An Unlikely Twist in Corporate Accountability


It’s beginning to become a serious question as to whether conservatives on the Supreme Court are deliberately tanking their own reputation. First, their ruling in Dobbs has condemned the Republican Party to lose elections for the foreseeable future. Then, they told 43 million young Americans who were on the verge of getting some relief for their student loans to go pound sand. This has already pushed the Court’s approval rating to its lowest point since Gallup started tracking public opinion.

For an encore, they are on the verge of either going into the history books for siding with the most notorious corporate miscreants in recent American history, or washing off the stink of unpopular rulings and scandal by officially stripping legal immunity from … the Sacklers.

Last Thursday, the Court blocked a $6 billion bankruptcy settlement with leading opioid peddler Purdue Pharma, after the Biden administration challenged a clause in that settlement which “absolutely, unconditionally, irrevocably, fully, finally, forever and permanently releases” the Sackler family, which owned and controlled Purdue, from financial or criminal liability for any possible type of opioid-related claim. In its one-page grant of cert, the Court said that it would hear oral arguments in Harrington v. Purdue in December, with the parties “directed to brief and argue the following question: Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.”

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To say this was a surprise is an understatement. The high-profile Purdue bankruptcy was heavily litigated and even rejected once, with nine “holdout” state attorneys general eventually squeezing $1.675 billion in additional money from the Sackler family and Purdue in exchange for the blanket immunity. An overwhelming majority of creditors, including the family members of OxyContin overdose victims who stand to receive a maximum of just $26,000 to $40,000 in the settlement, voted in favor of the amended deal, in no small part because some of their attorneys had been litigating the case for two decades without seeing a penny. The vast majority of the $6 billion is supposed to go to states, municipalities, and Indian tribes to mitigate the various public-health crises that have stemmed from the opioid crisis, money which is desperately needed.

That it represents only a portion of the $10.7 billion that the Sacklers managed to ferret out of the company between 2008 and 2016 alonemuch less the $2.2 trillion in claims filed against Purdue—was widely seen as outrageous, and in December 2021 a federal judge tossed out the settlement, arguing that the family’s liability releases illegally deprived victims of their due process rights. But when that ruling was overturned by the Second Circuit Court of Appeals in June, the matter seemed settled; among the appellate courts, the Second had been one of the more uneasy with the proliferation of nondebtor releases, even going so far as to throw out releases awarded to various insiders in the 2019 bankruptcy of a Switzerland-based supplier of fuel to ships.

Maybe the justices are as offended by the third-party release trend in corporate bankruptcies as everyone else, and are using the particular aroma of the Sacklers to stamp out the practice.

It seems unlikely that the Supreme Court, which just reversed two Second Circuit court rulings affirming the fraud convictions of two men involved in state bid-rigging schemes, would overturn the same court’s Purdue decision for going too easy on a corporate malefactor. But maybe this is the breaking point. Maybe the justices are as offended by the third-party release trend in corporate bankruptcies as everyone else, and are using the particular aroma of the Sacklers to stamp out the practice. In fact, some experts think that is indeed where this is going.

“Consensus thinking is that SCOTUS is going to kill off the practice with a 9-0 ruling,” said Georgetown bankruptcy professor Adam Levitin. “There’s really no statutory basis for nondebtor releases other than in asbestos cases.” He added that the case raises serious constitutional issues. In particular, nondebtor releases deny litigants from due process claims. And the immunity clauses could be seen as an unconstitutional taking of litigation claims from future third parties who are not even signatories to the settlement.

The conservative author Sohrab Ahmari, who devoted a chapter of his forthcoming book Tyranny Inc.: How Private Power Crushed American Liberty—And What To Do About It to the Purdue bankruptcy, was less optimistic. “One of the tragedies of Trumpian populism I address in my book is how it elevated extreme pro-corporate judges like [Neil] Gorsuch” who enable “the wider erosion of the real economy by the financial economy,” Ahmari said. If the Supreme Court ultimately votes overwhelmingly to ban third-party releases, he told the Prospect, “I’ll have to go back and revise my book for the paperback release.”

But a reversal of the Sackler settlement would answer the mystery of why the Supremes took the case at all, instead of just allowing the Sacklers to have the immunity that was already granted to them by the Second Circuit. The Sacklers didn’t contest the settlement; the petition to the Court was made by the U.S. bankruptcy trustee and the solicitor general. Levitin’s point is that a good-faith textual reading of the relevant law would push in the government’s direction.

WHATEVER SCOTUS DECIDES WILL HAVE MASSIVE IMPLICATIONS for workers and others affected by corporate bankruptcies. Nearly $150 billion in corporate debt is currently trading at “deeply distressed” levels, suggesting bankruptcy may be imminent, and investors are piling into “distressed opportunities” funds being marketed by bankruptcy court veterans like Apollo Advisors and Oaktree Capital Management. While the bankruptcy code ostensibly exists to relieve overleveraged companies of their most onerous debts, the trucking giant Yellow’s chaotic collapse during the past two weeks illustrates how savvy corporate raiders like Yellow lender Apollo often abuse the bankruptcy process to hold on to their returns while skipping out on pension obligations and union contracts. Closer to the Sackler-verse, the Missouri drugmaker Mallinckrodt recently announced it would likely soon file for bankruptcy protection for the second time in three years solely as a ploy, masterminded by its hedge fund owners, to get out of paying a $1 billion settlement it negotiated during its last stint in bankruptcy court stemming from its own massive role in the opioid crisis.

The role of “third-party releases” in such proceedings is simply to immunize all the parties who profited from the demise of a company but are conspicuously not too broke to pay their bills—like the still-billionaire Sackler family, or the Mallinckrodt insiders who made hundreds of millions when the company was riding high—from being personally sued for the misdeeds of the companies they ran and/or for “fraudulent conveyance.” Recovering ill-gotten gains from such parties is no easy feat: It took more than four years for workers, vendors, and other creditors of the now-defunct department store chain Mervyn’s to squeeze $166 million out of the private equity firms that had looted the company into liquidation.

But it was better than the nothing that has become more common in recent years as bankruptcy judges have begun to routinely hand out legal immunity to private equity firms, executives, and other wealthy and powerful insiders in insolvent corporations in the ostensible interest of speedily resolving the notoriously expensive bankruptcy process. In many cases, these releases have immunized brazen acts of corporate looting: The private equity owners of a fraud-infested urine-testing empire called Millennium Laboratories managed to snag third-party releases in the company’s 2015 bankruptcy after squirreling away more than a billion dollars raised in a debt offering the company floated the year earlier while it was under federal investigation for Medicare fraud.

Ruling in favor of any manner of accountability for the powerful would break with recent judicial precedent. The last major trend in white-collar prosecutions that the Supreme Court has shaped involved defining down fraud so much that nobody can be held accountable for it, leading to the release of two of Chris Christie’s aides from the “Bridgegate” scandal, the top auditor at KPMG who was previously convicted of stealing advance information of which of its audits would be inspected by federal regulators, parents from the “Varsity Blues” college admissions case, and a handful of hedge fund traders. Moreover, SCOTUS’s previous forays into bankruptcy law have hardly shaken up the machinations corporations use to maximize the process to their benefit.

Striking down the Sacklers’ third-party release might be a cheap way to salvage what’s left of the Court’s public standing. But the justices might also have to reckon with the fact that their junket-bestowing benefactors could have a future financial interest at stake.

In the wake of Yellow’s bizarre claims that the Teamsters deliberately destroyed the company where 22,000 of their members worked, a prelude to denying those workers compensation from the liquidation, the union demanded an update to corporate bankruptcy laws that “favor corporations in this country, not working people.” That legislation actually exists. Sen. Elizabeth Warren (D-MA) issued a reform bill in the last Congress called the Nondebtor Release Prohibition Act, which would simply ban what the Supreme Court might now bless. The Stop Wall Street Looting Act, another Warren bill, would attack the problems around private equity bankruptcies. And a bill introduced in 2020 by Sen. Dick Durbin (D-IL) and Rep. Jerry Nadler (D-NY) would restrict bankrupt firms’ ability to stiff workers and abandon pension obligations. (Notably, another Durbin proposal to amend the bankruptcy code, the FRESH START Through Bankruptcy Act of 2021, which would restore bankruptcy rights to student debtors, actually has a Republican co-sponsor: Texas Sen. John Cornyn.)

But in a divided Congress, these are going nowhere. That gives the Supreme Court all the cards.

Warren praised the bankruptcy trustee for getting the pause in the Purdue case, and asked, “Will the Supreme Court protect the billionaire Sackler family from accountability or help opioid victims pursue justice?” It’s somewhat jarring that this is even a question, given this Court’s demonstrated stance on corporate liability. But hope springs eternal.

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