Written By: Kalen P. Sullivan
A ruling by the U.S. Court of Appeals for the Second Circuit last Tuesday furthered the split amongst several Circuit Courts regarding a provision of the U.S. bankruptcy code. Specifically, the Second Circuit ruled that nonconsensual third-party releases may be allowed to resolve larger bankruptcy settlements. With its decision, the Second Circuit clarified precedent regarding whether such releases are allowed as a matter of law, but also takes the country one step closer to resolving contentious opioid epidemic settlements.
The opioid epidemic has claimed the lives of over nine hundred thousand people in the U.S. and nearly a quarter of those deaths can be traced back to prescription opioids, like OxyContin. But, when used and prescribed correctly, opioids serve an important purpose. They allow individuals to manage pain caused by chronic or terminal illnesses. The addictive properties of opioids leave them prone to misuse, thereby placing added responsibility with the prescribing physician and drug manufacturers. Enter Purdue Pharma — the once manufacturer of OxyContin, a time released formulation of oxycodone, and one of the main characters of the opioid epidemic.
Purdue Pharma is notoriously recognized as one of the major manufacturers of prescription opioids. In 2007, Purdue pleaded guilty to a felony charge of “misbranding” OxyContin, and admitted to misrepresenting the risk of the drugs’ addiction and potential to be abused. Since 2007, Purdue Pharma, and its owners, the Sackler family, have faced a flurry of civil lawsuits from State and individual plaintiffs. These suits attempt to recoup damages stemming from Purdue’s felonious misrepresentation of OxyContin between 1996 and 2001. In response, Purdue and its subsidiaries filed for bankruptcy in 2019. The Sackler family did not. So a lingering issue remained, what would become of the civil suits filed against the Sackler family members?
On May 30, the Second Circuit provided an answer. The Second Circuit reversed a prior District Court ruling and approved Purdue Pharma’s bankruptcy plan. The complex plan includes two salient features: first, Purdue Pharma would file bankruptcy, be dissolved, and a new company would be formed, Knoa Pharma, which would manufacture medications for addiction reversal and treatment; second, Purdue’s owners would pay out $6 billion in restitution for the company’s misdeeds, with at least $750 million earmarked for opioid victims and their survivors, but the Sackler family would be individually immune, or released, from current and future lawsuits.
Initially in 2021, the New York bankruptcy court approved the Plan, stating that the Plan was the only “reasonably conceivable” way to resolve the issues under the circumstances. Judge Colleen McMahon, of the U.S. District Court for the Southern District of New York, disagreed. Aligning with the Fifth, Ninth, and Tenth Circuit Courts of Appeal, the Southern District found that federal bankruptcy law did not permit the Sackler’s to be released from liability where they have not filed for bankruptcy, themselves. The three-judge panel at the Second Circuit reversed the Southern District’s decision, relying on precedent and pragmaticism.
Judge Eunice C. Lee began last week’s opinion diplomatically, stating that “[b]ankruptcy is inherently a creature of competing interests, compromises, and less-than-perfect outcomes.” Judge Lee’s olive-branch notwithstanding, concerns remain that the Second Circuit’s approach will embolden business owners that are potential liable in mass tort to file company bankruptcy and avoid personal liability. On one hand, the ruling may be viewed as the judicial system moving the settlement process surrounding the opioid epidemic one step closer to resolution. On the other, some have characterized the process as an alternative justice system for large corporations and rich owners. Support for these criticisms parallel points raised by Second Circuit Judge Richard Wesley in his separate concurring opinion. There, Judge Wesley wrote that the “release is non-consensual; it binds consenting and objecting parties, without providing an opt-out option to those who object.”
Some, including Purdue and the Sacklers, applaud the decision, while others criticize the substantive effects of the ruling and Second Circuit’s legal rationale. It remains unclear whether the decision will be appealed to either the Second Circuit sitting en banc or to the Supreme Court. But, for now, the bridge between the Circuit Courts of Appeal interpretation of nonconsensual third-party releases has not yet been built and will continue to vary along jurisdictional lines.
Sources:
James Nani, Purdue Opinion Deepens Circuit Split Over Bankruptcy Releases, Bloomberg Law (May 31, 2023).
Centers for Disease Control and Prevention, Drug Overdose – Overview (last reviewed May 18, 2022).
Centers for Disease Control and Prevention, Opioid Basics (last reviewed May 23, 2022).
Barry Meier, Origins of an Epidemic: Purdue Pharma Knew Its Opioids Were Widely Abused, New York Times (May 29, 2018).
Paul Schott, Individuals’ claims against Purdue Pharma sharply rise, Stamford Advocate (June 17, 2020).
In re Purdue Pharma L.P., 2023 WL 3700458, *15 (2d Cir. ).
Pierson et al., U.S. judge tosses $4.5 bln deal shielding Sacklers from opioid lawsuits, Reuters (Dec. 17 2021).
In re Purdue Pharma L.P. (“Purdue I”), 633 B.R. 53, 59 (Bankr. S.D.N.Y. 2021).
In re Purdue Pharma, L.P., 635 B.R. 26, 89 (S.D.N.Y. 2021).
Nani, supra note 1.
In re Purdue Pharma L.P., 2023 WL 3700458, *6 (2d Cir. ) (Wesley, J., concurring).
Jan Hoffman, Sacklers Can Be Shielded From Opioid Liability, Appeals Court Rules, New York Times (May 30, 2023).