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The Federalist Society takes no position on particular legal or public policy issues. All
expressions of opinion are those of the speaker. Hello, and welcome to scot
Discust. I'm your host, Kyle hammernus On, behalf of the Faculty division
of the Federalist Society. We are here today to discuss Harrington versus Purdue Pharma,
which was argued before the Court on December fourth. It is my honor
to introduce our guests today, Professor Anthony Casey. Professor Casey is the Donald
M. From Professor of Law and Economics and faculty director at the Center of
Law and Finance at the University of Chicago. And with that, I'll hand
things over to our guests to discuss how the case got to the Supreme Court
and summarized the oral arguments. Great, thanks for having me. It's great
to be here to talk about this case. I've noted a few times that
This is, in my opinion, probably the most important, definitely the most
important case for the Supreme Court bankruptcy case in the last twenty years. Maybe
you can go even further and go back forty years. This is the most
potentially impactful bankruptcy case that the Supreme Court has had. So the background of
the case, I think people know, the general kind of facts have been
very highlighted in the media. So Perdue Pharma is the manufacturer of the opioid
painkiller oxy Cotton, which was developed in the ninety in the nineteen nineties,
and Perdue was at the time owned and operated controlled by the Sackler family,
and during the first decade or so fifteen years of the production of OxyContin,
they marketed the drug as a non addictive opioid painkiller. We now know that
was not only false but very false, and it was quite addictive painkiller.
And it came out in the two thousands that Purdue and the manager and the
Sacklers perhaps or not perhaps, but what almost certainly did know about the addictive
nature of the drug and marketed it nonetheless aggressively for things that it wasn't appropriate
for. In the late first in around two thousand and seven and eight.
A seven two thousand and eight litigation started becoming clear, be given clear there'd
be a flood of litigation as the information came out about the marketing that Purdue
it and engaged in. This started building up over time, and in twenty
nine nineteen it kind of hit its big point that that's where we are today.
So at that point, the Sacklers relinquished control of Purdue pharm of the
company and the new board was put in place. Filed for bankruptcy in September
of twenty nineteen, recognizing that the company was beyond hopelessly insolvent. And I
say that if you kind of just do the math, the claims against the
company add up to the trillions of dollars. And this was a company that
had, you know, estimated around a billion dollars in assets. So they
filed for bankruptcy in September of twenty nineteen. Now, one of the common
things that a debtor in bankruptcy has as an asset is its claims against those
who have taken money from it or mismanaged it. And so in Purdue,
one of the main things that the company had as a potential asset were the
claims against the Sacklers, and those claims would take the nature of you know,
fraudent transfer. So they were taking money out in that decade before the
filing, once they knew the litigation was coming, taking profit out or what
they thought what they called profit. Although the company was then insolved, and
so money that would have belonged to the creditors offshoring it. There's also allegations
of you know, kind of what I would call piercing the corporate veil,
allegations because they were deeply involved in what was going on with the company for
their own benefit. So these claims are an asset that the debtor has,
and the debtor wants to recover from the Sacklers. But the Sacklers are now
a difficult group to recover from. And I should notice a side everyone always
talks about Purdue the Sacklers. The Sacklers is a group of people about you
know, fifties individuals, because it's a large family with various trusts. The
Sacklers who were running the company is a handful of people, and so there's
different claims you would have against different recipients of the money that was coming out.
Now a lot of that money is sitting in all offshore trust accounts that
would be hard to reach in litigation. So the debtor is facing this kind
of problem of how do we kind of monetize this asset? Which are these
claims against, you know, our old shareholders and managers. Meanwhile, all
the various creditors have potential creditors of Purdue have their own potential claims against the
Sacklers for the same behavior. So if Purdue says we can sue the Sacklers
for a fraud and transfer a claimant to Purdue might also try to sue Sackler
the sacklerst for that or piercing the corporate veil claim or any fraud or embezzlement
or any type of claim you might think of under the sun. If the
debtor has the claim, a creditor might as well. So in the negotiation,
the Sacklers ultimately say, we're willing to pay money to settle these claims
with you, Purdue, the debtor, but we're not going to settle if
tomorrow. So after the settlement, the claimants are going to sue us for
the same exact thing. And that's where the real issue that comes up in
this case. Is is, how do you settle a case with this non
debtor, the Sacklers when they won't settle, or at least they claim they
won't settle unless they can also settle their claims with all of the potential claimants
for related claims. Now, if you get into the kind of weeds of
the case, the potential claimants are in the hundreds of thousands, and they
include all the opioid victims who were either the ones who became addicted to oxycotton
the families of those people. And then the other group is states. So
states bore a large cost because of the opioid epidemic in the US, and
so there was a group of state attorneys general who were bringing claims against purdueing
the Sacklers potentially going to bring claims against purdueing the Sackler related to the opioid
epidemic. So the debtor negotiates a deal. The debtor being perdue again now
it's separated, it's adverse to the sacklers at this point, negotiates a deal
with the Sacklers and says, we will give you a release of all the
claims you have against us in exchange for originally the deal was around four point
something billion dollars and in the plan of reorganization will include releases of all the
claims that are related that the claimants the opia victims also have against you.
And so these are called non debtor releases because it's a release of claims that
a opioid victim has against the sacklers. Sacklers aren't the debtor, so it's
a third party or non debtor release, and perdue, the debtor is going
to include these in its plan. Now, that can only be done if
there's a vote of all the claimants and an overwhelming majority supermajority agrees to it.
So in the plan and the bankruptcy they had a vote and of the
hundreds of thousand I think it's somewhere around six hundred thousand potential claims, one
hundred and ten thousand voted and of that one hundred and ten thousand, ninety
six ish percent maybe ninety five, I don't remember the exact number, but
in ninety five or six percent voted in favor of the settlement. So that
was enough under the bankruptcy court's view to approve the deal. So the bankruptcy
court had hearings lots of discovery. They have this one hundred and ten thousand
claimants vote and there's this three or four percent dissenting voters, and they put
in the plan, we will release all the claims the debtor and the claimants
have against the sacklers for related claims. And they narrowed it because originally they
wanted all claims and then it was it had to be a because of the
opioid and related to the behavior of the debtor. So that's the settlement that
gets put on the table and gets voted on and ultimately gets confirmed at the
bankruptcy court. And the reason the sacklers, you know, say they want
this one hundred percent or they won't settle. And the theoretical reason people talk
about releases is in global pieces. What you often hear is you can imagine
in a tourt case, Let's say one state holds out and doesn't settle.
Well, if the sacklers say we're going to pay four billion dollars, that
state could sue the next day and get a ten billion dollar judgment, And
it's pointless for the sacklers to settle if they're going to still face that ten
billion dollar judgment from Connecticut, Massachusetts, wherever. Now, if it's an
individual, it's not as likely to be a ten billion dollar But let's say
there's a thousand individuals who hold out. All you need is, you know,
twenty one hundred million dollar claims, and you're saying, wait, this
isn't worth it for us to settle. And so when you're thinking about the
mass towards settlements, it's the defendants will say, we really need everyone on
board. And part of it is because the variant is so high, the
ability of the the cases to go from zero to two billion in damages,
it's just you can't predict it. It's not like a contract plane where you
can put a hard cap on it. And again, when we're talking about
states, their claims can go way higher. And in this instance, the
potential claims were again the trillions of dollars. So the bankruptcy judge says,
this is okay, I approve, it confirms the plans. The district court
reverses, and the district court reverses despite the fact that and this is the
Southern District of New York, that the pretty clear precedent in the second Circuit
says that third party is now non consensual because we're talking about the dissenting creditors
third party nine DEBTA releases the second the Second Circuit in prior cases it said
they're okay if they meet a certain standard. The district court says they're never
okay, which again was surprising given that the precedent should have bound the district
court. Excuse me. So at that point it gets appealed to the Second
Circuit. But way bankruptcy court cases, you appeal to the district court than
the circuit court. Along the way, the parties are still negotiating, and
they're still trying to get more and more of the claimants on board, so
that the dissenting group is shrinking, and so the states go. At one
point it gets down to the nine, so there were only nine states left
that were still dissenting and not part of the deal. The dissenter's appeal to
the Second Circuit. The Second Circuit takes quite a long time to decide the
case, but ultimately the Second Circuit reverses the District Court, which is to
say, it affirms the bankruptcy Court's approval of the settlement, saying that non
debtor, non consential, non debtor releases are allowed in the Second Circuit with
a seven fact. They're balancing tests that make sure or is intended to make
sure that these were negotiated arms length. They're necessary to get a deal in
a reorganization, they're in the best interest of the creditors, and that the
release party here the sacklers are paying something that looks like a fair amount for
the releases. By this point, and this is the one of the key
things. By this point, when the Second Circuit opinion comes out, those
nine states are now zero. They've all joined the settlement, so they're no
longer objecting now. To get there, the number went from four billion,
four point some billion to the way you know, there's a formula, but
it's five point five to six billion is where it's at now. So we've
gone up, you know, one and a half to two billion dollars in
amount of settlement to get those nine states on board. Then the question is,
well, what's next. The US Trustee, they're the key player in
the appeal. The US Trustee acts as a watchdog of the bankruptcy process.
That's their way that they phrase their job. The statute says they're allowed to
raise issues and objections in bankruptcy proceedings. They don't have to have a claim.
They're just the US government's representative in every bankruptcy, every Chapter eleven bankruptcy
cases. So the US Trustee wants to go to the Supreme Court. They
file emotion because they're worried the plan is going to get put in place.
So they file a request for a stay to the U s Supreme Court,
and in it they say, you should stay the implementation of the plan until
you have time to decide on a cert petition that's coming. But then they
note, if you'd like, we invite you to consider this motion as a
petition for cert itself. Sodo mayor, because she's the one flag you know,
gets the stay appeal or stay request flags. The case goes to the
court, the court accepts the invitation, rants the cert that it now reads
this motion as a petition for cert and takes the case. So importantly,
at this point there's no credit or or claimant appealing. It's just the US
Trustee who doesn't have a claim or a stake here. So one argument that
is in the brief to the court is well, they don't even have standing.
They're not the ones who have a claim. Now two claimants, one
individual one municipality from Canada joined the arguments of the US trustee. So their
respondents in support of the petitioner is the way that they're designated in the case.
But you know, likely they if they had had time, they might
have become petitioners themselves. But everyone else is on board, and so that's
the way the case goes to the Supreme Court. Now, the question presented
to the Supreme Court is, and i'll paraphrase it's is simply does the bankruptcy
Code or I guess the way they say it is a bankruptcy court authorized to
allow non debtor, non consensual releases in a chapter eleven plan. And so
that's the way the question comes to the court. And the briefing I thought
was quite strong. In particular, I thought quite strong on the respondent,
the debtor side, and notably when I say the debtor side. So the
debtor files a brief, the sacklers file a brief, but the creditors committee,
because now they ninety seven percent want the deal, they file a brief.
So there's vict a group of ad hoc, an ad hoc group of
victims file a brief. All of these people are arguing in support of the
of the ability to grant these releases. Their argument is that there's a provision
the code that's eleven twenty three B six. Eleven twenty three B six says
that a plan of reorganization can include any provision that is appropriate and not inconsistent
with another provision of the Bankruptcy Code. And then eleven twenty nine. Section
eleven twenty nine at the Bankruptcy Code has a whole bunch of things that have
to be true for a plan to be confirmed. And so when it says
not inconsistent with other provisions, I read it as meaning go through eleven twenty
nine and say does this violate any of those So eleven twenty nine says plans
have to be proposed in good faith. They have to be fair and equitable,
they can't unfairly discriminate. They have to make creditors better off than they
would be in a liquidation that goes all these various rules. And so as
long as the provision doesn't as long as the thing you put in a plan
doesn't violate one of those rules or some or any other provision of the Bankruptcy
code, it can be included. That's the debtor's argument, and eleven twenty
three eleven twenty three B six the words seem to say that the government the
trustees, so the US trustee is the one appealing. They argue that provision
can't mean that. Now they say they're being textualist, but I think what
they're really doing is something slightly different than textualism, because they're saying you can't
read that text as broadly as it stated, because they you know, in
oral argument, they meant this, and a lot of the people will use
this argument, this famous phrase, because Congress doesn't hide elephants in mouseholes,
and they wouldn't have allowed a bankruptcy court or a distrect court in a bankruptcy
case to release and extinguish claims that a non debtor has against a non debtor
in such broad language. That doesn't mention that that's their argument. The debtor
says, no, this is a catch all phrase that includes anything not inconsistent.
And if you think about the structure of the code, the structure of
the code is all about collective action problems. It's about solving the problem of
holdouts, and these cases, this case and other similar cases exactly present a
problem of holdouts because you can get a settlement that gets money in the victim's
hands, and ninety eight seven six percent want this, but one state holds
out, and that's a way for them to extract value from everyone else because
you want to be the last one to agree. And that's exactly the problem
the Bankruptcy Code is trying to solve. So this isn't an elphant hiding in
a mousehole. This is bankruptcy policy and the code and the provision says you
can do this, and you need if you want to say this isn't allowed,
point to another provision in the code that says it isn't allowed. Government
says, well, maybe five point twenty four G, which says you can
do exactly this, and asbestos cases implies you can't do it. Here.
Probably with that argument is when five twenty four G was pasted, Congress said,
nothing in this provision should be read to tell you anything about what we
think about other injunctions and releases. So they really said, we are not
answering the question that this is back in the nineties, but they're saying when
this Purdue question comes up, this provision about asbestos cannot be read to tell
you the answer. We're just saying what the rule is for asbestos. There's
another provision of the code that defines discharge and the government says this release looks
like a discharge and doesn't meet that definition. The debtor says, the definition
of a discharge is just that a definition. This isn't a discharge. This
is something different that isn't a provision in conflict. So those are the arguments
that were briefed out. And you know, my prediction on the case when
I read the briefs was and I was, I think contrariing in this because
a lot of people said it would be nine to zero for the government,
and I said, first, there's no way this case is nine zero in
either direction. And second, when I had read the briefs, I thought
I would bet strongly that the debtor wins, that this is an affirmance and
you know, something like a six y three or seven to two. My
thought was sodo Mayor was given her jurisprudence in other civil procedure matters and the
fact that she flagged the case, she was likely to vote to reverse.
But I thought you'd get the middle of the court and then the textualless argument
I thought was very strong in favor of the debtor, so you'd get the
more pure textualists, if you will. All right, So that's all how
we got where we are yesterday. So yesterday's the oil arguments. The oil
argument was fascinating. I will say I I think it was a bit of
a mess. And what I mean by that is, I thought the justices
did a really good job of asking the questions that non bankruptcy specials should be
asking when thinking about this case. And they were clearly aware of the policy
questions and they wanted answers to those. They were aware of the statutory issue,
and they wanted answers on that they were aware. And they brought up
some other issues that I'll come back to in a few minutes, about constitutional
questions and other interpretation questions. But the lawyers and I, you know,
I say this not be too critical. You know, I've never been there.
It must be hard, but I don't. I felt like the lawyers
didn't any on any side quite simplify and crystallize the answers for the justices.
So at the end of the day, the justices I think were left with
a lot of questions about what the policies and what the statutory imperatives are,
and so the this has asked these really pointed questions, and I felt like
sometimes the lawyers were trying to move it back. You know, you hear
people talk about oral arguments, always stick to your core argument. I don't
think this was one of those cases. This is one of those cases where
you have a very technical issue that you need to explain to a generalist,
and I think they struggled a little with that. So I don't think it
ever came out quite how important the structure of bankruptcy policy is to you know,
and how collective action is the core of it all, and this is
consistent with that structure. I don't think that came out clearly. I don't
think that the interplay between eleven twenty three B six and eleven twenty nine came
out. I don't think that the question of discharge came up but was never
fully played out. The arguments spent a lot of time on the policy,
and the policy is super important, and that is to say what happens if
the court reverses and the lawyer for the creditors committee really focused on this,
and I think made the correct and true argument that this will blow up the
deal and mean that the victims don't recover, and it will do that for
a lot of bankruptcies. There was some pushback from the justices where they were
skeptical, and I don't think he alleviated their skepticism from those justices. So
I don't know if he could have, but I just didn't get the sense
that they were like, oh, now we see that this is really going
to be the end of the deal. And the government said, oh,
there might be a better deal on the table, and the debtor and the
Credits committee layers did a nice job of kind of saying maybe, but I
don't know where this is coming from, but they didn't make it clear,
which I think is clear that it's almost certainly not on the table, And
if you go beyond Purdue, what is certainly true is lots of other cases
that deals have not been reached or finalized. Those are you know, I
think the Boy Scouts cannot resolve their bankruptcy without these releases, and that didn't
come out fully in the argument. All right, So last thing I'll note
is the other issues that were kind of thrown out but not addressed. And
this was interesting to me. So the this was robertson Alito, we're asking
and Thomas, we're asking questions about. So Thomas was asking a question.
I don't think the party's understood what he was getting at, but it was
really an interesting question. He asked, why can why are you allowed to
have fully consensual releases? Because that's not in the code either, is what
he said to the government. If you say I need a provision for non
consensual releases, don't I need a provision for consensual releases? And I think
a non expert would say, oh yeah, Like why is he asking that
people can always settle and have consents? And that's kind of the government's response.
But that's not quite right because if you I mean, it's like a
class settlement. If you have a plan of reorganization that has releases to go
to a vote and it's an opt in or opt out vote of whether I
accept the release that has to be in the plan, and you're asking the
claimants to vote on that, and if you're not allowed to put that in
the plan, you're not allowed to put that in the plan and ask for
them to vote on it, and so I think he was getting at to
the government, your argument proves too much, because if you want me to
find a specific provision for everything you ask the creditors to vote on, you
are going to really shrink the scope of what can be in a plan.
And this is not an issue in this case, but it's an issue in
other cases. The bankruptcy judge is not an Article three judge, and so
if the bankruptcy judge approves a plan with consensual releases, it's like a magistrate
judge approving a consent to create. It really doesn't have that force of law
until the district court stamps its approval. And so I think Thomas was getting
at, like, where do I draw the line where I where the Bankruptcy
Code can and can't allow the court to do things? What has to be
specific and what can be implied. No one answered that question, so I
think can hear his mind. He was trying to play out that idea of
what what does it mean to say I can or can't put something in a
plan. Then Alito and Roberts asked, why don't we apply our major questions
doctor into this case? And that's the doctor that normally applies to administrative agencies.
But they were thinking, well, you know, this is a non
Article three judge, although I always push back on that argument, because bankruptcy
proceedings are Article three proceedings, they technically start in the district court get referred
to the bankruptcy judge. But he asked that Major Questions doctrine question, and
the government wouldn't bite on it at all. And then there was a later
and I think it was a leader who asked later the government said you should
say this statute doesn't allow releases because you want to avoid the constitutional arguments.
And so the question was, well, would you like to tell us what
your constitutional arguments are? And they didn't want to. And so what was
interesting to me there is there were three things that the conservative justices were asking
that the government just would not fight on. And part of it is,
I think policy about other cases. The government doesn't want to say, we're
advocating the Major Questions doctrine and we're advocating it for bankruptcy. They don't want
to go down an originalist argument that the bankruptcy Code is unconstitutional. They don't
want to get into Thomas's argument that maybe you can't include anything in a bankruptcy
plan if it's not specifically late. They didn't want to make any of those
argument and so those questions were just left hanging in the air. Now.
I don't know what to make of that, but I think back to there
was a case in June, a sil procedure case about personal jurisdiction, and
Alito had a concurrence where it's like, hey, I'm going to join this.
But I thought maybe there was a dormant commerce clause argument that no one
made. I'll invite that in future cases. So I wonder if we might
have an opinion from the conservative justice is like there might be a major questions
problem, there might be a constitutional problem. I don't know. No one
made it, so on this argument, I can join the debtor like I
don't like. Like that struck me as interesting that they were making those questions.
The government would answer, which relates to one side argument, which is
does the trustee have standing? I think the trustee does have standing to bring
this appeal. The debtor is argued, they don't. The trustee. The
statute says they can bring objections and be heard. You know, I think
that implies that they can appeal now, of course, ironically, if I
were the trustee and I made their arguments that they're making about eleven twenty three
B six, I would say that's hiding an elephant in a mousehole, like
they're allowed to appeal a case to the Supreme Court. Where does it ever
say that, No, it implies that right. They're not consistent on there.
The statute has to be extremely clear that you can include releases. But
hey, we the government can appeal when no one else is appealing a deal
that's going to get six billion dollars in the hands of six hundred thousand people
and none of those six hundred thousand people are appealing, Hey, we don't
need a specific statutory provision there. There's a bit of irony there. My
view of the statute is they do have the standing to appeal, and releases
are allowed because that's the way language works. You if there are things that
imply other things, we take, we take the implication and broad language is
intentionally wrought. But whether or not it's a good idea for the trustee to
have standing is interesting watching those arguments, because if it wasn't the government making
the argument, if it was one of the actual claimants who wanted to really
have their day in court. Oh, they would have. They would have
been like major questions doctrine, bankruptcy clauses unconstitutional. Yeah, you know,
they would have. They would have bit on all of those arguments because they
wouldn't have been constrained by the government's policy in other cases. In the end,
I don't think the major questions doctrine applies to bankruptcy or should it's an
Article three proceeding even though it's a not Article what they're not an Article three
judge. But the question is not whether the bankruptcy judge can do this,
it's whether the district court can do it. That's what the Second Circuit held.
I don't think the constitutional arguments go anywhere. Uh, and you know,
but ultimately, it would have been nice to have heard a part who
made those arguments, who you know, had skin in the game, if
you will, right, like they were like I want you know, someone
was like, I actually really want to win this case. They would have
made that argument. The government wouldn't touch it, which shows that maybe the
trustee shouldn't have standing, although again I think the statute allows them to have
standing. So that's where the case. That's my take on the oral argument.
You know, I'm often asked for predictions. I'll say the following as
I counted it. Barrett, Jackson and Soda Mayor were all very hostile to
the debtor's position, and I think they vote to reverse Cavanaugh Kagan, and
I think Thomas our affirm. You know again, Thomas asked those questions,
but I think it's your argument proofs too much about the consensual releases. So
it leaves us with Roberts, Alito, and Gorsic to try to figure out.
So, as I said, going in, I was a pretty strong
bet on affirm. Come out, I'm less certain because I could see Roberts
wanting to constrain the bankruptcy courts. I think Gorstich will. So I think
that the debtors need Roberts and Alito, and they might get them, they
might not. I guess I'm my weak prediction, am I. But I'm
being optimistic, and a bias is that the court does affirm. And the
reason, you know, kind of I say it's optimistic because if they reverse,
this up ends all of bankruptcy law, because these releases are key,
not only to mass towort bankruptcies. But to really all major complex Chapter eleven
bankruptcies requires some sort of non debtor release, and so if we can't do
those without consent, we start doing opt ins and opt outs, and we
start litigating that question, and it really makes things quite messy if they reverse.
Well, thank you so much, professor. This was great, and
I just want to say, you know, thank you for coming on and
telling us all about Harrington versus Purdue Pharma. Great. It was great to
be here. Thanks for having me. Thank you for listening to this episode
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