Bankruptcy proceedings are sometimes used to limit corporations’ exposure to civil liability—stopping lawsuits in their tracks, and allowing vast numbers of plaintiffs just pennies on the dollar in their quest to hold corporate wrongdoers to account. This is not a new phenomenon. Indeed, asbestos producers (among others) have for years looked to the nation’s bankruptcy courts as a means of bundling underlying tort suits together, imposing limited recoveries on the corporation’s alleged victims, and allowing the “reorganized” corporation to resume operations free and clear of asbestos claims.
Traditionally, a corporate defendant’s eligibility for bankruptcy protection has been the same basic standard that applies to all persons and entities in bankruptcy: the fact that they owe more than they have, which is to say that their actual and potential liabilities exceed their assets. But are there circumstances where the wealthy and powerful should be afforded bankruptcy protection even when they aren’t bankrupt?
That’s the question posed in a massive bankruptcy case called Harrington v. Purdue Pharma, now pending before the United States Supreme Court.
Harrington is a creature of the opioid crisis. Nearly 30 years ago, Purdue Pharma began promoting its patented painkiller, OxyContin, as more or less non-addictive. But as is now universally recognized, the drug proved to be highly addictive. The result was an unprecedented public health crisis and, ultimately, thousands of lawsuits seeking trillions of dollars against Purdue Pharma and the Sackler family, who owned the lion’s share of the company throughout most of the drug’s history. These lawsuits allege that the Sacklers marketed OxyContin deceptively.
In response to this tidal wave of potential liabilities, Purdue Pharma filed for bankruptcy in 2019. Significantly, the Sacklers themselves have never filed for bankruptcy, and it is believed that the family retains billions in personal wealth—much of it derived from the sale of OxyContin. In response to Purdue Pharma’s filing, a bankruptcy court in New York put lawsuits against both the company and the Sackler family on hold.
In September 2021, the bankruptcy court confirmed a plan to reorganize Purdue Pharma as a nonprofit devoted to addressing the opioid crisis. Members of the Sackler family, who had taken pre-tax distributions of $11 billion from Purdue Pharma in the years leading up to the bankruptcy filing, agreed to contribute up to $6 billion to the bankruptcy plan. Under the plan’s terms, those funds would go to individual plaintiffs in the underlying tort suits, as well as to state and city governments and other entities. In exchange for the funds, the Sacklers would be shielded from future civil liability for opioid-related claims.
A federal district court struck down the bankruptcy court’s ruling, but a federal appeals court reinstated it. Now the Supreme Court will have the final word on whether non-bankrupt persons and entities, like the Sacklers here, can secure bankruptcy protection in so-called “mass tort” cases like Harrington.
Purdue Pharma argues that the plan is in the public interest because, through the bankruptcy system’s unique power to centralize relief, the bankruptcy courts can marshal “life-saving” funds on an urgent basis. Instead of waiting for tort cases to wind their way through state courts, yielding uncertain and potentially inconsistent results, the proposed bankruptcy plan can get money to victims quickly. Opponents of the plan point out that the Sacklers would not have agreed to a $6 billion contribution had they not feared that the traditional tort system would ultimately require them to pay more; and if that is the case, shouldn’t victims have an opportunity to prove that they are indeed owed more? And doesn’t due process entitle victims to their day in court? Those who defend the Sacklers’ plan to contribute $6 billion dollars must necessarily adopt the position that the Sacklers are acting in the interest of the public, and have chosen to contribute such a sum out of a desire to further public health, or some other noble cause in place of their desire to spend a smaller sum than they might owe. It strains belief to suggest that the family who so profitably oversaw the public health catastrophe known as the opioid crisis has undergone a change of heart. And regardless, the legal objection to this plan remains: why should the Sacklers be allowed to use bankruptcy to protect additional assets when they are not bankrupt? This is a question that proponents of the Sacklers’ proposed plan will likely struggle to answer directly, as the plan flies in the face of the core principles of bankruptcy law.
The plan’s opponents also argue that allowing a bankruptcy court to put a permanent end to thousands of lawsuits in scores of state and federal courts places too much power in the hands of a single judge. Allowing such a culling of potential suits may be appealing to state and federal judges who can count on less populous dockets, but it is likely less appealing to those whose lives have been touched by the opioid crisis and are rightfully seeking compensation for their losses in court. Finally, the plan’s opponents say that by neatly packaging the matter in a bankruptcy plan, the bankruptcy court allows wrongdoers to bypass the mechanisms that are used in tort cases to discover the truth; and this means that the information typically developed in such cases—information that might be used to implement necessary reforms, and thereby protect the public in the future—will be lost.
The case was argued before the Supreme Court in December 2023, and a decision is expected in the months ahead.