Courthouse Steps Preview: Harrington v. Purdue Pharma

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Sam Fendler:  Hello everyone, and welcome to this Federalist Society virtual event. My name is Sam Fendler, and I’m an Assistant Director of Practice Groups with The Federalist Society. Today, we’re excited to host a Courthouse Steps Preview on Harrington v. Purdue Pharma.

We’re joined today by Mr. Clifford White and Professor Tony Casey. Our moderator today is Jesse Panuccio. Jesse is a Partner in Boies Schiller’s Washington D.C. and Fort Lauderdale offices. Jesse has served as the Acting Associate Attorney General of the United States—the number three position at the DOJ—and as General Counsel to the Governor of Florida.

Today, Jesse’s practice focuses on high stakes litigation and appeals, particularly in the areas of regulation and crisis management. If you’d like to learn more about today’s speakers, their full bios can be viewed on our website, fedsoc.org. After our speakers give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window, and we’ll do our best to answer as many questions as we can.

Finally, I’ll note that, as always, all expressions of opinion today are those of our guest speakers and not The Federalist Society. With that, Jesse, thank you very much for being here today. Always good to have you, and the floor is yours.

Jesse Panuccio:  Thank you, Sam. Great to be back on a Federalist Society Courthouse Steps Preview. I appreciate The Federalist Society for always hosting these interesting seminars with experts. And today, we have two great ones, whom I’ll introduce in a minute.

First, a little background on the case. The Supreme Court is scheduled to hear Harrington v. Purdue Pharma in December of 2023. The case presents the issue of the authority of a court to provide a release from liability against non-consenting victims in favor of third parties who are not in bankruptcy. This case involves releases in favor of the non-debtor Sackler family who owned Purdue Pharma and is accused of fueling the national opioid epidemic.

Some say the bankruptcy system provides a more effective and efficient mechanism for resolving mass torts. Others say it is a vast expansion of court power without statutory or constitutional authority. The Purdue Pharma case was filed in 2019 in the United States Bankruptcy Court for the Southern District of New York. The company twice pleaded guilty to criminal conduct in the bankruptcy, followed thousands of legal actions brought by state attorneys general and alleged victims.

After much litigation and negotiation, voting creditors approved a bankruptcy plan that was confirmed by the bankruptcy court. The plan provides modest payments for victims and billions of dollars to government agencies for opioid abatement. The plan is largely funded from profits from a reorganized Purdue Pharma and $6 billion to be paid over many years by the Sackler family.

In return for their contribution, the Sacklers were given a release from opioid related claims held by non-consenting victims. Bankruptcy court confirmation of the plan was reversed on appeal by the United States District Court and then reinstated by the United States Court of Appeals in May 2023, when it reversed the district court. So to discuss this interesting case, the contours of it, the controversies around it, and what the Supreme Court might hear from the parties and what they might decide, we have two experts with us today—two excellent panelists.

The first is Professor Tony Casey. He is the Donald M. Ephraim Professor of Law and Economics at the University of Chicago Law School. His research and teaching focused on bankruptcy, corporate governance, finance law, and civil procedure. Before the academy, Professor Casey clerked on the Seventh Circuit Court of Appeals for Chief Judge Joel Flaum and practiced law at Wachtell, Lipton, and Kirkland & Ellis. We are very pleased to have him with us today.

Our other panelist is Clifford White, who is an Executive Vice President for Bankruptcy Compliance with American InfoSource, AIS—a financial technology company. Before retiring in 2022, Cliff served for 17 years as head of the Justice Department’s bankruptcy watchdog, the United States Trustee program. During Cliff’s tenure, the USTP objected to Purdue Pharma’s plan containing the Sackler family releases and appealed the bankruptcy court’s confirmation of the plan. And I can tell you from my own experience at DOJ that Cliff is one of the best public servants we had there and is a great expert in the field, and we’re very privileged to have him along with Professor Casey today.

So with that, let me turn to our experts to hear their views and their summary of the case and the issues at play. Professor Casey, I believe you’re going to kick us off today.

Prof. Anthony J. Casey:  Yeah, thanks for having me. It’s great to be here on this webinar. And I’ll jump right in. Jesse, you gave a bit of the summary of the case. I’ll add a few more details and then get to the arguments and the importance of it. And I will say, depending on how the Supreme Court decides and what reasoning they put out, this could be one of the most important bankruptcy cases at the Supreme Court in decades, I think, potentially since the 1980s. But to get there and understand, we have to kind of go back to where it started.

So, as Jesse said, this involves the litigation against Purdue Pharma and against the Sacklers, who were the owners of Purdue Pharma before the bankruptcy. And the way to kind of -- if you go far enough back, you go back to the 1990s when the Sackler -- when Purdue introduced OxyContin.

And if you’ve seen the documentaries and the various kind of news deep dives on this, you know that OxyContin is largely thought to be responsible in part or in large part for our nation’s opioid epidemic, which devastated thousands, hundreds of thousands of lives in America and Canada, which are the two that are relevant in this litigation. In the 2010s, litigation against the Sacklers in Purdue started picking up, and they started kind of thinking about the solutions to settlement. And the part where we jump in is 2019.

So in 2019, the Sacklers have now stepped out of any management of Purdue Pharma. So they’re not on the board anymore by the end of 2019. They’re not in management at that point. And they’re negotiating a settlement with Purdue and with victims and plaintiffs’ lawyers. And so we have this kind of negotiation going on. And there’s a framework that was reached for initial settlement with some of the plaintiffs, the debtor—this is Purdue, will become the debtor when it files—and with the Sacklers.

And so that framework originally starts with a $3 billion contribution from the Sacklers into the estate. And the idea is that the debtor, Purdue Pharma, will file for bankruptcy. This settlement will be kind of tied up in the bank -- tied up as in wrapped up in the bankruptcy. And, as I’ll get into the details, that would be a global settlement among all parties.

So based on that plan, Purdue Pharma—again not managed by the Sacklers anymore. They’re now an outside party dealing with Purdue—Purdue Pharma files for bankruptcy Chapter 11 in September of 2019. The Sacklers don’t file, and that becomes a key part in what we’re going to talk about. So this is the Purdue Pharma bankruptcy that we’re dealing with, but we’re going to have a deal that’s going to attempt to release liabilities of the Sacklers as well and get contributions from them as well.

So, in the bankruptcy, the parties continue to negotiate, and the timing of various things is going to be complicated. So I’m going to streamline it a little bit and just kind of talk about the settlement and then talk about the litigation. Over the period of time of the litigation, the settlement is going to go from a $3 billion contribution from the Sacklers to a $6 billion contribution. And in exchange for this, they want releases. And the releases are going to be releases of all claims that the victims have against the Sacklers.

Now, Purdue is also negotiating with the victims. And so there’s going to be a release of claims against Purdue, and then there’s going to be a release of claims against the Sacklers. And the idea of this is what some people will talk about—the global settlement. So the Sacklers put in $6 billion. Purdue puts in a billion dollars of its assets. We have a fund. That fund is going to be what victims can go to for compensation. And in exchange, the cases are over. That’s the idea. That’s what they want to get to. And to get there, they’re going to discharge the claims against Purdue that anyone has, and they’re going to release the claims that these victims potentially had against the Sacklers.

Now, I’m using the term “victims.” I guess I should more broadly say “claimants” because some of the claimants were also state governments and the Canadian government and indigenous nations. All these various parties have claims potentially against Purdue and potentially against the Sacklers. They’re trying to get to a resolution that resolves all of those claims in one proceeding.

Now, the way they do that, as Jesse kind of alluded to, is through these releases, and they’re often referred to as third-party releases or non-debtor releases. The idea is that they’re releasing a claim that a non-debtor has against a non-debtor. So the claimant has a claim against Purdue, the debtor, but also against the Sacklers, a non-debtor. And so we’re going to release those claims.

Now, one thing a lot of people miss is this wasn’t a process where the entire group gets forced into a settlement. Rather, the process plays out in bankruptcy, and there’s a vote. And there’s a vote among all claimants, and you need to get a supermajority of the claimants in order to approve the settlement. Now, in this case, 120,000-ish claimants voted, and 95% of those accepted the plan.

Now, there’s some debate. The judges in the district court and the bankruptcy court say and the lawyers have said that this is the largest group that’s ever voted in a restructuring. I know that that’s been questioned by some academics. I haven’t been able to kind of suss that out. But in some sense, it’s the largest -- it’s in the largest three or four groups of people who voted in a Chapter 11. And of the 120,000 voted, 95% said, “We like the plan.”

Now, it’s worth noting, that’s a small portion of all the claimants. So there’s actually somewhere around 600,000 potential claimants. A lot of them didn’t vote. So we get this vote of the group. Of those who voted, 95% want the deal. The question really is, “What do you do about the dissenters?” This is why they’ll use the phrase “non-consensual, non-debtor releases.” Can they force the holdout—the minority vote, the dissenters—to go along with the deal that’s been put on the table? And that’s the question that was faced at each of the court levels in this case.

So the bankruptcy judge looks at Second Circuit precedent, says, “This has been approved in Second Circuit in the past,” has a pretty robust hearing and fact findings to get to the position where he thinks this is the best deal for that group—the group that’s voting for it. And I have the authority, he has the authority to approve the third-party releases, and he does.

As Jesse mentioned on appeal to the Second Circuit, the Second Circuit reversed. That was then appealed. Sorry, I misstated that. On appeal to the Southern District of New York District Court from the bankruptcy court, the bankruptcy approval was reversed. That was then appealed to the Second Circuit, who -- which reversed the district court, which essentially meant they approved the plan.

So the Second Circuit said, “Yes, the bankruptcy court was correct. There is the authority to grant these releases, these non-debtor releases in a plan.” And the bankruptcy judge went through the right process, and the Second Circuit gives us a test for how to analyze that process. That was in May of 2023. So this took quite a while to get from the filing in 2019 to the Second Circuit approval of the plan in May of 2023.

Since then, there’s been—and I won’t go into all the procedural points—but, essentially, there were some back and forth motions to get the case to the Supreme Court. And in August of 2023, the Supreme Court granted cert.

Now, notably, the party appealing, the main party appealing is the U.S. Trustee. The U.S. Trustee is kind of the government’s representative or watchdog in the bankruptcy process. And the U.S. Trustee is sought to bring this to the Supreme Court. It is worth noting that along the way, the objectors to the plan have dwindled.

So at the bankruptcy court, there were nine states who said they didn’t like this. During the period in which he was on appeal—and this is when the case is going from 3 billion to 6 billion—there are negotiations that bring the Sackler contribution up to $6 billion, bring those states along, such that, at this point, the only groups actively opposing the plan are a group of Canadian governments, a group of Canadian indigenous nations, three pro se objectors, and the U.S. Trustee. So it’s a small group now objecting to what’s going on. And this is the way it’s going to the Supreme Court.

So overwhelmingly, the parties to the case and the victims—at least those who voted and who’ve voiced a position—have supported the plan. And so the question the Supreme Court will ask is whether or not it’s okay to force these releases upon the small group of dissenters. The broader question for bankruptcy will be, “Are non-consensual, non-debtor releases allowed in bankruptcy more generally?”

And if they say yes or no to that broad question, this is where we get a pretty massive effect on the bankruptcy system because third-party releases are proposed in quite a large number of cases. They’re pretty core to these extreme and large mass tort cases, but they’re also used in other types of cases where you might have an equity sponsor or a potential director officer liability. You see releases as a tool used to get to a final resolution.

Now, the Supreme Court has to decide the answer to that question, and I think that question—excuse me—really has three parts. So there’s the statutory question, the constitutional question, and the policy question. I’m going to spend the most time on the statutory question. I think Cliff will spend a little more time than I will on the constitutional question, and I will talk a little bit about policy.

So statutorily, you’ll hear people say, as Jesse phrased it, “This is a bankruptcy grab of power without statutory authority.” I’ve written amicuses in this case, and I’ve taken the position I think that’s absolutely incorrect. There’s three real groups, three potentially relevant statutes, and I’ll go through each of them.

So the first is section 105(a) of the Bankruptcy Code. So section 105(a) of the Bankruptcy Code says that “the Court may issue any order, process, or judgment necessary or appropriate to carry out the provisions of the Code.” Some courts have used this provision to get their authority to grant third-party releases. I think that’s wrong. The Second Circuit thought that was wrong. That’s not the argument that I think is going to be going before the Supreme Court.

Section 105(a) is not a blanket equitable grant of authority. It’s something much narrower than that. And the Supreme Court has said that in prior cases. So I can’t imagine this case comes out with the Supreme Court saying, “The circuits who use 105(a) alone to justify releases are correct.” I just think that’s really not on the table.

The next relevant provision is section 1123(b)(6) of the Bankruptcy Code. Now, this provision says that “a plan may include any other appropriate provision not inconsistent with the applicable provisions of this title.” The Second Circuit thought that this provision did grant courts the authority to approve third-party releases. And this is where I agree with the Second Circuit and where I hope the Supreme Court comes out—and I think a good chance they will.

It’s important to note the language in that provision and where it shows up. So 1123 doesn’t say “the court.” It says “a plan.” So it’s giving authority to whoever drafts the plan—usually the debtor—to include in it a broad expanse of provisions, anything that’s appropriate and not inconsistent with the provisions of this title.

Now this is in Chapter 11, not in Chapter 7. It’s not in the kind of general provisions of one, three, or five. It has to be through the plan process. The reason is that Chapter 11 has lots of protective provisions to make sure people don’t abuse the authority they have when they draft a plan.

So those provisions include the voting requirements. They include the best interest of the creditors test. They include absolute priority. They include that a plan has to be proposed in good faith, that it has to be fair and equitable, that it can’t discriminate unfairly. Most of these are found in Section 1129.

And so 1123 says, “You can put this in a plan.” And if the court finds that you’re putting it in the plan in good faith and it’s fair and equitable and it’s not discriminating unfairly and you met the voting requirements, then it’s okay. Now, from my view, this is the textual approach. Some people are like, “Oh, we need to be textualists,” and textualists would say, “Bankruptcy courts don’t have this power.”

As I read the text, they very clearly have the power. 1123(b)(6) says, “You can put this in a plan.” 1129 says, “The Court shall approve a plan that is proposed in good faith, fair, and equitable,” and it has various other requirements. All of those requirements have to be met. That’s the way the Code polices abuse of the use -- the potential use of third-party, non-consensual, third-party releases.

And the Second Circuit viewed it this way. And I won’t go through the seven parts. They adopted a seven-factor test to determine whether or not releases were being proposed in good faith and whether or not they were necessary to the plan. And so they’re taking that text that says, “You can include this. It has to meet these requirements. Here’s our test. It’s got to be really necessary.”

And you might read the Second Circuit opinion as saying, “Third-party releases are allowed, but we’re requiring a very strict test that we think was met here.” Notably, they also said, “The district court has to be able to review the application of that test de novo.” So really, you have -- the bankruptcy court has to approve the releases, and the district court has to approve the releases. So that’s the affirmative textual argument.

There’s one other provision that comes up and might be relevant, and that’s Section 524(g). So 524(g) allows these types of releases in asbestos cases. And so the negative argument that has been made is that because 524(g) only talks about asbestos cases, it must be that these releases aren’t allowed in other cases. There’s two problems with that textual argument.

The first is the statute that enacted 524(g) said, “This statute should not be read to limit the authority of bankruptcy courts to enter injunctions in other cases.” So they told us not to read it that way. The second reason is just a common sense one. If you think Congress -- so the history was asbestos cases were going on. Johns Manville came up with this way to settle them. Congress passes 524(g) to approve what happened in Johns Manville.

You’d have to imagine Congress having the following thought. The Johns Manville court was really good at innovating and coming up with this solution in asbestos cases. So we’re going to pass a law that says you can do that, but we’re going to make sure no court in any other mass tort case ever tries to innovate like that again, which is just a weird way to think about what Congress was doing. They liked the solution. Why would they preclude it in all future cases? So that’s the statutory argument.

The constitutional argument, the main one being put forward, is due process. And the argument here is that the Court, by resolving or forcing the release, is resolving a dispute which is a property right of that dissenting creditor without giving them an opt out right. And the Second Circuit said, “Well, wait a second. If that’s true, if that truly violates due process, well, what about when we extinguish the rights of creditors against the debtor?”

We do that, and that’s kind of a key part of bankruptcy is you get forced to go along in a lot of things in bankruptcy if you have claims. And so the Second Circuit’s view—and again, here, I think they have a very strong argument—is if they got the same due process that someone gets against the debtor and they’ve received the same notice, where’s the constitutional violation?

The statutory violation, we went over. If you say that this violates due process, you might be saying that all bankruptcy discharge violates due process, and that would upend the entire bankruptcy system. I don’t think that’s correct, and I don’t think you’re likely to have the Court go there. All right.

So what’s left is the policy argument, and I’ll try to be pretty quick here. But the main argument you hear is, “Look. You’re letting the Sacklers get off scot-free. We need to punish them.” A couple of responses to that.

The first and most important is bankruptcy courts cannot do anything that stops criminal courts and criminal prosecutors. This case is not about criminal liability. If the states want to prosecute the Sacklers tomorrow, criminally, this has nothing to do with that. Bankruptcy is about the resolution of these various claims.

And the problem that the Court was faced with is that everyone is competing for a limited pool of money. So the states have claims. The victims have claims. They have claims against Purdue. They have claims against the Sacklers. Purdue itself has claims against the Sacklers. If the states bring their claims against the Sacklers and the states had alleged upwards of $400 billion of damages, they’re now competing with the bankruptcy estate—Purdue.

And so now, we have this problem where everyone’s racing against the pool of assets, which let’s say it’s somewhere between 5 and 15 billion, and the claims they’re making are somewhere between 100 and 600 billion, and they’re all going after these assets. We’re trying to get to a place where we can get everyone to say, “I agree to my -- what I’m going to take. You agree to what you’re going to take. We settle this.”

If the Sacklers don’t put money in, then Purdue has to go after them, and then we can’t settle the bankruptcy until that gets resolved. And this could go on for quite some time. So even if you negotiate -- even if you could get the money from the Sacklers, you have this problem of parties competing with each other against the pool of money.

The bigger problem is, it’s not clear you can prevail against the Sacklers to any larger degree than what was put on the table here. And so it’s worth noting one thing. Everyone talks about the Sackler family. The Sackler family is over 50 people. Many of those people had nothing to do with running the company. They profited from the company being run, but they weren’t in the room. So the case against them looks very different than the case against the few who were running the company.

They’re also in five different countries. Their assets are in dozens of trusts around the world. Getting the money from them is not a foregone conclusion. And so when you’re saying, “We’re going to go after the Sacklers,” you’re saying, “We’re going to go after these 50 people for the various things they recovered.” And then you have to think about, “Okay. So they received in the last 10 years something like $10 billion.” They paid 30% to 40% of that in taxes. What do we do about that?

And so in the end, we’re thinking about what you can recover and what you can’t recover. And the Court was satisfied that the 6 billion they were putting in was a good deal for the 95 percent claimants who were voting in favor. Now, it might not be the best deal possible. It might be that if you litigate this out for 10 years, more money shows up. But it might be if you litigate this out for 10 years, less money shows up.

In some sense, the policy question is, “Who gets to make that decision?” And there’s three possible answers. One is, the trustee does. The U.S. Trustee says, “We’re the police -- the watchdog of the government, and this is a bad deal. You can’t take it.” Another is we always let the holdouts make the decision, and the holdouts get to say, “We’re five percent, but we want to go after the Sacklers in litigation outside of bankruptcy.”

The third option is, you let the supermajority vote subject to the protections that Chapter 11 has. And that, in my view, is the least bad outcome. None of these are great outcomes. The best outcome is a time machine that stops this from happening. But again, you want to live in a world where now that we know that there’s nothing -- there’s no perfect solution on the table, we take the one that 95% of claimants want, which gets them the money sooner rather than later, and it gets them the money that they voted in favor of.

And again, no deals on the table unless you get that supermajority voting in favor. And those are the three questions going to the Supreme Court. With that, I’ll leave it to -- I’ll turn it over to Cliff, who I’m sure has additional points and points of disagreement.

Jesse Panuccio:  Thank you, Professor Casey. Excellent summary and analysis of the issues at play. And we’re now joined by Cliff White. Mr. White, take it away. You’re on mute, though. You just got to unmute.

Clifford J. White, III:  There it goes. All right. Well, thanks to The Federalist Society for inviting me to be at this webinar. I’m especially pleased to be here with Professor Casey and also my old boss at DOJ, Jesse Panuccio. And as was referred to in the earlier introductions, when I was with the U.S. Trustee Program, we had a policy of consistently opposing non-consensual, non-debtor third-party releases. And we did object in the Purdue Pharma case. And I’m very glad the Supreme Court now is going to have the opportunity to bring some clarity to an issue that has been nagging at the bankruptcy system and will have far reaching impact.

Bankruptcy is supposed to be about the discharge of debts of a debtor and the rights of creditors. A debtor who plays by the rules gets a release, if you will, a discharge of liability. But with non-consensual, non-debtor third-party releases, there’s a de facto discharge to a third party, to a non-debtor who didn’t file bankruptcy and is done by taking away the rights of other non-debtors. In my view, it’s done without any basis in law.

Now, many judges, including in a very noteworthy opinion in the LTL case, many judges and other commentators justify third-party releases in mass tort cases by saying, “The tort system is broken. The bankruptcy system provides a better forum for more efficient resolution of these disputes.” To me, that’s results-oriented jurisprudence and it ought to be rejected by the Supreme Court. And I do think the case presents a very good, clear case, a clean case, to reaffirm, really, the rule of law over judicial-made policy.

Now, Jesse and the professor did a great job laying out the essential facts. Let me just put additional context on just a few of them—first, with regard to the funding and who gets money from the plan that was confirmed by the bankruptcy court. Victims will get some money. The average victim will get about $3,000. Most victims will get about $3,000. Victims in the aggregate are guaranteed about $700 million, and it could go higher.

Another big bucket of recipients of the money are—not surprisingly in a big Chapter 11 case—the bankruptcy lawyers and in a big bankruptcy mass tort Chapter 11 and the tort lawyers who are paid from the bankruptcy estate. They will get about the same amount of money as the victims are guaranteed in the case, although I should correct myself.

For the most part, they’ve gotten their payments in this case before the victims. Category three, by far the biggest payout, as was said earlier, is state attorneys general and governmental entities. They get the lion’s share to pay for opioid abatement programs.

The second point I want to make is just to reinforce because Professor Casey made this point I think quite clearly is that, yes, there was a 95 percent or so vote of voting creditors in favor of the plan of reorganization. But it’s really not so overwhelming upon that closer inspection that Professor Casey gave us.

First, 3,000 creditors voted against it, and those are the creditors who had actual notice. And only about 20 percent of the known creditors voted because most of the victims of the opioid epidemic who may have a claim against the Sackler family did not get actual notice. And one can argue they don’t have meaningful notice. Most of those harmed by OxyContin likely don’t know that any cause of action they have against the Sacklers is affected by this case.

A third point, the Sacklers are paying a lot of money, but not as much as it might appear. And the professor did acknowledge this. They did take out of Purdue Pharma more OxyContin profits than they are now being asked to pay back with the six billion. They get a multiple of that six billion.

But importantly, the $6 billion is going to be paid over 18 years. It is conceivable that returns on investment over that time are going to allow the Sacklers to pay the money into the trust as proposed in the confirmed plan without ever having to affect the principle of the Sackler family fortune.

I do want to make a fourth point in response to Professor Casey with regard to that the U.S. Trustee and I guess some Canadian entities standing alone in pursuing this case in the Supreme Court because he’s quite right that what happened were nine states that had appealed in the Second -- had appealed the case earlier in the Second Circuit did, through further negotiations with the Sacklers, withdraw their pursuit of an appeal and agreed not to appeal to the Supreme Court. But there was a reservation of rights, which will be interesting to see what position they’ll take on third-party releases now that cert has been accepted.

And one state attorney general actually did a news release to make clear that there is that reservation of rights as to the legal arguments. And I do agree with Professor Casey that the statutory arguments, really, I think are dispositive, just not in the way Professor Casey would assert that they are dispositive. And I say that because text matters. Text matters.

So I would start with not the provision that Professor Casey started with, but I’d start with Section 524(e) of the Bankruptcy Code, which prescribes the effect of a discharge in bankruptcy. And it says, “A discharge of a debt of the debtor does not affect the liability of any other entity or the property of any other entity for such debt.” What does it mean? Bankruptcy courts may discharge the debts of the debtor but not the debts of non-debtors. This should be dispositive with the Supreme Court.

I also think the third-party releases are inconsistent with other parts of the Bankruptcy Code, including some provisions that were cited by Professor Casey, for example, the best-interest test. The bankruptcy court in a Chapter 11 case is supposed to take -- is to ensure before confirming a plan that the creditors will get as much from the plan as they would from a liquidation—the liquidation of the debtor. Here, we’re dealing with a third party, not the debtor.

But here, if you were trying to mirror what the Bankruptcy Code would do for a debtor, one would expect then perhaps there to be an estimation of what the claims were of the victims. There was no estimation of the claims that the victims had against the Sackler family, and there was not the same investigation of the Sackler’s financial condition and worth as would have been in bankruptcy.

It may have been extensive. That argument, I know will be made, and I know Judge Drain made that in court on multiple occasions. But the fact is, the bankruptcy rules were not the rules that were played by importantly, very important deviation from the rules of the road in bankruptcy. The scope of the discharge itself that the Sacklers are getting is beyond what an individual debtor in bankruptcy would be allowed to get.

The Sacklers are getting a discharge from liability for fraud. So if there are any allegations that they committed fraud in connection with the OxyContin business, then that also will be effectively discharged. That discharge for fraud is something an individual who goes through bankruptcy plays by the rules of bankruptcy doesn’t get to do.

Now, proponents of the plan -- and Professor Casey did a very good job in pointing out what some sections that are commonly cited in favor of their releases, but I think they’re very weak. I really don’t think they stand up to much scrutiny. I hesitate to say that since Professor Casey said the opposite, and I have a lot of respect for Professor Casey, but I don’t think so.

I was very glad that he put to rest the 105 argument because a lot of courts have not put to rest the 105 argument. That’s sort of an elastic clause of the Bankruptcy Code that says the Court can issue any order, process, or judgment necessary or appropriate, that is, derivation in the All Ritz Act. But the Supreme Court has made clear in multiple decisions that is not an independent grant of authority.

So where do we look for an independent grant of authority? It’s just where Professor Casey told us to look: 1123(b)(6), which says that a Chapter 11 plan can include any other appropriate provision not inconsistent with the applicable provisions of this title. That is being used as a loophole through which to run a Mack truck.

I’ve just mentioned some Code provisions that I think are inconsistent with 1123. So I don’t think, by its own terms, 1123 stands up or provides a justification because what was done in Purdue is inconsistent, not only with 524(e), but other standards of Chapter 11, and also under ordinary rules of statutory construction, that a general provision, such as 1123, shouldn’t override the specific provision of 524.

If involuntary releases are allowed under such thin justification, it would, in some respects, be a rejection of Justice Scalia’s teaching that Congress doesn’t hide elephants in mouseholes. Chapter 11 instead could be whatever the judge says it is. Now, in one place and one place only in the Bankruptcy Code does Congress authorize non-consensual third-party releases.

It is, as the professor said, 524(g), and it has to do with asbestos cases. But that’s been 29 years since 524(g) was enacted. Congress has not expanded it. Their silence does not mean assent. And Congress when passing 524(g) was trying to. And so the history of the legislative history makes clear it was to ensure that the previous asbestos cases were not overturned.

It was not a grant of authority in any way to suggest that the asbestos treatment could be expanded. And I think that to take the silence of the Congress as a grant of such enormous new authority for the Court would be contrary to principles that The Federalist Society usually adheres to. What are the constitutional infirmities? Let me just mention a few so we can stay on time track in some way.

The big one would be due process. I don’t think the Supreme Court needs to get here. It can stop at the statute. And, in fact, the district court stopped at the statute. The circuit court, which reinstated the bankruptcy plan, had to, when finding the sufficient statutory basis, then did look at constitutional issues. But the big one is due process.

Broadly speaking, what’s the problem here? Congressionally prescribed rules governing the release of claims, and these claims are a distinct property interest held by victims against the Sacklers above and beyond whatever they hold against Purdue Pharma. Instead of congressional rules, the Court got to make up the rules. What were some of the specific problems? Notice.

Many release parties never received a notice. And even if they had notice, it was probably -- it wouldn’t be useful and unintelligible. According to testimony in Court, even Richard Sackler said that it was too dense for him to understand. There was public notice. But the public notice saying that there was a plan out there and it could affect victims said that the public notice referred to release of related entities. That’s unlikely to put on notice a parent of a child who died of OxyContin overdose to know that their cause of action was released against the entire family tree of the Sackler family—plus a lot of others.

Another critical point here with regard to due process, no compensation was given. What is being given to victims is only for the Purdue—whatever claims they have against Purdue. None of that compensation is given on account of the independent direct claims against the Sacklers. There are other issues that can be raised and I suspect will come up in some of the briefs in the Supreme Court.

The bankruptcy clause itself, does it reach non-debtors? The Supreme Court, not a whole lot of law on it. But when the Supreme Court did opine somewhat on that issue in 1938 referred to “relations between a debtor and his creditors extending to his and their relief”—not addressing specifically third parties, but the scope.

Takings Clause. Government is getting most of the money. Has there been a taking here? Federalism principles. The police power of the states has been at issue throughout this case and whether the bankruptcy court could enjoin it. Consequences of the Supreme Court decision? Life will go on in bankruptcy if the Supreme Court reverses and disapproves third-party releases.

The Sacklers have twice come up with additional amounts to contribute. Maybe they’ll decide they will use bankruptcy to get consensual resolution, which was not even sought in bankruptcy court, and then decide how much more it may cost them with regard to their exposure to the holdouts. There are other examples.

When the U.S. Trustee in one case, the Ann Taylor bankruptcy just a few years ago, appealed an order which the proponents of the plan said that the releases were essential to get a plan. We successfully appealed to the district court. And what happened just a few weeks after that? Suddenly, a new consensual plan came in without third-party releases. Plus, there’s a circuit split. Three circuits don’t allow these releases. They still have confirmed Chapter 11 plans.

So all that said, perhaps if the releases are disapproved, bankruptcy will go on, and perhaps it will also sharpen the issues for Congress, because it belongs in Congress, not with bankruptcy judges. If third-party releases are reversed, the issue is teed up for Congress. Do tort reform. Amend the bankruptcy code if you can find a way to do it that is consistent with due process and other constitutional obstacles that would have to be overcome, or do nothing. They have three choices. That’s the constitutional system, and that’s the way it ought to work out.

Jesse Panuccio:  Well, thank you very much, Cliff. Two excellent presentations. Professor Casey, you went first. So I think following oral argument protocols, we’ll give you a bit of a right to reply here. And then just to set the framework for the rest of this, I’ll have some moderator questions for you.

We’re also taking audience questions. A few have come in. You can type them in the Q&A function, and I will moderate those. But I do want to give the both of you a chance to respond to each other a bit. Here, let’s try to keep our comments a little shorter so we have a chance to get through some questions and some topics.

Prof. Anthony J. Casey:  Great, thanks. So I appreciate everything that Cliff said, and I’ll start with a point of agreement. I agree that text matters. And the point about results oriented, I -- the one unfair rhetoric I think we sometimes see is there’s -- that’s going on on both sides. There are some people who would want the Sacklers to be punished in bankruptcy no matter what the text said, and there are some people who want to settle this case no matter what the text says.

I disagree with the reading of 524(e). I would say that if you read that to say, “You can’t have injunctions related to non-debtors,” that’s the hiding the elephant in the mousehole. I think it just says the effect of a discharge. And when you see that, you say, “Okay. So that’s what a discharge does.” And then 1123(b)(6) says you can have any appropriate provision, and we have all these other protections in 1129.

So I don’t see that text as negating 1123. And when I do my textual --, what does this allow? Anything not inconsistent with applicable provisions? I don’t see an inconsistent provision.

And if you think about text, you have to remember that words like “fair” and “equitable,” words like “bad faith,” words like “appropriate,” we might not like those texts, but those are textual grants of broad authority. And I don’t think it’s textualism to say, “Oh, but we can’t let courts have that much power.” That’s a different theory, but it’s not a textualist theory. And as I read Chapter 11, it really is saying, “You can put this in there as long as it meets all these other requirements that are in the Code.”

And on that note, I’ll just -- in one defense of the LTL opinion, when the argument was made in that case that the mass tort system was broken, it was in a motion to dismiss for filing in lack of good faith, which does not appear anywhere in the text of the Code. There’s no provision in the Bankruptcy Code that says you can dismiss a case for lack of good faith. Judges have inferred that rule from the other text, and most people seem to be fine with that, especially the people who object to what’s going on in the Perdue Plan.

The reason, I think -- and I think you have a clear -- I think the Code does imply a right to dismiss for lack of good faith. So then Judge Kaplan’s point was, “Yeah, but it’s not in bad faith if you’re choosing a system that’s not broken over a system that’s broken.” That’s not results oriented. That’s just the interpretation of what’s good or bad faith. So that’s the way I read that opinion.

And then the last thing I’ll say just on the results because Cliff mentioned a few of them, and I think they are relevant to think about the policy argument, tax matters first. But when we think about what’s going on and the fact that this is over 20 years and who’s getting the recovery, then it is worth comparing to what would happen outside of bankruptcy. And I think you can look at -- 3M settled outside of bankruptcy last week. And there were all these people who said, “Look, we can have settlements outside of bankruptcy.”

It’s going to be paid out over, I think, 12 -- 10 to 12 years. The lawyers are going to get the bulk of it. If any claimant doesn’t settle, their lawyer is agreeing not to represent them anymore, subject to their ethical duties. It’s the same outcome just without a 95 percent vote before they settled it. And so there is something to be said for, “This is less coercive than that,” and those are the two options.

And if the Code allows the non-consensual releases when they’re appropriate and in good faith, then you do need to compare the results to what the alternative is. When I look at those two cases, this outcome looks better to me to the plaintiffs than that one does. So those are my key responses. Lots more in there, but I want to leave time for questions.

Jesse Panuccio:  Great. Cliff, do you want a brief sur reply, or shall I get to questions?

Clifford J. White, III:  You can go straight to questions.

Jesse Panuccio:  Okay, great. So my first question is from the audience and also one that I had, which is, “How do you predict the Supreme Court will rule? If you want to get more granular, what do you think the vote will be? Who might be in the majority of the dissent?” And then a nice twist from an audience member, “How confident are you? In other words, how many casino chips would you bet on your prediction?” So, Cliff, why don’t you start?

Clifford J. White, III:  Sure. I’m not that familiar with casinos to know how to count the chips, but I think I’m willing to count Supreme Court Justice votes here—nine zip. This is not going to stand. There is not a textual basis for third-party releases, and it would be a vast expansion of judicial power that has not been contemplated until recent years. And it is definitely expanded.

It used to be considered rare. It’s not rare anymore. Also, if you look at the way this case is coming into the Supreme Court, I think there’s reason to believe the justices are perhaps going to vote against these releases because there wasn’t even a cert petition. There was the government. The Solicitor General came in and asked for a stay until it could file the cert petition but said, “You may, Court. We think you also could construe this to be a cert petition”—vehement opposition to that.

And the Court came out with an order that said, “We grant cert.” And also what it did was it phrased the question to be argued in December. The question refers to whether the Court is authorized to grant the third-party releases, not whether there’s a prohibition, but whether it’s authorized.

And I think a lot of the disagreement between Professor Casey and me has to do with whether the bankruptcy Court -- whether the Bankruptcy Code is about authorization of actions, or it just says what you cannot do as prohibition. So I think those signs look good. If I knew more about the value of chips, I’d put a stack pretty high if I knew what I was getting into.

Jesse Panuccio:  I mean, I know it’s a big bet, so let’s see what Professor Casey has to say about that bet.

Prof. Anthony J. Casey:  So I’m not as confident about an outcome. I will say I would make a strong bet that it’s not 9-0 in either direction. I don’t think this is going to be a case that gets nine justices on the same page. It’s going to make, I think, strange bedfellows.

So I think the Second Circuit’s textual analysis of 1123 is very strong, and I think that is likely to pull the textualists on board. And so I think you get textualists in the middle of the Court, if you will, to come together on that point. I think the due process argument, which I find to be not that convincing, but given the jurisprudence in other areas of civil procedure, I could see Sotomayor going -- buying into that argument. So I think there’s that vote I count as one to reverse—Sotomayor’s vote.

Now, it’s interesting. Cliff mentioned very briefly what I think is the strongest constitutional argument. I still think it’s a weak argument, but the strongest one, is the scope of the Bankruptcy Clause. So I could imagine the other wing of the Court, like the Thomas, Alito, Gorsuch folks getting a, “Hey. The Bankruptcy Clause can’t be read this broadly.”

Now, if that’s the ground of the ruling or if that plus the due process of the grounds, that will do huge damage to the bankruptcy system because you could have -- I don’t know. Is Chapter 9 in the original public meaning of the Bankruptcy Clause? Is Chapter 11? This goes down a path. And I think that’s why the government hasn’t argued that point very much.

I think it’s the wrong reading of the Bankruptcy Clause, but I could see one or two justices going there if the government makes -- or an amicus makes the argument. I still think you get a middle that says the statute is a grant. And Cliff said it right. Is there a grant of authority?

There’s a grant of authority in 1123, and the Court is supposed to confirm those, 1129. That answers the question. We affirm. But I don’t think it’s going to be 9-0. So I would think something like 6-3 to affirm. I would not bet a lot of chips on anything other than it not being 9-0.

Jesse Panuccio:  Smart. Let me ask a question, maybe two questions, really, that grow out of a point I think Cliff made about the Ann Taylor bankruptcy and how they came to a deal anyway. So one is, “If the Court overturns the confirmation and we see the Sacklers contributing to a non-bankruptcy settlement in Purdue, would that suggest that the bankruptcy processes with third-party releases were never essential to the settlement?”

And a second question I think a bit related is, “Does the fact that the Sacklers ultimately negotiated up from three billion to six billion show that they somehow took advantage of or lowballed things in the bankruptcy court?” I think there’s a relation between those questions. But let’s see. Professor Casey, let’s start with you since you went second on the last question.

Prof. Anthony J. Casey:  So the first question, I worry about this because if there is a reversal and an immediate settlement, people will say, “Look, you never need a bankruptcy.” That might be true, but it might be, “Well, because we had a deal wrapped up with everyone except the trustee, the Canadian municipalities, and four pro se parties that we can now do this. And that happened in bankruptcy, and that will never happen again.” So I do think we -- that will -- when Congress thinks about what to do if there’s a reversal, they should make sure they understand that causal effect.

And then on the second part, again, we have to think about the causal effect. I don’t know the answer of what would happen if you had a bankruptcy negotiation with the Sacklers in a world where we knew third-party releases were bulletproof on appeal. And so what was happening was you get an offer, and they get a deal, but everyone knew it was going to be appealed to the district court. And then you get a reversal, and that changes the probabilities of whether or not this deal can work. So they’re negotiating in this world of uncertainty.

And so whatever the Supreme Court says, if they give us a certain answer, that changes the bargaining. And you could imagine, I know third-party releases are going to be upheld on appeal. I’ll offer six billion because it’s worth it to me. You could imagine it differently, but I don’t think we know the answer. And it frustrates me a little when folks are like, “Oh, that’s obviously -- Drain shouldn’t have approved it.” Well, it’s no, it was a negotiation in a world of uncertainty.

Jesse Panuccio:  Cliff, you want to respond to that?

Clifford J. White, III:  Sure. I mean, I think it has been all about leverage, and the Sacklers got more leverage against would-be plaintiffs through the bankruptcy system, and that’s why they went from three to six billion. And that’s why after there was an appeal, they added the last 1.75 billion.

The other problem with third-party releases and the way they’re handled, which is -- it is responsive to your question if just a little bit on the side road here, is that with the tests that are laid down as to when a third-party release is permissible is that one of them is what Jesse said, the question, “Is it essential? Is the third-party release essential to the plan?”

You know who gets to decide whether it’s essential? The third party who’s getting the release because they’re the ones who decide how much money they’re going to put in. So, at first, the Sackler said three billion, not a penny more. Then they said four and a half billion, not a penny more. And now it’s 6.1 billion and a penny more? We’ll see.

Jesse Panuccio:  Thanks, Cliff. Cliff, let me direct a question to you because I know this is something you worked on and you and I both worked on back at DOJ. But if the Supreme Court overturns the confirmation order here on constitutional grounds, what does that mean for the bankruptcy statute?

Clifford J. White, III:  Well, I think that if it’s overturned that you’re simply going to have bankruptcy returning to its core.

Jesse Panuccio:  I’m sorry, I meant to say the asbestos bankruptcy statute. I left out a key word in my question. I was thinking ahead. Yeah.

Clifford J. White, III:  With asbestos, I don’t think so. I think it depends how the -- how far reaching the Court goes. But the reason is, in the asbestos statute, it wasn’t -- it’s not the judges making up the rules. There’s a congressionally prescribed set of special rules. The supermajority that’s touted here in Purdue, that wasn’t imposed. That just happened to be of those who voted what the number was.

There are special voting rules, unlike the voting rules in other Chapter 11s. So there are special protections. There are also more limited releases here. It doesn’t say just any third party can get them. And generally speaking, in asbestos, it’s derivative claims that are released, the claims that could be brought by the debtor, not the direct claims, not the direct property interest of the -- of victims directly against some third party. So I think when you look at the scope of the releases, the special protections and care that Congress gave when putting in 524(g), I don’t think it will be disturbed.

Jesse Panuccio:  So do you think -- and then we’ll get Professor Casey’s reaction. But do you think the constitutional problems—and you went through a litany of them or the potential constitutional problems—what I’m hearing is you think they might be solved by Congress being involved, or are there constitutional problems that remain even if Congress is the one that enacts a scheme like this?

Clifford J. White, III:  Yeah, Congress is not going to be able in a constitutional way to give a grant of authority for the pre-willing way that the Purdue Pharma bankruptcy went forward or other -- many other Chapter 11s go forward. It’s going to have to pay attention to notice issues. It’s going to have to pay attention to the other -- a number of other concerns here with regard to the scope of the releases.

And so it may not -- I do not believe Congress is going to be able to give a grant of authority for Purdue Pharma type. But there could be some more limited ways on derivative claims, that there can be third-party releases. But what it’s not going to do is open the spigot for the bankruptcy system to replace the mass tort system.

Jesse Panuccio:  Okay. And we’re running up toward the end of our hour. We’re actually at the end. But I did want to ask one more audience question. Professor Casey, I think I will direct this one to you. Bear with me. But I think you can tell me if this is a good question because you know the statutory scheme better.

But an audience member asks, “Focusing on the statutory authority, what are the panelists' views of Section 1123(b)(3)(a), which provides that a plan may provide for the settlement or adjustment of any claim or interest belonging to the debtor of the estate? Purdue Pharma argues that the releases are part of a settlement of claims against the Sacklers belonging to the debtors, which are critical to the implementation of the plan provided by section 1123(a)(5).”

Now, tell me if you followed that. It’s hard to see without the screen. But if that rings a bell for either of you, feel free to respond.

Prof. Anthony J. Casey:  What I’ll say there is I think 1123 has a lot of parts to it. I think this is what it’s getting at. It’s a grant of authority for people to put things in plans that are necessary for you to get to a resolution.

Cliff said earlier the Chapter 11 bankruptcy is about discharge. I think bankruptcy is about resolving collective action problems. And so when I read 1123, it says a plan may do these things. And it’s getting at the fact that a plan can include things necessary to get to a global resolution. I think (b)(6) is the broadest grant in there, and that’s why that was what the Second Circuits focused on. I think then you get to 1129. But you could go provision by provision. None of them prohibit this is what I would say.

And then I would just add -- back to the constitutional point, I’m worried because text does matter. And I find it very hard for the Court to write an opinion that says, “This is unconstitutional under the text of our Constitution, but 524(g) isn’t.” If they get to -- that’s like a 200-page opinion because you got to be like, “Well, somehow, Bankruptcy Clause history says asbestos, and some -- or maybe it’s a Commerce Clause.”

And the notice, which was very robust here, was the exact notice that [inaudible 01:02:23] required. I can’t imagine the opinion that draws that line based on the text of the Constitution. So I worry more than Cliff does. I think, if they reverse, I hope it’s very narrow.

But I don’t think a constitutional reversal could be written in a very narrow way, especially not in a way that would satisfy this Court. So if this is 20 years ago, different. But this Court is going -- it’s going to be based on the text of the Constitution. I think it allows it. But if it doesn’t, it doesn’t allow any of this stuff.

Clifford J. White, III:  My only response, Jesse, would be that if one has to parse the code and look in every nook and cranny to see some words that can give rise to this massive new authority of third-party releases, we’re looking for elephants in mouseholes. And that, we cannot do.

Jesse Panuccio:  Thank you. Let me just ask if either of you have closing thoughts you’d like to provide. I know we didn’t get to all of the audience’s questions and probably some other questions you would have liked to hit. So if there’s any other facet of this you want to just close out on, I’m happy to hear that.

Prof. Anthony J. Casey:  Cliff’s last thing, it seemed like a nice closing statement. I would just say it’s not that new. We’ve been doing mass tort settlements like this since the 90s. That seems like yesterday, but that was 30 years ago. So this is a pretty widely accepted practice.

Jesse Panuccio:  I was going to say it was just yesterday that it was the 90s. Cliff, anything you want to add before Sam closes us out?

Clifford J. White, III:  No, except that this is an opportunity for clarity, which is very much needed. And the fact is that the bankruptcy courts have been accreting authority in this area. These used to be considered rare cases. They have expanded to what one bankruptcy court called -- they’re now participation trophies. And the fact that they became that just in recent years is not a reason to give them sanction.

Jesse Panuccio:  Well, thank you both for your excellent commentary. Really, a fascinating discussion, and I’m sure it will be a lively oral argument and a very interesting opinion when it comes down. Sam, you want to close us out?

Sam Fendler:  Yes, sir. Thank you very much, Jesse. On behalf of The Federalist Society, I want to thank our panelists today. Thank you very much, Cliff. Thank you, Professor Casey. And thank you also for going overtime for us. I wish we had another hour. Jesse, thank you for moderating and facilitating. We appreciate you carving out some time from your busy day.

I also want to thank our audience for joining us. We greatly appreciate your participation. Please check out our website, fedsoc.org, or follow us on all major social media platforms at FedSoc to stay up to date with announcements and upcoming webinars. Thank you all once more for tuning in, and we are adjourned.

 

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