Supreme Court ruling against Purdue Pharma makes it harder to shield wealth in bankruptcy

A 5-4 Supreme Court held that settlement was inadequate. Its ruling threw the massive bankruptcy case against Purdue Pharma into doubt after years of court battles over the company’s role in the nation’s opioid epidemic.

More broadly, legal experts said, the ruling will force companies to reconsider their strategies for dealing with a mountain of lawsuits when they want immunity from litigation for related parties, including owners and executives accused of receiving the spoils of improper activities.

“It could potentially impact whether bankruptcy is seen as the best option for a company facing mass tort liabilities,” said Sarah Foss, global head of legal for Debtwire, a financial-services firm.

The decision also adds a fresh wrinkle to a controversial legal strategy, called the Texas two-step, in which companies use a Texas law to split into separate companies and shift a large volume of legal claims onto the newly created entity. Then, in the second step, the entity carrying the lawsuits files for bankruptcy and seeks to release its parent organization from all liability in exchange for a payout.

In perhaps the best-known case, Johnson & Johnson transferred some of its assets and all of the legal claims against it over asbestos-tainted talc powder into a new legal entity that filed for Chapter 11. Judges have twice dismissed its bankruptcy filings, and the litigation is ongoing.

Notably, the Supreme Court’s opinion on Purdue pointed to an exception in federal law involving asbestos cases that allows bankruptcy courts to approve a settlement even if not all claimants agree to it. Erik Haas, Johnson & Johnson’s worldwide vice president of litigation, said in a statement Thursday that the ruling “affirms the viability and validity” of the company’s bankruptcy plan, citing the exception for asbestos cases.

But Melissa Jacoby, a bankruptcy law professor at the University of North Carolina School at Chapel Hill, said the Purdue decision doesn’t necessarily strengthen the position of Johnson & Johnson or others engaging in the Texas two-step. The asbestos exception, she said, was meant to protect parties like insurers of a debtor, not companies that face direct allegations of wrongdoing.

Companies “will have to engage more intentionally and more proactively with those claimants that are most prone to wanting to opt out and try their cases against non-debtors,” said Patrick Hughes, a partner at Haynes Boone.

William Organek, a bankruptcy law professor at the City University of New York, said a key consideration will be how much money the healthy company, or non-debtor, agrees to extend to its lawsuit-laden subsidiary to pay a settlement.

“You need to have a really bulletproof funding agreement,” he said, adding that the outcome of the Purdue Pharma case might have been different if the Sacklers had offered “every dime” they had.

Writing for the majority, Justice Neil M. Gorsuch wrote that the Sacklers “have not agreed to place anything approaching their full assets on the table for opioid victims” but still seek a release from claims without the consent of some plaintiffs. “The Sacklers seek to pay less than the [bankruptcy] code ordinarily requires and receive more than it normally permits,” he wrote.

The Sacklers have said nearly half of the sum they extracted from Purdue Pharma went to paying taxes.

Justice Brett M. Kavanaugh, writing in dissent, warned that the decision “deprives the bankruptcy system of a longstanding and critical tool that has been used repeatedly to ensure fair and sizable recovery for victims — to repeat, recovery for victims —” in complex mass litigation.

The majority’s ruling scrambled the usual conservative-liberal divide, with four of the court’s conservative justices — Gorsuch, Clarence Thomas, Samuel Alito and Amy Coney Barrett — taking a position that has been popular among liberal lawmakers. Democratic legislators proposed a bill in 2021 aiming to prohibit broad legal releases to non-debtors like the Sacklers unless those with claims against them consented. The legislation did not advance out of committee.

Sen. Elizabeth Warren (D-Mass.), one of the bill’s sponsors, said in a statement this week that the Supreme Court “closed this bankruptcy loophole,” calling it a “first step toward accountability for the Sackler family.”

The Purdue precedent could affect some high-profile cases, such as that of the retail pharmacy chain Rite Aid, which filed for bankruptcy last year as it faced a barrage of opioid lawsuits and has asked for third-party immunity, and Corizon, a correctional health-care company that filed for bankruptcy amid lawsuits from prisoners.

A spokesperson for YesCare, the company that emerged with most of Corizon’s assets after splitting its liabilities into a separate company, declined to comment. Rite Aid didn’t respond to a request for comment.

It could also impact the Boy Scouts of America, which agreed to pay $2.5 billion to settle claims of sexual abuse in bankruptcy court, a deal that shields from future litigation insurance companies as well as schools, churches and community organizations involved with the nonprofit. A group of plaintiffs who didn’t agree to the settlement is appealing it, arguing that they are in the same position as claimants who objected to the settlement with Purdue Pharma.

“The Purdue case made clear sex-abuse victims in the Boy Scouts case can’t be forced to give up their claims,” said Gilion Dumas, an Oregon attorney representing 69 abuse victims who are appealing the settlement.

Scouting America said plaintiffs appealing the settlement make up 0.2 percent of those claiming abuse. The organization pointed to a passage in the Supreme Court’s majority opinion declining to address whether its finding justifies unwinding bankruptcy settlements that have been “substantially consummated.”

Anthony Casey, a professor at the University of Chicago Law School, said that he doesn’t see a likely impact to the Boy Scouts case but that similar cases — such as those involving abuse by Catholic churches — may find it harder to reach settlements.

“All of these church cases, if they haven’t wrapped up deals, they are going to have to start over,” Casey said.