Ruling sparks interest, debate among bankruptcy bar

In the wake of the United States Supreme Court’s 5-4 decision in the Purdue Pharma case, viewpoints from bankruptcy practitioners around the nation about the consequences of the ruling vary, and the Carolinas are no exception.

“Bankruptcy courts will work through it,” said Kevin Campbell of Campbell Law Firm in Mount Pleasant, South Carolina. “Attorneys representing debtors and creditors will work through it. It is just that, now, we’ve got to change the rules a little bit to work through it.”

The June decision by the nation’s highest court in Harrington v. Purdue Pharma L.P. upended an agreement related to the bankruptcy proceedings of Purdue Pharma, a company at the center of a multibillion-dollar opioid epidemic. The enterprise made its owners, the Sackler family, extremely wealthy through the sale of OxyContin while the Sacklers took massive distributions from the increasingly weakened company. Under a 2019 bankruptcy, the Sacklers sought to return some of that money to the company in exchange for releases that would insulate family members from future claims. The justices ultimately held that the bankruptcy court did not have the authority to authorize the nonconsensual extinguishment of claims between nondebtors.

‘It’ll all work out’

Campbell welcomed the decision saying that his firm, which represents entities in bankruptcy, had been following the matter as it had several cases pending its outcome. He supports the decision and said that it resolves any potential dispute between circuits.

“Well, it certainly has a negative effect on the bankruptcy court’s ability to release third-party guarantors,” he said. “But will it cause the economy to fail, and will it cause bankruptcy cases to fail more rapidly than they already do? I’d say no. It’ll all work out one way or the other.”

He said that the bankruptcy court is a court of negotiation and compromise, and that the high court’s guidance has helped clarify a potential issue. He feels that personal guarantors might have to put up more money in such matters to satisfy claims or possibly declare bankruptcy themselves.

“There may be, as a result, an increase in the number of bankruptcies for these people who personally guaranteed the debt,” he said.

But others have mixed feelings about the decision. Raleigh attorney Brett Neve of Smith Anderson has represented various parties in bankruptcies, and he expressed concern about disrupting a compromise in the opioid case that was supported by most parties with a stake at the table.

“I think it is going to be a real challenge, especially in cases involving mass torts,” he said. “It is taking real tools out of the toolbox of companies that they have used to date to address those liabilities through bankruptcy.”

Neve said that the court left many issues open with a narrow ruling that could leave judges to grapple with unresolved issues about when releases can be granted and “the scope of what is permissible in this new world.”

He said that, in his experience, most plans rely on some version of consensual release which the court does not prohibit, although it isn’t clear exactly what consent might look like.

“Is that just negative notice to creditors, meaning that if I give you notice and if you don’t speak up and say ‘I don’t want to give a release,’ you give the release, or does that consent require an affirmative step saying, ‘Yes, I check this box or whatever the case may be’ to say I want to grant this release,” Neve said. “That is a very open question following the court’s ruling.”

He echoed the dissent’s concern that the arrangement being upended might not have been perfect, but it might be the best hope for a collective process to address significant systemic liabilities in a matter.

Still, Neve understood the majority’s position.

“I certainly recognize some of the process concerns that are raised in some of the statutory construction arguments that the majority tied into, and the idea that they have that this seems to be against the fundamental bargain of bankruptcy, which is that you push all of your assets onto the table and, in exchange for that, you get relief from your debts,” he said.

Fewer bankruptcies possible

Neve feels the ruling could mean fewer bankruptcies if the bankruptcy court’s power to enforce remedies is curtailed, which might leave other restructuring options more attractive.

He says mass tort practice may see very significant effects from the ruling.

“I’m taking a measured approach because I think there is so much still open on how lower courts will interpret the decision and what will be the realm of the possible in the aftermath, that I think it is hard to say what it is really going to do to the practice,” Neve said.

Brooks Bossong, a Maynard Nexsen shareholder who practices in North Carolina and South Carolina, strongly supported the ruling. He said that bankruptcy law was essentially designed to provide debtors with relief and provide equal treatment to creditors in a given class.

“What they were trying to do with the Purdue Pharma case in providing relief from potential liability for the family members, the Sacklers, is not provided for in the Bankruptcy Code anywhere that I’m aware of,” said Bossong, who represents creditors.

He said that, while he understood the expediency of trying to get compensation for opioid victims, he worried that bad actors might look to this kind of arrangement to escape liability.

“If the Supreme Court had ruled otherwise, I would imagine we would start to see this pattern pretty regularly and used on a large scale in a case like this,” he said.

Deep pockets

It also might favor those with deep pockets who were best able to pay their way out of trouble.

“What that means is that the people that are getting off the hook are the ones that can afford it,” Bossong said. “That’s what it would boil down to.”

He didn’t feel the decision was earth-shattering and instead considered it a “major clarification,” one that he believes might impact the “Texas two-step,” a dynamic in which liabilities and assets are transferred between companies to keep them off the table in a bankruptcy.

“I don’t see that that type of arrangement will be able to survive this decision,” he said.

Bossong, who says the ruling might result in fewer bankruptcies, said that third parties such as the Sacklers might simply have to deal with liability claims through normal litigation channels and, if such lawsuits force them into bankruptcies, that’s just the way it is.

“So be it,” he said. “That’s the appropriate situation to have.”

Still, he didn’t think that would happen and said it was unusual for officers, investors, shareholders and others to be targeted unless there were allegations they engaged in wrongdoing. In those cases, the corporate veil can be pierced, and regular legal wrangling can proceed.

“They are going to get sued, and they should get sued,” he said.

Still, he understood the disappointment of those who were depending on compensation from an opioid settlement process that had dragged on for years and appeared to finally be at an end.

“I think that, unfortunately, is going to have to be the cost of getting to the right decision,” he said.

Questions to be answered

Tara Nauful, a Mount Pleasant lawyer who has been certified by the South Carolina Supreme Court as a bankruptcy specialist, said she agreed with the decision but did not think it would have as much effect as many seemed to believe.

“I think it is a very factually specific case,” said Nauful, who practices as a special counsel at Best Law. “I think it has potential implications, but I think it leaves a lot of things unanswered.”

She noted that the narrow decision was tailored to a fairly limited set of potential cases. She wasn’t even sure how or if, it would affect or eliminate the Texas two-step.

Nauful said that the Sacklers may just end up putting in a bit more cash to bring things back to fruition, a possibility that might have avoided the whole matter.

“I think if the deal had been sweeter, we wouldn’t have had this,” she said.

In any event, she believed the majority was on solid ground.

“I think the court’s underlying legal analysis was correct,” she said. “The code doesn’t let you do this in the way that this plan did this.”

Still, the potential effect was murky, and Nauful agreed that it left unanswered questions.

“It is a significant opinion for bankruptcy geeks,” she said. “It is a big opinion, but I don’t think it necessarily changes the practice on a day-to-day basis.”

However, she did say that busy Bankruptcy Court districts such as Delaware, New York or Texas could see greater effect. She doesn’t feel it will have much impact on the number of bankruptcies either way.

Nauful said that, while the move will cause pain for supporters of the opioid plan, the court did what it had to do, and it is up to Congress to reform the Bankruptcy Code if it wishes to make changes to the power of the bankruptcy courts.

“While this is not a feel-good result, I don’t know that another result would have been OK,” she said.