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Mass tort settlement utilizing bankruptcy reorganization in Purdue Pharma deal may be upended this week by Supreme Court

12/6/23

By: Kevin M. Ringel and Kevin G. Kenneally

On Monday, December 4, the Supreme Court conducted oral arguments in a case that could impact the bankruptcy framework frequently utilized by businesses facing mass tort litigation. The case, Harrington v. Purdue Pharmacy L.P, will decide whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by non-debtors against non-debtor third parties, without the claimants’ consent.

The Justice Department is attempting to block the $6 billion settlement, arguing that the proposed deal violates federal law by providing members of the Sackler family, who previously controlled Purdue, with civil immunity for opioid-related claims. The deal is supported by the company’s creditors, which include state and local governments and victims of the opioid crisis. The creditors argue that the proposed settlement is the result of years of negotiations, and no other option exists for creditors to receive any compensation. Purdue and the Sacklers currently face $40 trillion in lawsuits against them.

At stake here is a bankruptcy framework frequently utilized by defendants in mass tort cases to protect their business operations through reorganization while addressing settlement liabilities. After filing for Chapter 11 bankruptcy, an automatic stay is put in place which pauses all litigation arising before the filing date. Section 524(g) of the Bankruptcy Code provides a channeling injunction for any future claims arising out of the mass tort. This procedure funnels all future cases to the litigation trust so future claimants can still receive compensation without directly suing the reorganized company, thus protecting claims brought after the bankruptcy concludes.

In the Purdue case, the justices appeared split. Justice Brett Kavanaugh appeared to be the most supportive of Purdue’s position, pointing out that bankruptcy courts have approved releases like the one shielding the Sacklers from liability when the parties are officers or directors in the company and the company indemnifies them against liability, so that a claim against the company official is effectively a claim against the company. Justice Elena Kagan also seemed supportive of the deal, pointing out that support for the settlement among creditors and opioid victims was overwhelming. Justice Kagan also pointed out that a principle of bankruptcy law is the obligation to maximize the value of the bankruptcy estate, and a “huge majority” of the creditors and victims have determined that if the current plan is not confirmed, they will not receive any compensation.  

Businesses currently facing mass tort claims should closely follow the Purdue case, as it may place future restrictions on the use of the Bankruptcy Code to navigate through mass tort litigation and settlement.  

For more information, please contact Kevin Ringel (Kevin.Ringel@fmglaw.com), Kevin Kenneally (Kevin.Kenneally@fmglaw.com), or members of the FMG Mass Tort and Class Actions teams.