Texas Two-Stepping Out of Liability: How the Purdue Pharma Decision Will Have Huge Implications for Future Chapter 11 Cases

By: Olivia Woodmansee

From 1999 to 2021, the national rate for deaths caused by drug overdose increased by more than sixfold; this increase is in part due to the actions of the Sackler family and Purdue Pharma LP (“Purdue”).[1] Despite knowing of the harmful and addictive effects of opioids, specifically OxyContin, Purdue continued to engage with shady health care providers, market the product, and file false reports with the Drug Enforcement Administration (“DEA”) about its actions.[2] As a result of these actions, Purdue and its owners the Sackler family faced an onslaught of liability litigation and criminal/civil charges involving millions of victims and billions of settlement funds.[3]

In September of 2019, Purdue filed a voluntary chapter 11 petition, which would allow them to restructure its operations and reduce its liabilities.[4] The United States Bankruptcy Court for the Southern District of New York approved Purdue’s original $4.5 billion settlement plan and granted nonconsensual third-party releases of the Sackler family.[5] The Southern District of New York then reversed, finding that the bankruptcy courts are not authorized to issue non-consensual non-debtor releases under the Bankruptcy Code.[6] Upon the reversal, Purdue modified the plan by agreeing to pay nearly $6 billion. [7] This modified plan ultimately went to the Second Circuit, where they upheld both the payment agreement and third-party liability release.[8] The Supreme Court granted the petition for a writ of certiorari and heard oral arguments on December 4, 2023.[9]

While not aligned with the precise Texas Two-Step approach used by Johnson & Johnson, the Sackler family is attempting to use the bankruptcy of Purdue Pharma to escape their personal liabilities.[10] The Texas Two-Step is a bankruptcy tactic that many large corporations facing mass tort liability have used and the subject of much criticism.[11]Essentially, a corporation creates a new entity, owned by the same shareholders and it puts assets and liabilities into.[12]That new entity, now burdened by the mass tort liabilities, then files for bankruptcy, alleviating the burden from the original corporation.[13] Purdue itself filed for bankruptcy, but used third-party release to alleviate any personal liability from the Sacklers.[14] Because of this release, individual tort litigants cannot seek damages from the Sacklers despite their very personal involvement in the deaths of thousands of individuals.[15]

This case is shrouded in controversy and the U.S. Trustee and President Biden are at odds with creditors and several states.[16] The Purdue case is unique from many other cases involving mass tort litigation because the settlement agreement releasing the Sacklers from liability received jovial support from creditors and tort litigants.[17] This support came in part because the confirmation of the plan is most likely the only way they would receive any type of compensation for the harms they suffered.[18] However, the outcome of this case will impact the ability of mass tort litigants in cases like the Catholic Church, Johnson & Johnson, and those which courts have not even litigated yet from receiving their proper day in court to hold those responsible liable for their harm.[19] Despite the valid concerns that victim advocates have raised about receiving compensation should the plan not go through, the blatant legal and ethical violations of the Sacklers should not go unpunished.[20] The bankruptcy process is designed to create equitable solutions for debtors and creditors.[21] This equity, while it allows the relief of some debtors, should not be a tool that large corporations can use to relieve themselves of liabilities that they incurred through bad faith. The Second Circuit, in approving the releases, highlighted that the releases were in large part due to an indemnity agreement that the Purdue Board of Directors signed in 2004, which was well before the “contemplation of bankruptcy,” so there was no indication of bad faith filing.[22] The Court argued that this would preclude other corporations from using third-party releases as a loop hole, but this incentive, if savvy businesses know it ahead of time, could be used in a number of cases to stop individuals or corporations from liability in mass tort litigation.[23] For the reasons stated above, the court should not approve the settlement plan because of

[1] See Understanding the Epidemic, CDC (Aug. 8, 2023), https://www.cdc.gov/opioids/basics/epidemic.html (describing numerous drug overdose and opioid-related death statistics); Press Release, Dep’t of Just., Just. Dep’t Announces Glob. Resol. of Crim. and Civ. Investigations with Opioid Mfr. Purdue Pharma and Civ. Settlement with Members of the Sackler Fam. (Oct. 21, 2020), https://www.justice.gov/opa/pr/justice-department-announces-global-resolution-criminal-and-civil-investigations-opioid (announcing the Department of Justice’s resolution of the criminal and civil investigations into the Sacklers and Purdue Pharma).

[2] See Dep’t of Just., supra note 1 (“Purdue, through greed and violation of the law, prioritized money over the health and well-being of patients.”).

[3] Candice L. Kline, Purdue Pharma Goes to SCOTUS: Mass Tort Date with Destiny, 37 Com. L. World 12, 13 (2023).

[4] Chapter 11 Voluntary Petition, In re Purdue Pharma, L.P., No. 19-23649 (Bankr. S.D.N.Y. Sept. 15, 2019), ECF 1; see also 11 U.S.C. ch. 11 (governing chapter 11 bankruptcy reorganization cases).

[5] In re Purdue Pharma, L.P., 633 B.R. 53, 114–15 (Bankr. S.D.N.Y. 2021) (describing how the settlement plan contains other important elements like the creation of a public document depository but emphasizing the lack of remorse various members of the Sackler family demonstrated during their testimony).

[6] In re Purdue Pharma, L.P., 635 B.R. 26, 37–38 (S.D.N.Y. 2021) (“The great unsettled question in this case is whether the Bankruptcy Court – or any court – is statutorily authorized to grant [third-party] releases. This issue has split the federal Circuits for decades.”).

[7] In re Purdue Pharma, L.P., 69 F.4th 45, 85 (2d Cir. 2023).

[8] Kline, supra note 3, at 13; In re Purdue Pharma, L.P., 69 F.4th 45, 85 (2d Cir. 2023).

[9] Harrington v. Purdue Pharma, L.P., 144 S. Ct. 44, 44 (2023); Amy Howe, Court Conflicted Over Purdue Pharma Bankruptcy Plan that Shields Sacklers from Liability, SCOTUSblog (Dec. 4, 2024), https://www.scotusblog.com/2023/12/purdue-bankruptcy-sacklers/.

[10] Emily Sen, How Bankruptcy Can Protect Companies from Lawsuits, Scripps News (Oct. 12, 2022), https://scrippsnews.com/stories/purdue-pharma-to-j-j-bankruptcy-can-protect-from-lawsuits/.

[11] See Katharine H. O’Neill, Dirty Dancing: Is the Texas Two-Step a Bad Faith Filing?, 91 Fordham L. Rev. 2471, 2477-80 (2023) (describing the spin-off company technique, which corporations used, that eventually became the Texas Two-Step).

[12] Id. at 2477.

[13] See id. (noting how the “Texas Business Organizations Code (TBOC) provides a statutory avenue for companies to effect an economically identical transaction”).

[14] Abbie VanSickle, Supreme Court Appears Split Over Opioid Settlement for Purdue Pharma, N.Y. Times (Dec. 4, 2023), https://www.nytimes.com/2023/12/04/us/politics/supreme-court-purdue-pharma.html.

[15] Id. (noting that in the hearing Justice Kagan prodded as to whether the settlement “would allow wealthy people like the Sacklers to shield themselves from lawsuits, including claims of fraud, without putting ‘anything near their entire pot of assets on the table[.]’”).

[16] Melissa Quinn, Supreme Court Wrestles with Legal Shield for Sackler Family in Purdue Pharma Bankruptcy Plan,CBS (Dec. 4, 2023), https://www.cbsnews.com/news/supreme-court-purdue-pharma-sackler-family-bankruptcy/.

[17] Id.

[18] Id.

[19] See id. (identifying the Catholic Church and Boy Scouts of America as reorganization plans that utilized third-party releases).

[20] See VanSickle, supra note 11 (noting that, in addition to their other crimes, the Sacklers had “moved money out of Purdue into offshore accounts.”).

[21] Cong. Rsch. Serv., R45137, Bankr. Basics: A Primer 1 (2022).

[22] In re Purdue Pharma, L.P., 69 F.4th 45, 58, 80-81 (2d Cir. 2023).

[23] See id. at 81 (noting that the court “would be far less persuaded if the party seeking to be released entered into this type of indemnity agreement in contemplation of such a third-party release in bankruptcy” but not describing how a court could determine whether an indemnity agreement is entered into in contemplation of bankruptcy).