Purdue Seeks to DIG Sackler Release Appeal Out of SCOTUS, Says US Trustee Lacks Standing, Compares UST to ‘Postmaster of Walla Walla’ in ‘Administrative State’ Broadside at Watchdog Program

Relevant Documents:
Purdue Debtors’ Brief
UCC Brief
Ad Hoc Governmental Claimant Committee Brief
Ad Hoc Group of Individual Victims Brief
Multistate Governmental Entities Group Brief
Mortimer Sackler Family Brief
Raymond Sackler Letter of Support

From “United States Trustee Program: Watchdog or Attack Dog?”:

“In answer to the question, ‘Watch dog or attack dog,’ the answer is the U.S. Trustee is not one dog. It is a pack of dogs.”

--Judge A. Jay Cristol of the U.S. Bankruptcy Court for the Southern District of Florida

The proponents of Purdue Pharma’s plan of reorganization are defending the plan’s most controversial element - nonconsensual nondebtor releases of Purdue’s owners, the Sackler family - at the U.S. Supreme Court. In briefs filed last month, the plan supporters call on SCOTUS to affirm a decision from the U.S. Court of Appeals for the Second Circuit holding that bankruptcy courts have authority to approve nonconsensual nondebtor releases in chapter 11 plans.

The Second Circuit was correct, the plan defenders say, when it concluded that Judge Robert Drain had jurisdiction and statutory authority to release creditors’ direct claims against the Sacklers without the creditors’ consent when he confirmed Purdue’s plan in September 2021. The proponents point to sections 105(a) and 1123(b)(6) of the Bankruptcy Code, which confer broad equitable powers to bankruptcy courts.

The plan defenders’ interpretation of the Bankruptcy Code is well-trodden ground. Ever since these proponents unveiled the plan settlements undergirding Purdue’s plan, they have argued that the Sackler release is lawful. Reorg will explore those statutory and constitutional arguments in more detail in forthcoming stories ahead of oral arguments on Dec. 4.

However, the latest round of briefing also assails the UST’s appeal from a new angle: The Purdue debtors, the official committee of unsecured creditors and claimant groups argue the UST lacks standing to challenge the Sackler release at the Supreme Court because the UST lacks a financial stake in the outcome of the litigation. Conversely, a group of individual claimants maintains that the UST has a financial stake - the federal government’s $2 billion forfeiture claim if the plan craters - and is disqualified for that reason.

The briefs attempt to turn a dispute over the powers of bankruptcy courts into a debate over the UST’s powers as “a litigating component of the Department of Justice [] whose mission is to promote the integrity and efficiency of the nation’s bankruptcy system for the benefit of all stakeholders - debtors, creditors, and the American public.” The UST says it opposes the Sackler release as an independent bankruptcy “watchdog,” but Purdue says Congress never granted the UST the power to pursue a lone “crusade,” invoking the specter of the overreaching “administrative state” often curbed by the conservative-leaning high court of the past several decades.

William Harrington, U.S. Trustee for Region 2, asserted in his brief that the debtors failed to argue that the UST lacks standing to appeal in the lower courts, and thus forfeited the point. Besides, the brief adds, the UST has standing to appeal under section 307 of the Bankruptcy Code, which states that “[t]he United States trustee may raise and may appear and be heard on any issue in any case or proceeding under [Title 11].”

Purdue responds that objections to standing “cannot be waived or forfeited” - and that it would have made little sense to raise the argument at an earlier stage, when there were other litigants with standing. However, this is no longer true, Purdue says, and the Supreme Court case “underscores why standing matters.” According to the debtors, the UST “hijacked this case after the Second Circuit’s decision, alone appealed it to this Court, and now asks the Court to invalidate a plan that was negotiated and overwhelmingly approved by the victims” of Purdue’s misconduct (emphasis added).

As a result, Purdue argues that the Supreme Court should dismiss its writ of certiorari as improvidently granted - in other words, the Supreme Court should decline to review the Second Circuit Purdue ruling at all, reversing its decision to accept the case.

The UCC likewise insists that SCOTUS should dismiss the writ of certiorari as improvidently granted, or alternatively for lack of jurisdiction. The ad hoc committee of governmental and other contingent litigation claimants adopts the others’ views. If the court does reach the merits of the case, they add, it should affirm the Second Circuit.

The DIG

The dismissal of a certiorari writ as improvidently granted - a DIG, as SCOTUS observers call it - is rare. In a 2005 article, Michael Solimine and Rafael Gely explained that “[f]ew cases are DIGged.” The authors conducted an empirical analysis of DIGs rendered by the Supreme Court from 1954 through 2004 and concluded that “the Court has on average only DIGged about two or three cases per Term,” typically after briefing and oral argument.

Solimine and Gely argued that DIGs are worthy of scrutiny because “virtually by definition, any case in which certiorari is granted is an important case to the legal community in some way.” Almost all cases reach the docket of the Supreme Court after the court issues a discretionary writ of certiorari; “Declining to review a case, where the initial decision was to do so, is bound to make waves.”

For example, DIGging the Purdue case would mean that the Second Circuit opinion would stand and the nation’s courts would continue to be divided on the viability of nonconsensual nondebtor releases. The Fifth, Ninth and Tenth Circuits have held that bankruptcy courts lack authority to impose nonconsensual nondebtor releases in non-asbestos cases (section 524(g) of the Bankruptcy Code specifically allows for nonconsensual releases of asbestos claims against nondebtors, subject to more stringent confirmation requirements). The First, Second, Third, Fourth, Sixth, Seventh and Eleventh circuits permit channeling injunctions and nonconsensual nondebtor releases in some form.

At the same time, the procedure for DIGs is still “relatively unknown,” Solimine and Gely observed in a 2010 follow-up study. When it DIGs a case, the Supreme Court sometimes explains the decision in one or more written opinions, but the process and reasons for issuing a DIG remain arcane compared with other aspects of Supreme Court practice, the authors said.

Kevin Russell, partner at Supreme Court litigation boutique Goldstein & Russell, outlined three main reasons cases get DIGged in a 2019 article for SCOTUSblog. He wrote that “cases are most commonly DIGed when the court discovers something after granting certiorari that makes the case a poor vehicle for resolving the question it had taken the case to answer.” For example, Russell suggested, “the facts may not actually present the question, there may be a jurisdictional problem or it may come to light that an argument wasn’t properly preserved.”

Russell also pointed to “a handful of instances in which it appears that the Supreme Court DIGed a case simply because it was unable to reach a consensus and apparently believed that DIGing the case would be better than issuing a fractured opinion with no controlling rationale.” At other times, the court tossed a case “in response to a perceived bait-and-switch” after a petitioner made one argument in the cert petition and another in the merits briefing.

Debtors, UCC: The UST Is Not a Creditor or the Government but the Administrative State Run Amok

Returning to the Purdue papers, the debtors and the UCC seem intent on pursuing one version of the “poor vehicle” DIG argument. The debtors insist that the UST lacks standing to act as a party in this case under Article III of the U.S. Constitution because the nondebtor releases in the Purdue plan do not cause the UST “concrete harm.” The case law sometimes refers to this as the “person aggrieved” standard.

The debtors emphasize that the UST is not a creditor of Purdue. Moreover, the U.S. government itself is carved out of the nondebtor releases under a previously announced settlement (more on this later), and the releases’ legality “does not impact the Trustee’s discharge of his duties in any way,” according to Purdue.

Similarly, the UCC asserts that “[b]ecause the Trustee does not hold a claim against either the Debtors or the Sacklers, he has no concrete interest necessary to establish Article III standing.” Meanwhile, the committee distinguishes its own role, pointing out that it serves as a fiduciary to “creditors that do hold claims subject to the Release.” Those creditors “overwhelmingly support the Plan,” the committee says, highlighting that over 95% of voting creditors accepted the plan.

In short, the debtors and the UCC accuse the UST of overstepping its powers. The disagreement is rooted in their interpretation of section 307 of the Bankruptcy Code and 28 U.S.C. section 586, which together spell out key duties and powers of the UST. Section 307 states that “[t]he United States trustee may raise and may appear and be heard on any issue in any case or proceeding under this title,” although the UST may not file a plan. The UST’s duties under section 586 include “monitoring” and “fil[ing] ... comments” on chapter 11 plans and disclosure statements.

The debtors insist that “appear and be heard” is an “amicus-type role” - “a far cry from ‘commandeer and appeal’” (emphasis added). In other words, the UST “is free to file a brief presenting his views on third-party releases in a case otherwise properly before the Court” but cannot act as a party or lodge an appeal absent a pecuniary interest in the case. Similarly, the UCC argues that the statutes allow the UST to comment on an existing case or proceeding but not “to create a ‘case or proceeding,’ either in the bankruptcy court or in this Court.”

The UST points out that the First, Second, Third, Fourth, Sixth and Ninth Circuits have already recognized that section 307 of the Bankruptcy Code “grants U.S. Trustees standing to appeal regardless of the government’s financial interest.” The petitioner brief also asserts that U.S. Trustees are part of the U.S. Department of Justice, and “a statute authorizing suit by the United States is fundamentally different” from statutes permitting private persons to sue.

The U.S. government “has a long-recognized right to sue in appropriate circumstances to prevent injury to the general welfare,” the UST continues. The federal government also “regularly participates as a party in an array of cases - most obviously criminal prosecutions, but also civil cases - to vindicate its sovereign interest in the enforcement of federal law, even in the absence of any pecuniary interest” and even without express statutory authorization, the brief says.

Purdue responds that “William K. Harrington, even when acting as Trustee, is not the United States. He is simply an agency official [] - one who has not been nominated by the President or confirmed by the Senate” (emphasis added). According to the debtors, “[t]he Trustee’s duties, spelled out by statute …do not include representing the United States or enforcing U.S. law. He is not ‘the United States’ any more than the postmaster of Walla Walla, Washington, is” (emphasis added).

After that swipe at postmaster Emma Davis, the debtors warn that giving an agency official such as the UST the power to litigate as a party “would only further enlarge the heavy footprint of the administrative state” (emphasis added). The UCC agrees, calling the UST a mere “advisory ‘watchdog’” and emphasizing the absence of presidential appointment or Senate confirmation for the UST. The committee also asserts that “[t]he Trustee is not the SEC or FTC” and lacks those agencies’ regulatory powers.

By contrast, the UST highlights in its brief that individuals holding the position of UST are subject to removal by the attorney general. By challenging the lawfulness of the Sackler release under the Bankruptcy Code, the UST is “permissibly exercising the Executive’s authority,” the UST says.

Generally, the two sides paint starkly different portraits of what practitioners have come to expect about the UST’s power to litigate. For instance, the UCC says it believes Purdue is “the only case in which the Trustee has served as petitioner” in the Supreme Court, except for “the isolated circumstance of defending the constitutionality of fees payable to the Trustee (i.e., where he was himself a party with a direct financial interest)” (emphasis added). The committee is referring here to Office of the United States Trustee v. John Q. Hammons, which the Supreme Court agreed to review in the wake of its recent opinion on UST fee increases, Siegel v. Fitzgerald.

The UST maintains that U.S. Trustees “frequently appear in bankruptcy proceedings to litigate the legal viability” of chapter 11 plans - and “U.S. Trustees appeal orders in Chapter 11 cases, including as the sole appellant” (emphasis added). As examples, Harrington cites the UST’s pending Third Circuit appeal of a bankruptcy court order denying the appointment of an examiner in the FTX cases; a 2019 Ninth Circuit plan confirmation appeal opinion, Garvin v. Cook Investments; and the U.S. District Court for the Southern District of Texas’ 2021 opinion in the UST’s appeal of exculpation provisions in the Diamond Offshore Drilling plan.

Neither side mentions last year’s Ascena Retail decision from the U.S. District Court for the Eastern District of Virginia, which directly addressed the UST’s standing to appeal the bankruptcy court’s approval of nonconsensual nondebtor releases in a chapter 11 plan.

In Ascena, U.S. District Judge David Novak struck down nondebtor releases in the retailer’s plan approved by the Richmond bankruptcy court. That ruling, along with Judge Novak’s requirement that the case be reassigned on remand to a new, non-Richmond-based bankruptcy judge, was seen as a potential turning point in the law of nondebtor releases, as Reorg’s own Court Opinion Review discussed.

For our purposes - probing the UST’s standing to appeal the Sackler release at the Supreme Court - take a look at Judge Novak’s discussion of the UST’s powers under section 307 of the Bankruptcy Code:

Judge Novak continued, “the Fourth Circuit has recognized that a trustee could never satisfy the ‘person aggrieved standard’ [] but still has standing to appeal adverse bankruptcy decisions in its role as a ‘public watchdog’ over bankruptcy proceedings” (emphasis added). Again quoting the Clark decision, the judge finds that “standing to appeal under the Bankruptcy Act as a ‘party aggrieved’ may arise from a party’s official duty to enforce the bankruptcy law in the public interest.”

The opinion went on: “Accordingly, the Trustee has standing to appeal to this Court. And, his appeal of the Third-Party Releases encompasses the appeal advanced by the Securities Litigation Lead plaintiffs. This leaves the Court with no reservations that it can consider the merits of the appeal regardless of whether the Securities Litigation Lead plaintiffs have standing” (emphasis added).

The Ascena appeal in the district court was prosecuted by both the UST and two securities fraud class-action plaintiffs. Judge Novak ultimately concluded that the securities plaintiffs lacked standing to appeal the nondebtor release in the Ascena plan because they opted out of the release, and “therefore it has no impact on them” - that is, they suffered no “concrete harm” of the kind discussed by Purdue and the UCC. However, as noted above, Judge Novak found that the UST had standing to challenge the nondebtor release as the sole appellant.

Of course, the Supreme Court is not bound by Ascena or the Fourth Circuit’s Clark decision. But the question of whether the UST can appeal the Sackler release alone is key to Purdue as well. In the Supreme Court appeal, two other respondents have joined the UST in calling for the reversal of the Second Circuit Sackler release ruling: a group of Canadian First Nations and municipalities and an individual, Ellen Isaacs, whose son died of an opioid overdose.

Because there are other appellants seeking to vacate the Purdue confirmation order, the UST reasons, the Supreme Court “need not address the U.S. Trustee’s own standing” at all. “The existence of one litigant with standing to seek a particular form of relief satisfies Article III.”

But Purdue and the UCC argue that the UST cannot piggyback on the Canadian creditors and Isaacs. The UCC says the Canadian creditors lack standing themselves because they assert claims against nondebtor Purdue Canada and their claims are explicitly carved out of the Sackler release. The result is that the Canadian creditors will not be harmed by the release and “cannot supply the Court with Article III jurisdiction that the Trustee’s petition failed to confer.”

Now, the debtors say, the Canadian creditors argue that they could be affected by the Sackler release because they “purport [] to represent an uncertified class of Canadian creditors who might have claims that would be released” if the debtors and the Sacklers’ conduct “somehow ‘permeated’ into Canada.” These claims are “extraordinarily attenuated, suffer from obvious causation problems, and would stretch public-nuisance doctrine beyond its limits,” Purdue asserts.

As for Isaacs, she has forfeited any challenge to the Sackler release because she did not object to confirmation of the plan, the debtors and the committee argue. Purdue adds that Isaacs “has not presented any legal argument bearing on the question presented.”

Individual Victims Group: The UST Is the Government, and the Government Is Purdue’s Largest Creditor

Interestingly, while the debtors and the UCC insist the UST lacks standing because it has no concrete interest in the case, the ad hoc group of individual victims suggests the UST - or at least the solicitor general, which is pressing the UST’s appeal in the Supreme Court - is not a “disinterested bankruptcy ‘watchdog.’”

In its brief, the ad hoc group, made up of “over 60,000 individuals who were injured either directly or indirectly by exposure to Purdue’s opioid products,” voices skepticism that the UST and solicitor general should be viewed as neutral. The White & Case-represented group does not challenge the UST’s standing but warns that it “is not a disinterested advocate for personal injury victims.”

Specifically, the ad hoc victims group asserts that “the Solicitor General is a Department of Justice official, and the Department of Justice has a clear financial interest in the outcome of this case” (emphasis added). Indeed, the U.S. government is the “only party that will be economically benefitted by a reversal here” because it “stands to recover $2.0 billion ahead of all of Purdue’s creditors if the Plan fails,” according to the group (emphasis added).

Here, the ad hoc group of individual victims is alluding to the Department of Justice resolution announced in October 2020, one of the pillars of Purdue’s plan. Under the deal, the DOJ agreed to forgo most of the recovery on its $2 billion nondischargeable criminal forfeiture claim against Purdue, subject to significant conditions that shaped the plan eventually filed by the debtors.

Critically, the United States agreed to accept a $225 million cash payment after Purdue is convicted under a plea agreement but would not pursue the remaining $1.775 billion from the debtors, instead “crediting” Purdue for that amount if the debtors distribute the funds to state, local or tribal governmental entities.

In exchange, Purdue is required to emerge as a “public benefit company (or entity with a similar mission),” and the public claimants could only use the $1.775 billion to abate the opioid crisis. In line with these requirements, Purdue’s plan proposes that the reorganized company, Knoa Pharma LLC, would be indirectly owned by trusts established for the benefit of non-federal governmental and tribal creditors.

If the plan cannot be confirmed and the debtors are liquidated instead, the ad hoc victims group explains, then the U.S. government’s agreement to forgo “$1.775 billion of its $2 billion superpriority administrative expense claim for the benefit of the plan’s abatement program would disappear,” and “[t]he United States would be entitled to all of that recovery first from the Debtors’ estates.”

Because “no one has controverted” PJT Partners’ valuation analysis, which estimated the midpoint value of the debtors’ businesses at $1.8 billion on a going-concern basis, the DOJ claim would swallow Purdue’s entire enterprise value, the brief points out.

In short, the ad hoc victims group argues that “while formally speaking on behalf of a disinterested ‘watchdog,’ the Solicitor General also stands for the interests of the one creditor (the United States) that stands to recover billions in the event of this Court’s reversal of the Second Circuit decision and a resulting failure of the Plan” (emphasis added).

Synthesizing the Arguments

Readers may be suffering from whiplash. Remember, Purdue insisted that the UST is not the U.S. government - any more than a postmaster of a small Washington city - and lacks a pecuniary interest in the case. In a funhouse mirror version of this argument, the ad hoc group of individual victims argues that the UST is too connected to the U.S. government, Purdue’s largest creditor - in other words, that the UST has a pecuniary interest that prevents it from serving as a neutral watchdog.

These two visions of the UST, both from plan supporters asking for the same result, are not easy to square with each other. But the ad hoc victims group’s critique seems to be twofold. First, the group argues that it is hypocritical for the DOJ to purport to speak for victims in the appeal, when it is the DOJ itself that would benefit if Purdue’s plan fails. Second, the group links the UST to the DOJ, highlighting the Solicitor General’s decision to represent the UST in the appeal.

The first point - a conflicts of interest argument, essentially - is the focus of William Organek’s discussion of the Purdue proceedings in Mass Tort Bankruptcy Goes Public. Examining the DOJ’s participation in the case, Organek argues that governments’ “simultaneous roles as representatives of injured citizens, creditors in their own right, and sovereigns with broader social duties and regulatory powers” can “lead to intense conflicts of interest.” Again taking Purdue as an example, Organek also asserts that mass tort chapter 11 cases give governments the tools to “privilege their recoveries over those of their citizens.”

Whether you are swayed by the ad hoc victims group’s second point probably depends on whether you identify the Office of the U.S. Trustee with the U.S. government. As discussed above, the debtors answered the question with a resounding no in their bid to get the Supreme Court to DIG the case. The practical reality may be more mixed.

As “a litigating component of the Department of Justice,” the Office of the U.S. Trustee is surely “the United States” for some purposes. For example, when the Supreme Court asked “the United States” to weigh in as an amicus on the competing cert petitions related to the Fifth Circuit’s Highland Capital Management exculpation decision, it was - who else? - the UST and the solicitor general that responded. But the exact link between the UST and the rest of the DOJ (and therefore, your view of the watchdog’s independence, whichever way that cuts) seems to vary depending on the function the UST is carrying out. Lindsey Simon described the office this way in a 2020 article:

So is the UST the U.S. government for purposes of its campaign against the Sackler release? For what it’s worth, William Harrington did not exactly toil alone as U.S. Trustee for Region 2. In a 2022 budget submission, the U.S. Trustee Program told Congress that it coordinated with “Department leadership and other components [of the DOJ] in drafting numerous legal briefs related to the appeal of” the Purdue confirmation order. And Clifford White III, who served as director of the U.S. Trustee Program for 17 years, told the Creditor Rights Coalition that “[t]he decision to oppose the non-consensual, non-debtor releases in Purdue Pharma and other cases has had support at the very top of DOJ.”

Whether the Supreme Court chooses to delve into the conflicting views of the UST’s “disinterestedness” and its proximity to the DOJ when it considers dismissing the Purdue case is anyone’s guess.