Supreme Court’s Sackler Ruling Upends Bankruptcy Settlements

The US Supreme Court in Washington, DC.

(Bloomberg) -- Lawsuits over toxic products. Compensation for survivors of sexual abuse. Deals to shield executives of companies driven to bankruptcy.

In one fell swoop, the US Supreme Court upended how they may all play out.

The court’s 5-4 decision to scuttle Purdue Pharma LP’s $6 billion opioid settlement, ruling that it improperly protected the OxyContin maker’s billionaire owners, is set to have ripple effects that stretch far beyond the company and the victims of the drug crisis. It stands to change the way troubled organizations have used Chapter 11 for decades to survive onslaughts of lawsuits.

“Bankruptcy lawyers don’t prosecute holy wars; they make deals,” Jared Ellias, a professor at Harvard Law School, said after the ruling Thursday. “The dealmaking capacity of American society really took a blow today.”

The agreement with Purdue’s owners, members of the Sackler family, promised between $5.5 billion and $6 billion to compensate victims hurt by OxyContin and fund programs to fight opioid addiction. The deal was poised to end civil lawsuits against the Sacklers — a move that even the judge who approved the settlement in 2021 considered a “bitter result.”

Similar agreements have been used to end mass litigation over dangerous products and waves of sex abuse lawsuits brought against Catholic dioceses, the Boy Scouts of America and USA Gymnastics. The Supreme Court outlawed a provision of the Purdue settlement that would force all opioid victims to take the deal and give up potential claims against the Sacklers even if they would rather take their chances with a jury.

The high court’s decision drew criticism from supporters of the Sackler agreement, who expressed concern that eliminating such deals will result in higher legal bills that leave less money for victims. Opponents of the Purdue settlement said they are hopeful that the ruling will mean bigger payouts for victims while eliminating a tactic industries have used to unfairly cap liabilities.

Senator Elizabeth Warren, a Massachusetts Democrat who proposed legislation to ban such settlements, said Thursday that the Supreme Court closed a “bankruptcy loophole” and that “it’s time for the Sacklers to pay up.”

While the ramifications of the ruling won’t be fully known for months or even years, the contours of deals so often used to end mass litigation in major American crises stand to change. Bankruptcy courts are now less able “to be a social dumping ground that resolves disputes and ties them into nice little bows,” Ellias said.

‘Not Necessarily Better’

The Supreme Court ruling changes business in busy corporate bankruptcy hubs like Delaware and New York, where these agreements had been given the green light by lower federal courts. Other federal courts had long forbidden these types of settlements, which has prevented them from being used in Texas, California and other states.

Bankruptcy’s lax venue rules meant companies headquartered in California or Texas could get past their state’s rules by filing in Delaware or another place of their choosing. Thursday’s ruling creates a nationwide ban.

For plaintiffs in such litigation, the ruling is likely to result in victims obtaining less money for their injuries, said Anthony Casey, a law professor at the University of Chicago Law School.

“You might see deals, but they’re not necessarily better deals,” Casey said. “And there will be other cases where you just can’t get a deal.”

Purdue, states and other proponents of the Sackler accord have argued the deal provides victims with more money than they would obtain in a lawsuit against the family or their trusts, and that nothing in the agreement prevents state authorities from pursuing criminal charges. Sackler family members have denied wrongdoing.

Bankruptcy settlements often revolve around how much money victims will be paid, but have also been used to gain non-monetary concessions meant to ease suffering caused by wrongdoing. In 2022, dozens of people were permitted to confront members of the Sackler family who were involved in running Purdue, sharing in court traumatic experiences they and their loved ones endured as a result of opioid addiction.

The types of settlements struck down Thursday have been used in the past to strong-arm victims into agreeing to a bankruptcy deal they would otherwise have rejected, said Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill who wrote a book called Unjust Debts that is critical of these types of deals.

Ending these settlements may give victims greater leverage to obtain both financial and non-monetary concessions from bankrupt organizations that could now be more motivated to obtain consent from holdouts, Jacoby said. In the past, she said, bankruptcy lawyers and judges have responded with creative methods to adapt to thorny rulings by the Supreme Court — and this time is no different.

“This isn’t going to end mass tort bankruptcies,” she said. “It’s going to fuel another round of creativity.”

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