Supreme Court Seems Dubious About Purdue’s Nonconsensual, Nondebtor Releases

At the Purdue oral argument yesterday in the Supreme Court, the justices focused much of their attention on the word “appropriate” in Section 1123(b)(6) and whether it permits confirmation of a chapter 11 plan that includes nonconsensual releases of creditors’ direct claims against third parties who themselves are not in bankruptcy.

The justices were not unreceptive to the argument that creditors with claims related to opioid addiction may receive nothing if the Court reverses the Second Circuit and sets aside confirmation of Purdue’s chapter 11 plan. To read ABI’s report on the Second Circuit opinion, Purdue Pharma LP v. City of Grand Prairie (In re Purdue Pharma LP), 69 F.4th (2d Cir. May 30, 2023), click here.

Tough Sledding for the Government at First

Purdue was a manufacturer of opioids. The bankruptcy court confirmed a chapter 11 plan for Purdue that included nonconsensual releases of opioid claims against the company’s owners, officers and directors in return for the contribution of several billion dollars by members of the Sackler family. The district court reversed and set aside confirmation. Under longstanding authority in the circuit, the Second Circuit reversed the district court and reinstated confirmation.

On nondebtor releases, there is a split of circuits. The Fifth, Ninth and Tenth Circuits don’t permit them. Like the Second Circuit, others allow them.

The U.S. Trustee sought a stay pending appeal. The Second Circuit denied a stay, but the Supreme Court granted a stay. In fact, the Court took the government’s petition for a stay to be a petition for a writ of certiorari and granted review on August 10. To read ABI’s story, click here.

As the petitioner in the Supreme Court, the U.S. Trustee argued first and was represented in the Court by the U.S. Solicitor General.

The Solicitor General received a tough but not brutal reception from the justices. The government’s oral argument was based largely on the idea that the word “appropriate” in Section 1123(b)(6) does not allow nonconsensual releases of this type. The section says that a chapter 11 plan “may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.”

The government contended that the nonconsensual releases were the equivalent of a bankruptcy discharge that violated two fundamental concepts of bankruptcy law: (1) To receive a discharge, individuals, like members of the Sackler family, must submit all of their assets to the bankruptcy court; and (2) the Purdue plan gave releases to the Sacklers that would insulate them from claims that would be nondischargeable were they in bankruptcy themselves.

Several justices challenged the government’s opposition to the plan by alluding to how 97% of voting creditors were in favor of the plan. How or why could the government substitute its judgment for the wishes of creditors who stand to make recoveries under the plan but may never receive any compensation if confirmation is set aside?

The government received several “friendly” questions from the bench. For example, Justice Neil M. Gorsuch asked whether the releases might offend the Due Process Clause of the Fifth Amendment or the Seventh Amendment’s right to a jury trial. Justice Amy Coney Barrett wondered whether it would be preferable for Congress rather than the courts to craft global solutions for mass tort cases.

Justice Ketanji Brown Jackson asked the government whether there was any precedent under the former Bankruptcy Act to permit nonconsensual releases. The Solicitor General cited Callaway v. Benton, 336 U.S. 132 (1949), and said that the “courts were not doing this” under the Act.

Tough Sledding for Purdue

As respondents, counsel for Purdue and the official creditors’ committee argued second and third. They said that nonconsensual releases have been used successfully for 30 years and that the Court should not “disrupt longstanding practice.”

Questions from the bench to the debtor and the committee were more probing.

Justice Sonia Sotomayor said that one of the government’s “stronger arguments” was based on the idea that discharges are dispensed only when all of the “assets are on the table” and that affirming the Second Circuit might “subvert” one of the fundamental principles of bankruptcy law.

Much of the questioning by the justices focused on the word “appropriate” in Section 1123(b)(6). One justice said that a broad word like “appropriate” has “some limits” and should be read in the “statutory context” of the more narrow subsections (b)(1) through (b)(5).

Constitutionally speaking, a justice said that the releases raise “serious” due process and Seventh Amendment concerns and “defy” what the Court does with class actions.

The so-called major questions doctrine was also on the minds of some justices. Justice Brett M. Kavanaugh said that the Court has been “cautious” in giving broad authority to agencies on major questions. He also cited the Court’s reluctance to conclude that Congress put “elephants in mouse holes.”

Justice Barrett asked why Congress enacted Section 524(g) to permit nonconsensual releases in asbestos cases if the power already resided in Section 1123(b)(6).

Standing and Consensual Releases

The debtor and the committee challenged the U.S. Trustee’s standing. Indeed, finding that the U.S. Trustee lacked standing might be the debtor’s best hope of success.

The government said that the U.S. Trustee is the congressionally created “watchdog” over bankruptcy. In addition, the Solicitor General noted that an opioid creditor had been objecting in bankruptcy court throughout and was a petitioner in the Supreme Court.

Justice Clarence Thomas on several occasions asked why the government conceded that releases under a plan could be consensual. The questions suggested that Justice Thomas may be of the opinion that a plan may contain neither consensual nor nonconsensual releases.

Justice Sotomayor noted that a petition for certiorari is pending in the Supreme Court from the Fifth Circuit’s decision in In re Highland Cap. Mgmt., L.P., 48 F.4th 419 (5th Cir. July 28, 2023). She asked how the Court could craft an opinion disallowing nonconsensual releases without also wiping out exculpations. To read ABI’s report on Highland Capital, click here.

Curtis E. Gannon, the Deputy Solicitor General, argued on behalf of the U.S. Trustee as petitioner. Gregory G. Garre from the Washington, D.C., office of Latham & Watkins LLP argued for the debtor, while Pratik A. Shah from the Washington, D.C., office of Akin Gump Strauss Hauer & Feld LLP argued for the creditors’ committee. All are veteran appellate advocates in the Supreme Court.