The US Supreme Court heard arguments Monday in a case that could decide if the billionaire Sackler family that controlled OxyContin maker Purdue Pharma can use bankruptcy to shield their personal fortunes from future opioid-related liabilities.
At the heart of the case is the power of federal bankruptcy courts to sign off on settlement agreements that absolve parties outside the bankruptcy of legal responsibility without the consent of litigants. The agreements, known as third-party releases, have been used in bankruptcy proceedings for decades to end mass tort litigation against insolvent companies — and to distribute their assets to injured victims.
In exchange for a release from such claims, the Sacklers agreed through a series of negotiations to pay $6 billion to opioid victims and their families, as well as to state and local governments. The funds are meant to compensate victims for opioid-related injuries and deaths and to help the governments establish aid programs to combat opioid addiction.
According to the US Trustee, the supermajority of personal injury claimants who voted yes to the settlement included less than 50% of those eligible to vote. Other claimants wished to opt out of the settlement agreement and retain their right to sue.
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 not subject to the bankruptcy proceedings.
“A fundamental bargain in bankruptcy law … is you get a discharge when you put all your assets on the table to be divided up among your creditors,” said Justice Elena Kagan, who was appointed by President Obama. “And I think everybody thinks that the Sacklers didn't come anywhere close to doing that.”
“It would be a kind of extraordinary thing if we gave the power to basically subvert this basic bargain and bankruptcy law,” Kagan added about giving the Sacklers a discharge from future liability.
On behalf of the US Trustee, which brought the case in its capacity as a watchdog over US bankruptcy proceedings, deputy solicitor general Curtis Gannon argued that the kind of third-party liability releases granted by the Purdue bankruptcy court should be prohibited because the Sacklers were not parties to the bankruptcy and never put their funds into the bankruptcy estate. Instead, Gannon said, they transferred roughly $11 billion from Purdue into offshore accounts they controlled.
Purdue’s attorney, Gregory Garre, argued that the deal was necessary to achieve the goal of bankruptcy: to maximize the estate and therefore maximize recoveries for the company’s creditors. Garre said 40% of the $11 billion transferred to the Sacklers’ offshore accounts went to pay taxes.
Justice Ketanji Brown Jackson said the Sacklers created the conditions that required the opioid litigants to have to negotiate for a return of Purdue's funds.
“It's only because the Sacklers have taken the money offshore, right?” the Biden-appointed justice said in response to Purdue’s claim that the settlement releasing the Sacklers was needed. “It is necessary to do this [release] because the Sacklers have taken the money and are not willing to give it back unless they have this condition.”
Justice Amy Coney-Barrett was also skeptical of Purdue’s argument.
“As Jackson rightly points out, the 97% of the money, after tax, that they're contributing is all money that they took out of the corporation,” said Coney-Barrett, who was appointed under President Trump.
On the other side of the argument, Justice Sonia Sotomayor, an Obama-appointed justice, expressed concern that outlawing the agreement could undermine the parties' freedom to contract as they see fit. She noted that a supermajority of claimants, which is required for mass tort settlements reached in bankruptcy, had agreed to the deal.
Under bankruptcy law, Sotomayor said, courts are supposed to maximize the estate and effectuate successful reorganizations.
"It seems as though the federal government is standing in the way of that, as against the huge, huge, huge majority of claimants who have decided that if this provision goes under, they're going to end up with nothing," Sotomayor said.
In an email to Yahoo Finance Purdue said, "We are pleased to have had the opportunity to demonstrate before the Supreme Court that Purdue’s Plan of Reorganization is solidly grounded in legal precedent. Our creditors, who insisted on the third-party releases at issue and overwhelmingly support our Plan, further underscored to the Court that this Plan is the only way to deliver billions of dollars toward lifesaving opioid abatement programs and victim compensation."
Purdue filed for bankruptcy protection in September 2019 under the pressure of thousands of lawsuits government and individual lawsuits. The suits blamed Purdue for fueling the opioid crisis.
At the time of the bankruptcy petition, the company agreed to relinquish control of the company and said the proceedings would provide $10 billion in value to its creditors.
In July 2021, the Sacklers reached an agreement with 15 states and local governments that had previously declined to settle. The deal ended roughly 3,000 lawsuits in exchange for the Sackler’s agreement to pay $4.3 billion and to make public roughly 33 million documents that had been kept secret under attorney-client privilege.
The high court agreed to take up the dispute in August after a federal trial court and a divided federal appeals court came to different rulings on whether the New York federal bankruptcy court that green-lighted the deal had authority to release the Sacker family members from opioid-related liabilities.
State attorneys general have also accused the Sacklers of transferring millions of dollars from the company leading up to the bankruptcy. They say the maneuver is an abuse of bankruptcy law that stripped Purdue of funds that could have been used to compensate opioid victims.
To date, none of the Sackler family members have filed for bankruptcy. In November 2020, Purdue pleaded guilty to three felony charges brought by the Justice Department for illegally marketing opioids.
The US Trustee argued that the liability release for the Sacklers “forcibly extinguished” the property rights of opioid litigants who did not wish to settle their claims. According to the Trustee, 3% of the claimants wished to opt out of the settlement.
Purdue’s lawyer said the net worth of the “small number” Sackler family members who served as directors and officers in the company in the US is roughly $1.2 billion.
A decision in the case is expected this summer.
This story was updated to add a statement from Purdue Pharma following Monday's Supreme Court hearing.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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