Court Opinions: US Supreme Court Says Purdue Pharma Bankruptcy Plan Violates Codes by Releasing Sacklers From Future Claims

Editor’s Note: Law Week Colorado edits court opinion summaries for style and, when necessary, length.

Harrington v. Purdue Pharma L.P.

Between 1999 and 2019, approximately 247,000 people in the U.S. died from prescription opioid overdoses. Purdue Pharma sits at the center of that crisis, according to the U.S. Supreme Court opinion. 

Owned and controlled by the Sackler family, Purdue began marketing OxyContin, an opioid prescription pain reliever, in the mid-1990s. After Purdue earned billions of dollars in sales on the drug, in 2007 one of its affiliates pleaded guilty to a federal felony for misbranding OxyContin as a less addictive, less abusable alternative to other pain medications. Thousands of lawsuits followed. 

Fearful that the litigation would eventually impact them directly, the Sacklers initiated a “milking program,” withdrawing from Purdue approximately $11 billion — roughly 75% of the firm’s total assets — over the next decade.

Those withdrawals left Purdue in a significantly weakened financial state. And in 2019, Purdue filed for Chapter 11 bankruptcy. During that process, the Sacklers proposed to return approximately $4.3 billion to Purdue’s bankruptcy estate. In exchange, the Sacklers sought a judicial order releasing the family from all opioid-related claims and enjoining victims from bringing such claims against them in the future. The bankruptcy court approved Purdue’s proposed reorganization plan, including its provisions concerning the Sackler discharge.

But the district court vacated that decision, holding that nothing in the law authorizes bankruptcy courts to extinguish claims against third parties like the Sacklers without the claimants’ consent. A divided panel of the 2nd Circuit Court of Appeals reversed the district court and revived the bankruptcy court’s order approving a modified reorganization plan.

The U.S. Supreme Court held that the bankruptcy code doesn’t authorize a release and injunction that, as part of a reorganization plan under Chapter 11, effectively seeks to discharge claims against a non-debtor without the consent of affected claimants.

It reversed the 2nd Circuit’s decision and remanded the case.

Justice Neil Gorsuch delivered the opinion of the court, in which Justices Clarence Thomas, Samuel Alito Jr., Amy Coney Barrett and Ketanji Brown Jackson joined. Justice Brett Kavanaugh filed a dissenting opinion, in which Chief Justice John Roberts Jr. and Justices Sonia Sotomayor and Elena Kagan joined.

The dissenting justices asserted, “Today’s decision is wrong on the law and devastating for more than 100,000 opioid victims and their families.”

Kavanaugh, in the dissenting opinion, noted bankruptcy solves the issue of individual creditors obtaining all of a company’s assets, leaving nothing for anyone else. He wrote that the bankruptcy code allows courts to approve plan provisions so the bankruptcy system can fairly and equitably toll out assets among creditors and/or victims. 

The dissenting justices also pointed out the “rare consensus” of Purdue’s plan among all 50 state attorneys general and a good number of the creditors and victims. 

SEC v. Jarkesy

After the Wall Street crash of 1929, Congress passed a suite of laws designed to combat securities fraud and increase market transparency. Three such statutes are relevant: The Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. These acts govern the registration of securities, the trading of securities and the activities of investment advisers. Although each regulates different aspects of the securities markets, their pertinent provisions — collectively referred to by regulators as “the antifraud provisions” — target the same basic behavior: misrepresenting or concealing material facts.

To enforce the acts, Congress created the Securities and Exchange Commission. The SEC may bring an enforcement action in one of two forums. It can file suit in federal court or adjudicate the matter itself. The forum the SEC selects dictates certain aspects of the litigation. In federal court, a jury finds the facts, an Article III judge presides and the Federal Rules of Evidence and the ordinary rules of discovery govern the litigation. But when the SEC adjudicates the matter in-house, there are no juries. The commission presides while its division of enforcement prosecutes the case. The commission or its delegee — typically an administrative law judge — also finds facts and decides discovery disputes, and the SEC’s Rules of Practice govern.

One remedy for securities violations is civil penalties. Originally, the SEC could only obtain civil penalties from unregistered investment advisers in federal court. Then, in 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act authorized the SEC to impose such penalties through its own in-house proceedings.

Shortly after the passage of the Dodd-Frank Act, the SEC initiated an enforcement action for civil penalties against investment adviser George Jarkesy Jr. and his firm Patriot28, LLC for alleged violations of the “antifraud provisions” contained in the federal securities laws.

The SEC opted to adjudicate the matter in-house. The final order determined that Jarkesy and Patriot28 had committed securities violations and levied a civil penalty of $300,000. Jarkesy and Patriot28 petitioned for judicial review. The 5th Circuit Court of Appeals vacated the order on the ground that adjudicating the matter in-house violated the defendants’ Seventh Amendment right to a jury trial.

The U.S. Supreme Court agreed with that ruling. It held that when the SEC seeks civil penalties against a defendant for securities fraud, the Seventh Amendment entitles the defendant to a jury trial. 

It affirmed the judgment and remanded the case.

Chief Justice John Roberts Jr. delivered the opinion of the court, in which Justices Clarence Thomas, Samuel Alito Jr., Neil Gorsuch, Brett Kavanaugh and Amy Coney Barrett joined. Gorsuch filed a concurring opinion, in which Thomas joined. Justice Sonia Sotomayor filed a dissenting opinion, in which Justices Elena Kagan and Ketanji Brown Jackson joined.

In the dissenting opinion, Sotomayor wrote, “Throughout our Nation’s history, Congress has authorized agency adjudicators to find violations of statutory obligations and award civil penalties to the Government as an injured sovereign.” The dissenting justices go on to note that the court has said these types of claims don’t need to be tried before a jury in federal district court.

“Today, for the very first time, this Court holds that Congress violated the Constitution by authorizing a federal agency to adjudicate a statutory right that inheres in the Government in its sovereign capacity, also known as a public right,” Sotomayor wrote.

Ohio v. Environmental Protection Agency

When the Environmental Protection Agency sets standards for common air pollutants, states must submit a state implementation plan, or SIP, providing for the “implementation, maintenance, and enforcement” of those standards in their jurisdictions. 

Because air currents can carry pollution across state borders, states must also design their plans with neighboring states in mind. Under the Clean Air Act’s good neighbor provision, state plans must prohibit emissions “in amounts which will . . . contribute significantly to nonattainment in, or interfere with maintenance by, any other State” of the relevant air-quality standard.

Only if a SIP fails to satisfy the applicable requirements of the act may the EPA issue a federal implementation plan, or FIP, for the noncompliant state that fails to correct the deficiencies in its SIP.

In 2015, the EPA revised its air-quality standards for ozone, triggering a requirement for states to submit new SIPs. Years later, the EPA announced its intention to disapprove more than 20 SIPs because it believed they had failed to address obligations under the good neighbor provision. During the public comment period for the proposed SIP disapprovals, the EPA issued a single proposed FIP to bind all those states. 

The EPA designed its proposed FIP based on which emission control measures would maximize cost effectiveness in improving ozone levels downwind and on the assumption the FIP would apply to all covered states. Commenters warned that the proposed SIP disapprovals were flawed and that a failure to achieve all the SIP disapprovals as the EPA envisioned would mean that the agency would need to reassess the measures necessary to maximize cost-effective ozone-level improvements in light of a different set of states. The EPA proceeded to issue its final FIP without addressing this concern. 

The EPA announced that its plan was severable. Should any jurisdiction drop out, the plan would continue to apply unchanged to the remaining jurisdictions. Ongoing litigation over the SIP disapprovals soon vindicated at least some of the commenters’ concerns. Courts stayed 12 of the SIP disapprovals, which meant the EPA couldn’t apply its FIP to those states.

A number of the remaining states and industry groups challenged the FIP in the D.C. Circuit. They argued that the EPA’s decision to apply the FIP after so many other states dropped out was arbitrary or capricious, and they asked the court to stay any effort to enforce the FIP against them while their appeal unfolded. The D.C. Circuit denied relief, and the parties renewed their request in the U.S. Supreme Court.

The U.S. Supreme Court granted the applications for a stay and held that enforcement of the EPA’s rule against the applicants will be stayed pending the disposition of the applicants’ petition for review in the D.C. Circuit and any timely petition for writ of certiorari.

Justice Neil Gorsuch delivered the opinion of the court, in which Chief Justice John Roberts Jr. and Justices Clarence Thomas, Samuel Alito Jr. and Brett Kavanaugh joined. Justice Amy Coney Barrett filed a dissenting opinion, in which Justices Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson joined.

The dissenting justices asserted, “The Court today enjoins the enforcement of a major Environmental Protection Agency rule based on an underdeveloped theory that is unlikely to succeed on the merits. In so doing, the Court grants emergency relief in a fact-intensive and highly technical case without fully engaging with both the relevant law and the voluminous record.” 

Moyle v. United States

Per curiam, the U.S. Supreme Court dismissed the writs of certiorari as improvidently granted and vacated the stays entered by the court on Jan. 5.

Editor’s note: this article was updated June 27 to include a correction to a typo made in a posted revision by the U.S. Supreme Court. 

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