COURT: Purdue Pharma, US Trustee complete US Supreme Court arguments with a hot bench questioning Sacklers’ nonconsensual third-party releases
Purdue Pharma and the US Trustee today (4 December) completed arguments before the US Supreme Court on the third-party releases granted under a confirmed plan to the company’s owners, the Sackler family.
Though the company has secured bankruptcy court approval of its Chapter 11 plan, Purdue has not yet consummated the deal as it has moved through an appeals process at the District Court and Circuit Court levels before finally reaching the US Supreme Court.
In September 2021, now-retired Judge Robert Drain of the US Bankruptcy Court for the Southern District of New York confirmed the company’s plan of reorganization, centered on a USD 4.325bn contribution from the Sackler family to pay opioid claimants and combat the opioid crisis in exchange for third-party releases. The Sacklers later increased that contribution to USD 5.5bn to resolve a dispute with certain parties who appealed plan confirmation after the US District Court for the Southern District of New York found, on appeal, that the Bankruptcy Court lacked authority to grant the nonconsensual releases. That decision was subsequently overturned on appeal by the US Court of Appeals for the Second Circuit.
Specifically, in considering the issues and arguments raised today, the Supreme Court will decide whether the Bankruptcy Code gives bankruptcy courts the power to approve a release that extinguishes claims against third parties without the consent of those that hold the claims. The Supreme Court in August issued an order indicating it would take on the Purdue Pharma dispute.
The US Trustee’s arguments
The parties kicked off their arguments at 10am ET and completed the hearing just before 12pm ET. Deputy Solicitor General Curtis Gannon, representing US Trustee William Harrington – who has pursued the plan appeal to this level – went first, and the bulk of the time reserved for today went to him, as the petitioner.
In his opening comments, Gannon noted that the Sacklers, as Purdue’s owners, took billions from the company leading up to the bankruptcy filing in 2019 and then secured nonconsensual third-party releases under the plan, despite making little of their own assets available to the estate for the proceedings. Gannon said the releases allow them to benefit as if they filed for bankruptcy themselves and that this release might even go beyond what’s typically granted in that situation, as it does not include a carveout for fraud. He argued that the Supreme Court should find that nonconsensual third-party releases of non-debtors cannot be imposed.
Questions from the bench
Justice Clarence Thomas asked Gannon if the non-debtor third-party releases would be acceptable if they were consensual. Gannon said that would be a different story because then no one is being forced to release rights without their consent. In that situation, parties would not need the bankruptcy court to extinguish anyone’s rights because they agreed to relinquish them, he said.
“A consensual release doesn’t need the force of the Bankruptcy Code,” Gannon asserted.
Gannon said the relief Purdue Pharma is pursuing through the plan releases is inconsistent with multiple provisions in the Bankruptcy Code and granting them goes against the Code itself.
Justice Samuel Alito asked Gannon if this is the best deal that creditors and victims of the opioid crisis can expect. Gannon said he thinks the Sacklers believe they are at risk for litigation, which is why they’ve offered close to USD 6bn, but as a bankruptcy court watchdog, the US Trustee think it’s fair to say that the bankruptcy court cannot extend its authority in this way, no matter what the deal is.
Gannon pointed out that previously, the USD 4.325bn the Sacklers were initially set to provide was seen as the best possible offer, but it was later upped. He reiterated that the Bankruptcy Code cannot dispose of non-estate property and if the Sacklers want the benefits of the releases, they need full consent.
According to Gannon, the US Trustee’s position has typically been that creditors need to affirmatively opt in to granting releases for them to be deemed consensual, rather than requiring creditors to opt out if they do not want to grant them. However, he noted that Purdue’s releases did not even include an opt-out mechanism, which he said represents a due process problem.
“Here, there isn’t any form of consent at all,” he argued.
Though Purdue touted the 97% acceptance rate of the plan from the opioid creditors, Gannon pointed out that figure includes people who did not respond at all.
Justice Brett Kavanaugh pointed out that for more than 30 years, bankruptcy courts have been approving releases similar to the releases proposed by Purdue, going to debtors’ officers and directors. He also pointed out that the opioid victims, who make up the majority of the creditor body, overwhelmingly supported the deal, including the releases. For those reasons, Justice Kavanaugh wondered how the Supreme Court could find the releases “categorically” inappropriate.
Justice Elena Kagan also weighed in, similarly pointing out that creditors and victims – many of whom “have no love for the Sacklers” or even think the Sacklers are “the worst people in the world” – have given overwhelming support to the settlement that is embodied in the reorganization plan. She said despite “highfalutin” Bankruptcy Code principles Gannon referred to, the main principle of bankruptcy is to maximize value. So, by ruling against the releases, Justice Kagan said, it seems like the Supreme Court could be standing in the way despite creditor support.
Gannon said the US Trustee’s office does not believe it is appropriate to take away rights with regard to assets that are not part of the estate, and he argued that the Purdue releases went beyond typical director and officer releases. Further, Gannon said, the US Trustee’s office believes there could still ultimately be a deal without the nonconsensual releases and also feels that fraudulent conveyance causes of action against the Sacklers have value.
When asked by Chief Justice John Roberts Jr if Gannon believed there was a better deal available, Gannon responded that he could not say that but was instead emphasizing that the deal as is cannot be allowed to proceed with the nonconsensual releases.
In response to questions about whether a watchdog like the US Trustee has standing to seek to undo everything, Gannon said the authority to do so is granted by Congress and the Bankruptcy Code – the watchdog role ensures there is a disinterested party in the case.
Justice Kagan asked if there was any amount of consideration the Sacklers could provide that would change the US Trustee’s mind on the releases, but Gannon said it would only change things if more money led to all parties agreeing to consent to the releases.
Kavanaugh noted that Gannon’s rhetoric seemed to imply there was not enough money being provided as of now, and questioned whether the discovery process during bankruptcy would have helped determine if it’s an appropriate amount. Gannon said he took Kavanagh’s point as there was discovery and important information was made available, but that’s not the same as the Sacklers making all of their assets available.
Justice Kavanaugh also said it sounded like Gannon was saying the views of the opioid victims didn’t matter, but Gannon denied that, pointing out that other victims – who did not consent – feel differently than the majority.
Justice Amy Coney Barrett asked what effect the decision could have on other mass tort cases, if releases like this were not available to them. Gannon said multiple Catholic dioceses with mass tort claims have been able to confirm a plan without nonconsensual releases.
Upon questioning from Justice Ketanji Brown Jackson, Gannon confirmed that the Sacklers could still fund the money without getting releases from everyone but have conditioned it on that.
Purdue, UCC’s arguments
Gregory Garre of Latham & Watkins gave the arguments today on behalf of Purdue Pharma. He insisted that the Supreme Court should reject the argument that nonconsensual releases are categorically not authorized by the Bankruptcy Code. Because of the intertwined relationship of Purdue and the Sacklers, he said, people have filed identical claims against both, which is why it is appropriate that both are being released. He also noted, like multiple justices pointed out, that creditors overwhelmingly accepted the releases.
Garre asserted that releases like these have been used for over 30 years to resolve bankruptcies. And in this situation, he said, without the releases and the plan being consummated, creditors will not get any recoveries and the funds earmarked for opioid abatement programs will not go out.
“Creditors and victims will be left with nothing, and lives will literally be lost,” he said.
Justice Kagan interjected, noting that one of the US Trustee’s more convincing arguments is that the releases would give the Sacklers essentially a discharge without them having to put all of their assets on the table, and without a carveout for fraud.
Garre said they are not getting a discharge – they are getting releases that apply to prepetition claims. Further, Garre said the point of the case is to maximize value, which this would do, and the US Trustee’s position undermines that goal.
Justice Jackson pointed out that the situation is not only about the Sackers not putting all of their assets on the table, but actually taking assets out of Purdue ahead of the bankruptcy.
Garre said those transfers from the company went 40% to taxes and what’s left from the funds is largely going to the pot of money that would go to victims and opioid crisis abatements. He also noted that the Sacklers would not be easily able to file for bankruptcy on their own, because their assets are largely in trusts which are ineligible for that relief.
If the releases are not granted, the other option aside from the proposed reorganization plan would be to liquidate, Garre said. But Justice Jackson pointed out that is only because the Sacklers are requiring 100% acceptance of the releases.
Pratik Shah of Akin Gump Strauss Hauer & Feld, representing Purdue’s unsecured creditors committee (UCC), also spoke in favor of the plan and releases.
“The US Trustee does not speak for the victims of the opioid crisis,” he said.
To the contrary, Shah noted, the UCC was appointed to represent creditors, including the victims. He said creditors want these releases so they can avoid a “race to the courthouse” where some creditors get recoveries while others get nothing.
Shah said the US Trustee should not speculate about a potential deal that might not include nonconsensual releases – this case is about the victims and what they want, not the Sacklers, and this is the deal on the table.
“Without the releases, the plan will unravel; Chapter 7 liquidation will follow,” he argued, saying that victims of the opioid crisis will get nothing.
When questioned on that by Justice Sonia Sotomayor, he said the reason they would be left with nothing is because states with billions in claims could succeed in litigation, and “gobble up” all of the available funds if there is not a deal locked in place.
Protests outside the courthouse
Ahead of and after the hearing today, a group of protesters lined up with signs that included comments like “Shame on Sacklers” – a phrase which they also chanted – and T-shirts that said “no billionaire releases”. The protesters specifically disparaged Judge Drain’s rulings in the Chapter 11 case. Some of the signs had pictures of people the protesters lost to opioid addiction.
One of the protesters was Alexis Pleus, whose son died in 2014 after suffering from opioid addiction when he was prescribed Oxycontin in high school.
“We’re here to try to make sure that justice is finally served in terms of the Sackler family and the owners and makers of Oxycontin,” she told Debtwire this morning, noting that the entire nation was affected by this family’s actions.
Pleus called the releases being provided to the Sacklers a “special shield that’s only available for billionaires” to allow them to keep their money. She said she and the other protesters want the bankruptcy decision confirming the plan overturned because it was not justice.