US Supreme Court rejects plan to shield Sacklers in Purdue bankruptcy

The US Supreme Court has invalidated a measure in Purdue Pharma’s bankruptcy that would shield members of the company’s founding Sackler family from future civil liability in exchange for a $6bn contribution, in a closely watched case involving the maker of the opioid OxyContin.

The Department of Justice had sought to invalidate the comprehensive liability releases granted to the Sacklers, ruling that they could not get the benefits of the bankruptcy code without filing for bankruptcy themselves, unless potential creditors consented. The Supreme Court on Thursday agreed in a 5-4 ruling in the case, Harrington vs Purdue Pharma.

“Nothing in present law authorises the Sackler discharge,” Neil Gorsuch wrote in the majority opinion, in which he was joined by Justices Clarence Thomas, Samuel Alito, Amy Coney Barrett and Ketanji Brown Jackson.

The decision has cataclysmic consequences for Purdue’s bankruptcy case, which hinged on a sweeping deal struck between opioid victims and the Sackler family. The court’s ruling upends that agreement, leaving creditors and their lawyers scrambling to figure out a path forward.

Purdue’s bankruptcy has been one of the biggest legal cases to spring from the US opioid crisis, which has led to more than 600,000 deaths since 1999, according to the Centers for Disease Control and Prevention.

Purdue, which filed for federal bankruptcy protection in 2019, struck a deal with tens of thousands of opioid victims as well as dozens of states and municipalities after lengthy negotiations.

According to its terms, the Sackler family would contribute up to $6bn to fund opioid abatement programmes and make payments to victims. But the family insisted that the deal should end any litigation against them.

The company had told the court that virtually every creditor had agreed to the deal and that if the settlement was upended, victim compensation would be delayed by years while Purdue and its founding family struck a new deal.

“Opioid victims and other future victims of mass torts will suffer greatly in the wake of today’s unfortunate and destabilising decision,” Justice Brett Kavanaugh wrote in a dissent in which he was joined by Chief Justice John Roberts and Justices Sonia Sotomayor and Elena Kagan. “Only Congress can fix the chaos that will now ensue.”

Family members of the late Mortimer and Raymond Sackler, who owned and operated Purdue, said in a statement that they remained “hopeful about reaching a resolution that provides substantial resources to help combat a complex public health crisis”.

Without the $6bn deal, they said, victims could pursue financial restitution through lawsuits but that route would involve “costly” and “chaotic legal proceedings in courtrooms across the country”.

In a separate statement, Purdue called the ruling “heart-crushing” because it invalidated a settlement supported by creditors ranging from states to hospitals that would have delivered billions of dollars for victim compensation and other efforts to address opioid addiction.

Purdue added that it would contact creditors “immediately”, to renew its pursuit of a resolution that would let it emerge from bankruptcy as a public benefit company.

US bankruptcy lawyers have used so-called non-debtor third-party releases as a bargaining chip in recent years, allowing such entities to extinguish their potential liabilities without entering bankruptcy themselves if they can meaningfully improve recoveries for creditors.

Companies such as Purdue and organisations like Boy Scouts of America that have faced product liability or misconduct lawsuits have turned to US bankruptcy courts to streamline settlement payments, but often in deals that rely on shielding individuals or other entities.

Purdue’s bankruptcy had been one of the most expensive cases in US bankruptcy history, costing more than $1bn in legal and administrative fees, according to Jayne Conroy and Paul Farrell, two lawyers leading consolidated civil litigation against the makers and distributors of prescription opioids.

“Those who have advocated using the bankruptcy court to resolve cases of this kind ignore the reality of the tremendous cost of the process, and communities have continued to suffer due to these costs and delays,” they said in a statement.

Bankruptcy judges had initially extended special powers granted to them by Congress in asbestos bankruptcies to grant releases for other kinds of companies, a practice the Supreme Court has now rejected.

“In each of these ways, the Sacklers seek to pay less than the [bankruptcy] code ordinarily requires and receive more than it normally permits,” Gorsuch wrote. “Contrary to the dissent’s suggestion, plan proponents cannot evade these limitations simply by rebranding their discharge a ‘release’.”

However, the high court’s majority stressed that its decision was a “narrow one” that did not call into question consensual third-party releases in bankruptcies where every creditor agrees to a restructuring plan that wipes future liability for alleged wrongdoers.

Purdue could now ask the Sacklers to increase their contribution to the settlement to secure approval from a handful of holdout creditors.

“There’s going to be chaos until parties figure out how to address the linchpin issue,” said Samir Parikh, a law professor at Wake Forest University, referring to the consequences of ending the practice of non-consensual releases in Chapter 11 bankruptcies.