Purdue Pharma ruling makes it more difficult for owners of bankrupt companies to sidestep liability
The Supreme Court upended a $6 billion opioid settlement that would have shielded members of the Sackler family from legal peril.
A new Supreme Court ruling that upended a $6 billion opioid settlement just made it more difficult for owners of any company to use federal bankruptcy proceedings to shield themselves from legal peril.
The dispute — Harrington v. Purdue — involved bankrupt OxyContin manufacturer Purdue Pharma and members of the Sackler family, the company's billionaire owners.
The main question in the case was whether or not Purdue’s bankruptcy proceedings could be used to protect the Sacklers’ personal fortunes from future opioid-related liabilities.
In the 5-4 decision, the court said that no provision within the US Bankruptcy Code permits the type of agreement that the Sacklers and the company tried to reach.
Purdue filed for bankruptcy protection in September 2019 under the pressure of thousands of lawsuits blaming it for fueling the opioid crisis, but none of the Sackler family members declared bankruptcy.
The Sacklers agreed to pay $6 billion and give up their ownership in exchange for effectively discharging them from facing OxyContin-related death and injury claims. Some claimants objected to these terms.
"In this case, the Sacklers have not filed for bankruptcy or placed all their assets on the table for distribution to creditors, yet they seek what essentially amounts to a discharge," Justice Neil Gorsuch wrote in the majority's opinion.
"No provision of the code authorizes that kind of relief."
Gorsuch highlighted in the court's opinion Purdue's central role in the US opioid crisis that contributed to the deaths of approximately 247,000 people between 1999 and 2019.
“Fearful that the litigation would eventually impact them directly, the Sacklers initiated a ‘milking program,’ withdrawing from Purdue approximately $11 billion — roughly 75% of the firm’s total assets — over the next decade,” the opinion stated.
Howard & Howard bankruptcy attorney Jim Morgan said the court's decision will impact all companies and their owners, whether those owners are corporate parents or equity holders.
"Those owners must now either file bankruptcy themselves as well or reach a negotiated settlement with every claimant," he said. "In effect, today’s decision gives more economic power to every claimant because each claimant now has hold-out power."
The ruling, he added, also makes it clear that the power of federal bankruptcy courts is not unlimited.
"This will likely cause bankruptcy courts to be more circumscribed in their approach to using their equitable powers," Morgan said.
Purdue was driven into bankruptcy largely due to hundreds of thousands of lawsuits that successfully alleged the company and its affiliates lied about the addictive nature of OxyContin.
In order to settle outstanding claims, Purdue, the Sacklers, and dozens of plaintiffs' lawyers reached a comprehensive settlement with most but not all of the remaining plaintiffs.
In exchange for a release from future OxyContin injury claims, the Sacklers agreed through a series of negotiations to pay $6 billion to victims of the drug and their families, as well as to state and local governments.
The multibillion-dollar fund was meant as compensation for both individual opioid-related deaths and injuries and to establish government aid programs to combat opioid addiction.
A majority of the litigants agreed to the settlement as a way to extract as much money as possible for their injuries, but not all consented to the Sacklers sidestepping personal liability for their claims.
During arguments, justices across the political spectrum questioned whether Congress, by passing bankruptcy laws, meant to deprive personal injury victims of their right to sue third parties, such as the Sacklers, who are not subject to the bankruptcy proceedings.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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