The United States Supreme Court last week put on hold a proposed Chapter 11 bankruptcy plan for Purdue Pharma that would reserve billions of dollars allotted to pay victims and their families who suffered under the opioid crisis, which also (and controversially) is a plan that would give “immunity” to the payor of the funds, the Sackler family, who owns the company, to settle thousands of lawsuits filed by the states, hospitals, and victims. The Supreme Court will hear the argument in December 2023. Purdue Pharma filed for Chapter 11 relief in 2019 due to all of the debts arising from the lawsuits alleging that OxyContin fostered the opioid epidemic and caused more than 600,000 overdose deaths.

In a brief unsigned order, the Supreme Court granted the Justice Department’s request to temporarily block the Chapter 11 Plan which was approved by the bankruptcy court in 2021 and then affirmed by the Circuit Court. The Justice Department is challenging whether Sackler family members — who personally did not file for bankruptcy — can be protected from litigation over their role in the nation’s gargantuan opioid crisis. The Supreme Court has agreed to review the case and consider whether the U.S. bankruptcy code authorizes such agreements.

The appeal to the Supreme Court comes more than two months after the U.S. Court of Appeals sustained the approval by the bankruptcy court of the plan, saying the Sacklers being shielded from lawsuits was needed to “ensure the fair distribution” of the settlement money. Under the negotiated deal, the Sacklers would pay up to $6 billion over nearly two decades to help alleviate the crisis. The settlement plan could ultimately be worth more than $10 billion, Purdue Pharma has said.

The Justice Department argues in its filing to the high court that shielding the Sacklers is “an abuse of the bankruptcy system,” and that allowing the appellate court’s decision to stand would leave in place “a road map for wealthy corporations and individuals to misuse the bankruptcy system” to avoid liability from lawsuits.

There are very broad implications for the decision that the Supreme Court will hand down. A ruling by the Supreme Court to block the use of “non-consensual third-party releases” (which allow for the release of non-debtor third parties in exchange for their payment of proceeds to use to fund a bankruptcy plan) would likely jeopardize the Pharma bankruptcy settlement and have future implications in the funding and settlement of mass tort litigation in bankruptcy proceedings.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

On February 22, 2023, the U.S. Supreme Court decided Bartenwerfer v. Buckley, No. 21-908, and affirmed the Ninth Circuit in holding that 11 U.S.C. § 523(a)(2)(A), which bars debtors from discharging debts obtained by fraud, holding that it applies to debtors who are liable for fraud even though they did not personally commit the underlying relevant actions.

Kate Bartenwerfer (“Kate”) jointly purchased a home with her business partner, David Bartenwerfer (David”). They worked to remodel the home and sold it at a large profit. David performed most of the remodeling services and Kate was largely uninvolved in those actions. When the remodeling was finished, Kate and David (hereinafter may be referred to as the “Sellers”) sold the house to Kieran Buckley (“Buckley”), and as part of the sale process they certified that they disclosed all material facts related to the property. After the sale was consummated, Buckley noticed that many substantial defects were concealed from her prior to the sale and commenced a suit alleging misrepresentation and secured a judgment against both of the Sellers for the remodel for breach of contract, negligence, and nondisclosure of material facts.

The Sellers then jointly filed for bankruptcy in an attempt to discharge Buckley’s judgment. The Bankruptcy Court concluded that the judgment against Kate was non-dischargeable under section 523(a)(2)(A), which bars the discharge of “any debt . . . (2) for money, property, [or] services . . . obtained by . . . (A) false pretenses, a false representation, or actual fraud,” because David’s knowing concealment of the home’s defects could be imputed to Kate. The Bankruptcy Appellate Panel reversed in part and remanded for determination of whether Kate had specific knowledge of David’s fraud. On remand, the Bankruptcy Court concluded that Kate lacked any information regarding David’s fraud and therefore the judgment against her could be discharged. The Ninth Circuit reversed, holding that a debtor who is liable for a partner’s fraud cannot discharge that debt in bankruptcy, even if there is no evidence of that debtor’s responsibility or blame.

An appeal was taken up to the U.S. Supreme Court, which held that the text of section 523(a)(2)(A) precluded Kate from discharging the judgment debt insofar as the debt emanated from “the sale proceeds obtained by David’s fraudulent misrepresentations, it is a debt ‘for money . . . obtained by . . . false pretenses, a false representation, or actual fraud.’” In so concluding, the Supreme Court recognized that the statute does not concern itself with who committed the fraud — if debt results from someone’s fraud, it is non-dischargeable under section 523(a)(2)(A).

Further, the Supreme Court analyzed precedent interpreting a prior version of the statute — where it held two innocent partners were prohibited from discharging debts arising out of the fraud of another partner — and Congress’s decision to enact a new version of the statute echoing the Court’s holding. The Supreme Court stated that when Congress enacts a statute, it is presumed to be aware of the Court’s precedents and that the presumption is especially strong when Congress changes the statutory text to embrace one of the Court’s prior holdings or interpretations of the statute.

The Court also did not accept Kate’s argument that “[p]recluding faultless debtors from discharging liabilities run up by their associates” is inconsistent with Congress’s policy of giving debtors a fresh start. The Supreme Court stated that Congress struck a careful balance between debtors and creditors under the bankruptcy code, which the Court is not at liberty to rewrite. This decision resolves a circuit split as to whether these types of debts are dischargeable.

To discuss the issues raised here or any other issues involving creditors’ rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.

On, January 31, 2023, Bankruptcy Judge Goldblatt issued a comprehensive opinion discussing Mareva injunctions which generally prohibit the defendant from transferring its assets when a plaintiff has only asserted a “legal claim” against the defendant/debtor and before a judgment is actually entered. The court also discussed how the U.S. Supreme Court opinion in the Grupo case (as discussed below) controlled his decision. See Miller v. Mott (In Re Team Systems Int., LLC).

In this highly contentious bankruptcy, Debtor was a small business government contractor whose work was done solely by its members and had no independent employees. The Chapter 7 trustee (the case was originally filed as a Chapter 11 but converted to a Chapter 7) initiated a fraudulent conveyance complaint (“Complaint”) against numerous defendants/insiders, their family members, and entities which they owned in an attempt to recover property worth in excess of $14 million. Per the Complaint, the trustee sought: (a) recovery of these conveyances; (b) the imposition of a preliminary injunction to prevent the alienation of 3 specific properties; (c) the enjoining of the transfer of other real estate and other assets; and (d) an accounting.

During the course of the litigation and the bankruptcy in general, it came to light that not only were there substantial prepetition transfers to insiders and that the insiders had taken steps to conceal the existence of these transfers, but that Debtor’s business records had been fabricated by the insiders to conceal substantial transfers to themselves. For example, some of the transfers were for the insiders’ purchase of multimillion dollar homes, expensive cars, etc., yet were listed by debtors on their business records as “payments to contractors” to lawyers for their legal services. Further, it appeared that some of the transfers of substantial sums of money were whited out on Debtor’s bank records in an effort to conceal these transactions.

The Court performed a thorough analysis under the U.S. Supreme Court decision in Grupo Mexicano de Desarrolla SA v. Alliance Bond Fund Inc., 527 U.S. 308 (1999), which held that a federal court may not freeze a defendant’s assets when a plaintiff only asserts a legal “claim” against the defendants as they only have a claim in general and not one against any particular asset. Importantly though, the Grupo court did not rule out the availability of an injunction when the Plaintiff seeks “equitable relief”.

In the case herein, the Court found that the trustee’s requests including one for an asset freeze was “equitable” in nature and therefore permissible. As aforestated, despite the fact that the Complaint was one for the return of fraudulent transfers (generally an action sounding in “law”), the trustee also requested a preliminary injunction to freeze certain assets. In deciding that Trustee’s request to “freeze cash” was a bit more troublesome, this Court still granted the relief as the Complaint also called for an accounting of the disposition of cash due to the incomplete business records and the uncertainty about the end result of the transferred funds. It appears that the Court’s granting of the trustee’s requested relief hinged on the “equitable exception” in the Grupo decision and thus concluded that it had the authority to impose the asset freeze here. Note that this Court also delved into an analysis of the U.S. Supreme Court case of Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), which discusses the availability of the requested relief where the trustee seeks the freezing of debtor’s cash. Herein, the trustee’s requests (albeit with a somewhat more limited scope than originally requested) were permitted since in addition to seeking to recover the value of the transferred cash as a fraudulent conveyance it also included a claim for an accounting in the disposition of that cash, which is categorized as equitable relief.

This opinion provides an extremely well-reasoned and analytical approach detailing the burdens which must be met and the scope in requesting an asset freeze of Debtor’s property.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.