Why Purdue Pharma's SCOTUS case matters for bankruptcy law

• The high court's decision could have a far-reaching impact on the ability of all kinds of bankrupt companies — not just those facing consumer litigation — to efficiently reorganize and repay creditors some of what they're owed.
• The ruling will be closely watched in the bankruptcy world, a restructuring lawyer tells Axios.

Zoom out: The case comes at a time when other bankruptcy filings like units of Johnson & Johnson and 3M have rankled judges and politicians with their attempts to resolve mass tort liabilities in bankruptcy, rather than in the traditional court system.

Catch up fast: Purdue filed for bankruptcy in 2019 because it couldn't afford the damages from thousands of lawsuits over its role in fueling the opioid crisis.

• As part of a bankruptcy deal, the Sacklers agreed to pony up $5.5 billion to fund a settlement with Purdue's creditors — aka mass tort claimants, including individuals, states and cities — and establish a trust dedicated to opioid abatement efforts.
• In exchange, the opioid claimants agreed to release the Sacklers from future civil liability.

The big picture: These "releases" are the core issue in the Supreme Court case.

• The Department of Justice bankruptcy watchdog, known as the U.S. Trustee, asked the Supreme Court to block the bankruptcy plan, arguing that the bankruptcy court doesn't have the power to grant these types of releases. (Go deep on the legal arguments.)

Context: In the corporate bankruptcy world, releases are a common way to encourage pre-bankruptcy investors or lenders to contribute funds toward the reorganization. It may feel icky, but it's a key part of moving cases along efficiently, and getting money to creditors when the bankrupt company itself doesn't have any.

• The other side: It's also a way for those investors to stamp out their legal liability without facing bankruptcy themselves.
• Releases amount to "special protection for billionaires," said one of Purdue's claimants in a brief.

The intrigue: Releases have long been a lightning rod for objections — and courts have disagreed on the matter.

• Purdue's bankruptcy judge approved the plan, only to have the U.S. District Court reject it. The 2nd Circuit then reversed that ruling and approved the plan — which is when the U.S. Trustee petitioned the high court to hear the case.

The impact: "It seems clear that whatever the Court decides in the context of this mass torts case will spill over to typical corporate restructurings," wrote the LSTA, a debt market trade group.

• If the justices decide the bankruptcy court can't approve releases, it would likely lead to more and longer litigation over bankruptcy plans, and to slower, harder-fought distributions to creditors — unless the Supreme Court opts to distinguish mass tort bankruptcies from other types of cases, the bankruptcy lawyer says.

💭 Thought bubble: Given that recent decisions have been all over the map, the issue was bound to find its way to the Supreme Court — and it's not surprising that it was the Sackler case that got it there.

• After all, with the evidence of Purdue's deceptive marketing about the addictiveness of its painkillers, a deal that allows the Sacklers to hold onto any of their billions feels particularly odious.
• (The Sacklers paid $225 million in a DOJ civil settlement over False Claims Act liabilities; Purdue paid $8 billion.)

Yes, but: Many of the claimants themselves would simply like to finally get their money and move on.

• Three groups of Purdue creditors filed briefs arguing the bankruptcy court has the legal authority to approve these types of settlements.
• And they acknowledge the practical side. "The actual victims here want this plan, want the releases, and want closure, not the opportunity for endless, damaging, and assumedly futile litigation against the Sacklers," a group of more than 60,000 individuals affected by Purdue's painkillers wrote in a brief to the high court.
• "For personal injury victims, many of whom live on the edge of poverty ... these funds are desperately needed," the brief said.

The bottom line: It's "a case study in unsavoury tradeoffs," as the Economist described it.