medicines.

“We will immediately reach back out to the same creditors who have already proven they can unite to forge a settlement in the public interest, and renew our pursuit of a resolution that delivers billions of dollars of value for opioid abatement and allows the company to emerge from bankruptcy as a public benefit company.”

The turn of events is likely to add to the frustration among the many people who have sought some form of resolution. In part, this reflects criticism that federal authorities failed to bring criminal charges against any individuals over OxyContin marketing. Purdue, however, did previously plead guilty to three felony criminal charges as part of an $8.3 billion settlement that also resolved civil charges against the company.

Indeed, Hampton said that the Department of Justice should now pursue criminal charges against members of the Sackler family, an issue that has angered many patient advocates and opioid victims. Federal authorities had previously hinted at the possibility, but never took action.

Under these circumstances, the timing for a resolution is unclear, which means that payouts could be delayed indefinitely, a warning the Sacklers issued when they pressed for immunity. This was one reason that several state attorneys general, who sought funds to pay for various programs, eventually agreed to a settlement that provided the legal shield.

“It’s a pretty narrow ruling and doesn’t give much guidance,” said Carl Tobias, a law professor at the University of Richmond, who specializes in product liability and mass torts litigation. “They sent it back but its not clear what the lower court is supposed to do. … Congress could if it wanted to rewrite the bankruptcy code to allow for this, but I don’t know if it would get through. So it’s not clear what will happen.”

Meanwhile, the attorneys for the committee representing victims in the opioid crisis maintained that the bankruptcy process has cost Purdue – and therefore, the creditors, including victims – more than $1 billion in legal and administrative fees.

The other reason the case drew attention reflected debate over the extent to which bankruptcy courts can offer legal immunity as envisioned in this instance.

In the dissenting opinion, Kavanaugh argued that the majority of the court was wrong to allow anger at the Sacklers to sway interpretations of the bankruptcy code. “To be sure, many Americans have deep hostility toward the Sacklers. But allowing that animosity to infect this bankruptcy case is entirely misdirected and counterproductive, and just piles even more injury onto the opioid victims,” he wrote.

The bankruptcy process had generated substantial controversy after court documents revealed some Sackler family members withdrew an estimated $10 billion from the company between 2008 and 2017, which the five justices in the majority called a “milking program.” More than half of that money was either invested in offshore companies owned by the Sacklers or deposited into trusts that could not be reached in bankruptcy and offshore locations. About $4.6 billion was used to pay pass-through taxes.

This raised a scenario suggesting the Sacklers withdrew so much money from the company that Purdue was left with little choice but to accept the settlement offer in exchange for immunity from opioid lawsuits. The Sackler family members consistently denied abusing the system, while Purdue and a creditor committee argued that victims would get less money if the litigation continued.

Last year, the U.S. Court of Appeals for the 2nd Circuit disagreed that a shield was an issue and ruled that a U.S. bankruptcy court judge had been correct in approving the immunity. Moreover, the appeals court said it was “equitable and appropriate under the specific factual circumstances of this case” to protect the Sackler family members from future lawsuits. The U.S. Trustee continued to disagree and sought a Supreme Court review.

The bankruptcy plan had also been criticized over hurdles facing individuals or surviving family members whose loved ones were harmed. A $48,000 payout was usually mentioned, but these people faced a sizable amount of paperwork that hinged on obtaining personal medical records. Even then, applications could have been challenged and much smaller sums might have been accepted.

Going forward, the company is expected to file a request with the bankruptcy court for a 60-day mediation period in hopes of reaching a new settlement, according to Matthew Gold, a partner at the Kleinberg Kaplan law firm that represents the state of Washington. He added the move was discussed by all of the parties involved in the case during the run up to the Supreme Court decision.

Whether a new deal can be reached, though, is highly uncertain, he explained. Among the issues to be resolved, for example, is the extent to which members of the Sackler family might agree to exposure from lawsuits, perhaps on a limited basis. There are also questions about payments to account for the years of settlement negotiations during which the Sacklers did not pay anything, and how any payments as part of a new settlement would be allocated.

“There’s very little precedent for this exact type of situation,” said Gold. “And it’s certainly ambitious. But the prospect of having complicated issues worked through by a lot of parties is the bankruptcy process writ large. The parties involved are used to negotiating complicated issues under a time constraint. And we’re not starting from scratch.”