Second Circuit Reverses District Court, Reinstates Sackler Immunity Deal

On May 30, 2023, the United States Court of Appeals for the Second Circuit reversed U.S. District Judge Colleen McMahon’s December 2021 ruling, holding that bankruptcy courts do have authority to approve non-consensual third-party releases. The divided 2-1 decision reinstated the Purdue Pharma bankruptcy plan granting the Sackler family immunity from opioid-related lawsuits, clearing the path for the controversial settlement to proceed.

Reversal of District Court

The Second Circuit panel reversed Judge McMahon’s finding that bankruptcy courts lack authority to grant immunity to non-bankrupt third parties. The appeals court held that the Bankruptcy Code does permit such releases and affirmed the bankruptcy court’s order confirming Purdue’s Chapter 11 plan, which included sweeping legal immunity for the Sackler family.

The decision found that bankruptcy courts have subject matter jurisdiction and statutory authority to approve the Sackler family releases, despite the family members never filing for bankruptcy themselves.

Legal Reasoning: Majority View

The Second Circuit majority held that bankruptcy courts have broad equitable powers under bankruptcy code section 105(a) to approve non-consensual third-party releases when necessary to achieve a successful reorganization. The court found that the releases were appropriate given the Sacklers’ increased contribution (eventually rising to $6 billion) and the overwhelming creditor support for the plan.

The majority opinion emphasized that 95% of creditors who voted supported the plan, suggesting that the democratic nature of the bankruptcy process justified overriding the objections of the Department of Justice and dissenting states.

Dissenting Opinion

One judge on the panel dissented, agreeing with Judge McMahon that bankruptcy law does not authorize such sweeping releases for non-debtors. The dissent argued that allowing non-bankrupt billionaires to purchase immunity through corporate bankruptcy fundamentally distorts the bankruptcy system and exceeds statutory authority.

DOJ Requests Supreme Court Review

Following the Second Circuit’s decision, the Department of Justice requested that the Supreme Court review the appeals court’s ruling and temporarily put the bankruptcy plan on hold. The DOJ argued that the case presented important questions about the scope of bankruptcy court authority and the ability of non-debtors to obtain immunity through corporate bankruptcy proceedings.

Circuit Split on Third-Party Releases

The Second Circuit’s decision conflicted with other federal circuits that had taken more restrictive views of bankruptcy courts’ authority to approve non-consensual third-party releases. This circuit split made the case a strong candidate for Supreme Court review, as different regions of the country were applying different legal standards to similar bankruptcy questions.

Years of Delays Continue

The May 2023 Second Circuit decision came nearly four years after Purdue’s September 2019 bankruptcy filing. The subsequent DOJ request for Supreme Court review would trigger additional months of delay as the high court decided whether to hear the case. In August 2023, the Supreme Court agreed to pause the bankruptcy plan and scheduled oral arguments for December 2023.

Sacklers Retain Billions Throughout Appeals

Throughout the entire appeals process—from September 2019 bankruptcy filing through May 2023 Second Circuit decision—the Sackler family retained the estimated $11-13 billion they had extracted from Purdue before bankruptcy. While courts debated whether they could purchase immunity for approximately $6 billion, they kept the remaining billions and faced no criminal charges.

Death Toll Mounts During Legal Proceedings

Between Purdue’s September 2019 bankruptcy filing and the May 2023 Second Circuit decision, over 300,000 additional Americans died from drug overdoses, with opioids playing a major role. While courts deliberated the Sacklers’ liability, the crisis they helped create continued killing Americans at accelerating rates, surpassing 100,000 annual overdose deaths for the first time in 2021.

Pattern of Judicial Disagreement

The fact that three different federal judges (Bankruptcy Judge Drain approving, District Judge McMahon reversing, and Second Circuit reinstating) reached different conclusions on the same bankruptcy plan demonstrates the legal complexity that allows wealthy defendants to delay accountability through successive appeals. Each level of appeal adds months or years to the timeline while the protected parties retain their wealth.

This decision set the stage for the Supreme Court’s ultimate resolution of whether bankruptcy law permits billionaires who never filed for bankruptcy to purchase immunity from civil liability through their company’s bankruptcy proceedings—a question that would not be answered until June 2024.