June 27, 2024

Supreme Court Decides Harrington v. Purdue Pharma L.P.

On June 27, 2024, the U.S. Supreme Court decided Harrington v. Purdue Pharma L.P., No. 23-124, holding that the Bankruptcy Code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants.

In 2019, facing thousands of civil lawsuits alleging it deceptively marketed the prescription pain narcotic OxyContin, Purdue Pharma filed for Chapter 11 bankruptcy. In the years leading up to that bankruptcy filing, the Sackler family, which owned and controlled Purdue, had recognized that the mounting opioid litigation would eventually impact them directly and began a “milking” program, distributing to themselves as much as 70% of Purdue’s revenue each year. In total, Purdue’s distributions to the Sacklers amounted to approximately $11 billion, draining Purdue’s total assets by 75% and leaving it in a significantly weakened financial state.

In connection with Purdue’s bankruptcy, the Sacklers proposed to return $4.325 billion of the withdrawn funds in exchange for (1) a release voiding any current or future opioid-related claims against the family, including claims for fraud and willful misconduct, and (2) an injunction enjoining all claims against Sackler family members and entities under their control. Purdue included these terms in its proposed reorganization plan. In the plan, Purdue also proposed to reorganize as a “public benefit” company dedicated primarily to opioid education and abatement efforts and to provide payments to individual victims harmed by the company’s products ranging from $3,500 to $48,000. While fewer than 20% of Purdue’s creditors voted on the plan, the majority of those polled approved it. Thousands of opioid victims, however, objected, and the U.S. Trustee and several creditors and governmental entities joined their objections.

The bankruptcy court confirmed Purdue’s proposed plan, but the district court reversed; Purdue appealed to the Second Circuit. While the case was on appeal, the Sacklers agreed to contribute an additional $1.175 to $1.675 billion to Purdue’s bankruptcy estate, and, in exchange, the majority of the objecting governmental entities withdrew their objections, but the U.S. Trustee did not. Ultimately, the Second Circuit reversed the district court and revived the bankruptcy court’s order approving the (now-modified) reorganization plan. The U.S. Trustee sought — and was granted — a writ of certiorari.

The Supreme Court noted that in exchange for a discharge from liability for its debts, a debtor in bankruptcy “places virtually all its assets on the table for its creditors.” And, generally, a discharge operates only for the benefit of the debtor against its creditors and does not extend to claims creditors might hold against the debtor for fraud or willful and malicious injury. With these fundamental bankruptcy concepts in mind, the question, the Court explained, was whether a bankruptcy court may effectively extend to nondebtors the benefits of a Chapter 11 discharge that the Bankruptcy Code usually reserves for debtors.

In answer to that question, the Court held that the Bankruptcy Code does not afford bankruptcy courts the authority to extinguish claims held by nondebtors (here, opioid victims) against other nondebtors (here, the Sacklers) without the claimants’ consent. The Court observed that the Sacklers had not agreed to place anything approaching their full assets on the table for opioid victims, as a debtor in bankruptcy would have to do to obtain a discharge from liability. And the release approved by the bankruptcy court was broader than the Bankruptcy Code would permit for a debtor, extinguishing virtually all claims against the Sacklers for fraud, willful injury and even wrongful death, all without the consent of those who brought or might seek to bring such claims. Nothing in the text or history of the Bankruptcy Code, the Court determined, contemplates or authorizes that relief.

The Court emphasized, however, that its opinion does not call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan. And it declined to express any view on what qualifies as a consensual release or pass upon a plan that provides for the full satisfaction of claims against a third-party nondebtor.

Justice Gorsuch delivered the opinion of the Court, in which Justices Thomas, Alito, Barrett, and Jackson joined.

Justice Kavanaugh filed a dissenting opinion in which the Chief Justice and Justices Kagan and Sotomayor joined.

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