2024 saw several important decisions rendered by the Supreme Court of the United States. In this 5 part series, we take a look at some key decisions and the cases that led to those decisions. These are the case summaries decided by SCOTUS that most affect our clients and the courts in which we practice. Case summaries were prepared by Christian & Small summer law clerks Katie Applebaum and Eric Posas along with Partners Sharon D. Stuart and Bill D. Bensinger.
Part 2: Decisions Impacting Bankruptcy and SEC Sarbanes Oxley Law
Bankruptcy
Harrington v. Purdue Pharma, L.P., 144 S.Ct. 2071 (decided June 27, 2024) – non-consensual release of creditor’s claims against non-debtor third parties in bankruptcy
In Purdue Pharma, the Supreme Court addressed the issue of whether a debtor’s plan of reorganization could include a non-consensual release of creditors’ claims against non-debtor third parties. The Court held that such non-consensual releases are not permitted.
The debtor Purdue Pharma, L.P., was owned and at one point managed by members of the Sackler family. Purdue Pharma’s primary business was the manufacture and distribution of the opioid OxyContin. Purdue Pharma marketed OxyContin as a less addictive opioid pain reliever. Based primarily on OxyContin sales, Purdue Pharma generated revenues of approximately $34 billion between 1996 and 2019.
In the mid-2000’s, however, thousands of drug addicts, families, states, and municipalities commenced litigation against Purdue Pharma relating to OxyContin addiction. During at least a portion of this time, the Sacklers received distributions from Purdue Pharma totaling approximately $11 billion, but also relinquished control over the company. In 2019, Purdue Pharma filed for bankruptcy protection under Chapter 11.
Purdue Pharma faced the task of negotiating and confirming a plan of reorganization that involved thousands of mass-tort claimants, operational creditors, and the Sackler family. Eventually, Purdue Pharma’s plan proposed a settlement that provided that the Sacklers would pay $4.325 billion to the estate for distribution to creditors holding opioid claims. In consideration for this payment, the Sacklers required that the plan provide for a release of, and injunction against, any creditor or claim against the Sackers.
A great majority of the voting creditors supported the plan, including the Sackers’ release. However, several thousand opioid claimants objected to the plan, and in particular the release and injunction. These creditors wanted to maintain their direct claims against the Sacklers. After a six-day trial, the bankruptcy court confirmed the Purdue Pharma plan, including the release and injunction. Some of the objecting opioid creditors and the U.S. Trustee appealed the confirmation order. Ultimately, the Court of Appeals for the Second Circuit affirmed the plan confirmation, and the U.S. Trustee sought an injunction from the Supreme Court to prevent the plan from being effective. The Supreme Court treated the injunction request as a petition for certiorari and granted the petition.
In a 5-4 decision, the Supreme Court reversed the plan confirmation, holding that the Bankruptcy Code does not allow non-consensual third-party releases, except as specifically provided. The Court reasoned that the plan effectively provided the Sacklers with “what essentially amounts to a discharge” without placing “virtually all their assets on the table for distribution to creditors[.]” That is, the Sacklers obtained the benefits of the Bankruptcy Code without the commensurate burdens. The Court relied primarily on a textual analysis of the plan confirmation provision – 11 U.S.C. § 1123 – and concluded that it was not broad enough to include non-consensual releases for third parties.
Historically, insurance companies and their insureds were able to use third-party releases to obtain definitive settlements of commonly insured claims. For example, insured directors and officers – who are typically non-debtor third parties in a bankruptcy case – have obtained releases or injunctions in exchange for insurance proceeds being paid to the estate. See generally David v. Weinstein Co. Holdings, LLC, No. 21-171 (MN), 2021 U.S. Dist. LEXIS 49063, at *13 (D. Del. Mar. 16, 2021) (approving non-consensual third-party release of debtor’s former officers and directors upon the insurance company’s contribution of funds). And, similar to the Purdue Pharma case, debtors and third-party defendants in mass tort bankruptcy cases have long utilized third-party releases in exchange for insurance proceeds. MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 94 (2d Cir. 1988). In many instances the insurers have obtained not only releases for the insured, but releases for the insurers as well.
Given the Court’s holding in Purdue Pharma, those days are likely gone. Insurance companies will likely not be able to limit potential payouts to reasonable and appropriate amounts as in the past. Now, insureds face the prospect of having to pay policy limits or potentially facing thousands of piecemeal cases. Neither is especially appealing.
Truck Insurance Exchange v. Kaiser Gypsum Co., 144 S.Ct. 1414 (decided June 6, 2024) – insurance company standing in Chapter 11 bankruptcy
In a case involving mass torts, and therefore insurance companies, the Supreme Court in Truck Insurance Exchange v. Kaiser Gypsum Co., held that an insurance company has standing as a party-in-interest in a Chapter 11 bankruptcy case.
Kaiser Gypsum manufactured cement products that contained asbestos. After years of fighting asbestos-related lawsuits, Kaiser Gypsum filed for Chapter 11 protection. Kaiser Gypsum’s proposed plan provided that Truck Insurance Exchange would, in accordance with its insurance policies, defend each asbestos claim and indemnify the debtor up to $500,000. The insurance company objected to plan confirmation, arguing that the plan altered its obligations and did not company with applicable provisions of the Bankruptcy Code. The court eventually confirmed the plan over Truck Insurance Exchange’s objection, concluding that the insurer had limited standing. The court reasoned that the plan did not alter Truck Insurance Exchange’s obligations or impair its rights, and therefore the company had no grounds to object. Truck Insurance appealed to the U.S. Court of Appeals for the Fourth Circuit, which affirmed, and the Supreme Court granted certiorari.
The Supreme Court held that Truck Insurance Exchange was a “party in interest” as that term is used in Bankruptcy Code section 1109. The Court reasoned that the insurance company had standing because it would ultimately have financial responsibility. In this regard the Court stated that “potential financial harm – attributable to Truck’s status as an insurer with financial responsibility for bankruptcy claims – gives Truck an interest in bankruptcy proceedings and whatever reorganization plan is proposed and eventually adopted.” However, the Court did not stop its reasoning there. It went on to additionally reject the “insurance neutral” logic that lower courts have developed that often sidelined insurance companies.
The Court’s decision in Truck Insurance Exchange confirms an insurance company’s standing as a party in interest in a mass tort bankruptcy and settles debtors’ arguments that “insurance neutral” plan provisions can prevent insurers from objecting or otherwise being heard. Insurers don’t have to show that a debtor’s plan will modify the insured’s obligations under the pre-petition contracts. Rather, insurers will only have to prove that they have financial responsibility for bankruptcy claims. This right will give insurance companies a better negotiating position and the ability to challenge adverse proposals from debtors and creditors alike.
SEC /Sarbanes Oxley
Macquarie Infrastructure Corp. v. Moab Partners, 601 U.S. __ (decided 4/12/24) – private claim under Rule 10(b)
The Supreme Court held that the failure to disclose information required by Item 303 can support a Rule 10b-5(b) claim only if the omission renders affirmative statements made misleading.
Macquarie Infrastructure Corporation owns an infrastructure-related business including a subsidiary that operates a large “bulk liquid storage” facility in the United States that stores liquid commodities such as No. 6 fuel oil, a high-sulfur fuel oil that is a byproduct of the refining process. The United Nations’ International Maritime Organization formally adopted IMO 2020 in 2016, which was a regulation that capped the sulfur content of fuel oil used in shipping at 0.5%, No. 6 fuel typically has a sulfur content closer to 3%. Macquarie did not discuss IMO 2020 in its public offering documents over the next years, but the corporation announced in 2018 that the amount of storage capacity contracted for use by its subsidiary had dropped. This reduction was attributed to the structural decline in No. 6 fuel oil. Macquarie’s stock price fell 41%.
Moab Partners, L.P. sued Macquarie, alleging a violation of Section 10b of the Securities Exchange Act of 1934 and 15 U.S.C. § 78j(b). Moab argued that it was Macquarie’s duty to disclose how much storage capacity was devoted to No. 6 fuel and that their single largest product was “faced with a near-cataclysmic ban on the bulk worldwide” through IMO 2020. Moab further argued that Macquarie’s public statements were “false and misleading” because they “concealed” the information about No. 6 fuel. The District Court dismissed Moab’s complaint, concluding in relevant part that Moab had not “actually pleaded an uncertainty that should have been disclosed” or “in what SEC filing or filings Defendants were supposed to disclose it.”
The Second Circuit reversed the District Court’s judgment, holding that Macquarie had a duty to disclose following IMO 2020 even if there was not a statute or regulation requiring the disclosure. The court held that the significant restriction of No. 6 fuel was likely to have a material effect on Macquarie’s financial condition or results of operation. The Courts of Appeals disagree about whether a failure to make a disclosure required by Item 303 can support a private claim under §10(b) and Rule 10b-5(b) in absence of an otherwise-misleading statement.
The Supreme Court granted certiorari to resolve the circuit split. The Court stated that private parties remain free to bring claims based on Item 303 violations that create misleading half-truths. Further, the SEC retains authority to prosecute violations of its own regulations, and the Exchange Act requires that issuers file reports “in accordance with such rules and regulations” so that the SEC can investigate whether a violation has occurred, including item 303. The Court held that pure omissions are not actionable under Rule 10b-5(b), and that the duty to disclose does not automatically render silence misleading under Rule 10b-5(b). The Court thus vacated the judgment of the Second Circuit and remanded the case for further proceedings consistent with the opinion.
This decision gives power to the SEC as they are the primary authority to report Item 303 charges against a corporation or company. This may keep frivolous claims in-house with the SEC and out of federal courts. The decision also addresses the circuit split surrounding Rule 10b-5(b), as the Court ruled that pure omissions do not fall under the violation of the statute. This clarification will help corporations distinguish whether they are committing a wrongful act when disclosing information to the shareholders of the company.
Fischer v. U.S., 603 U.S. __ (decided 6/28/24) – parameters of federal obstruction of justice statute
The Supreme Court held that Section 1512(c) of the Sarbanes Oxley Act of 2002, which prohibits obstruction of congressional inquiries and investigations, does not include acts of obstructive conduct unrelated to investigations and evidence.
The Sarbanes-Oxley Act of 2002 imposes criminal liability on anyone who corruptly “alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so, with the intent to impair the object’s integrity or availability for use in an official proceeding.” Joseph Fischer was prosecuted for his conduct on January 6, 2021, the day a crowd used “forced entry” to storm the U.S. Capital. A grand jury returned a seven-count superseding indictment against Fischer. Six of those counts alleged that Fischer forcibly assaulted a federal officer, participated in disorderly conduct, and entered and remained in the Capitol, among other crimes.
In Count Three, the Government charged Fischer with violating 18 U.S.C. § 1512(c)(2). Fischer moved to dismiss the count arguing that the provision only criminalizes attempts to impair the availability or integrity of evidence. The District Court granted his motion in relevant part holding that the scope of § 1512(c)(2) is limited and therefore requires the defendant to “have taken some action with respect to a document, record, or other object.”
A divided D.C. Circuit Court of Appeals reversed and remanded the District Court’s ruling. The Court of Appeals held that the word “otherwise” in § 1512(c)(2) means that the provision unambiguously covers “all forms of corrupt obstruction of an official proceeding, other than the conduct that is already covered by § 1512(c)(1).” Judge Katsas dissented. In his view, the language that follows the word “otherwise” in (c)(2) is narrow, and the section applies “only to acts that,” like the ones specified in (c)(1), “affect the integrity or availability of evidence” at an official proceeding.
The Supreme Court granted certiorari to resolve this disagreement. The Court held that to prove a violation of § 1512(c)(2), the Government must establish that the defendant attempted to or did impair the availability or integrity of records, documents, objects, or other things used in an official proceeding. The Court interpreted the “otherwise” provision of § 1512(c)(2) to be limited by the list of specific criminal violations that precede it in (c)(1). According to Chief Justice Roberts, an “unbound” interpretation of subsection (c)(2) would “render superfluous the careful delineation of different types of obstructive conduct in §1512 itself.” In his view, an “unbound” interpretation would also criminalize the work of activists and lobbyists. Because the D.C. Circuit did not apply this limited interpretation of (c)(2), the Court vacated the judgment of the D.C. Circuit and remanded the case for further consideration in light of its holding.
This interpretation of § 1512(c)(2) allows the D.C. Circuit to “assess the sufficiency” of the § 1512(c)(2) count and to determine whether Fischer impaired the integrity of things used during the January 6 proceeding “in ways other than those specified in (c)(1).” It is likely that federal prosecutors will request delays in sentencing proceedings against those involved in the breach of the Capitol to consider the impact of the decision. However, prosecutors will still charge those involved on January 6 with violating other statutes that remain unimpacted by the Court’s holding in Fischer. If a defendant was previously convicted for entering the capital and his sentence relied heavily on § 1512(c)(2), then resentencing will likely occur.
This decision will also clarify the facts in which a violation under 18 U.S.C § 1512(c)(2) occurs. This will help guide the courts and will not leave the fate of defendants up to the discretion of the court on how the statute will be construed. This creates a well-defined interpretation, as a statute violation occurs only when someone tries or does impair the use documents in a proceeding, and the courts cannot add this violation to stack charges on defendants.
Securities & Exchange Commission v. Jarkesy, 603 U.S. __ (decided 6/27/24) – regulated party’s right to jury trial in SEC civil enforcement proceeding
The Supreme Court held that the Seventh Amendment entitles defendants in certain civil enforcement actions to a jury trial in federal court when the SEC seeks civil penalties against those defendants for securities fraud.
Following the enaction of the Dodd-Frank Act, the SEC began an investigation into George Jarkesy, an investment advisor who ran the firm Patriot28. According to the SEC, Jarkesy and Patriot28 misled inventors in three ways: (1) by misrepresenting the investment strategies that Jarkesy and Patriot28 employed; (2) by lying about the identity of the funds’ auditor and prime broker; and (3) by inflating the funds’ claimed value so that Jarkesy and Patriot28 could collect larger management fees.
Relying on Dodd-Frank, the SEC adjudicated the matter itself rather than in federal court. The final order levied a civil penalty of $300,000 against Jarkesy and Patriot28, directed them to cease and desist committing or causing violations of the antifraud provisions, ordered Patriot28 to disgorge earnings, and prohibited Jarkesy from participating in the securities industry and in offerings of penny stocks. Jarkesy and Patriot28 petitioned for judicial review.
A divided panel of the Fifth Circuit granted their petition and vacated the final order. The panel held that the agency’s decision to adjudicate the matter in-house violated Jarkesy’s and Patriot28’s Seventh Amendment right to a jury trial. The court concluded the case should have been brought in federal court, where a jury could have found the facts pertinent to the defendants’ fraud liability. Judge Davis filed a dissent, but the Fifth Circuit denied a hearing en banc.
The Supreme Court granted certiorari to address the split in the Fifth Circuit. The Court held that a defendant facing a fraud suit has the right to be tried by a jury of his peers before a neutral adjudicator. The Court warned against permitting Congress to concentrate the roles of prosecutor, judge, and jury in the hands of the executive branch, which would be in opposition to the Constitution’s demand for separation of powers. The Supreme Court held that the Seventh Amendment entitled Jarkesy and Patriot28 to a jury trial in an Article III court.
This decision upholds the separation of powers and allows for defendants in a securities fraud case to have a right to jury trial. This decision will require an unbiased court and jury for defendants in these cases to plead their defense in trial without worry about consistent judgment for the plaintiff. This will also limit the power of the SEC on handling issues “in-house.” The Court’s ruling limits the SEC’s administrative process by requiring claims that are “legal in nature” to be heard by courts. Due to the substantial costs associated with federal litigation, Jarkesy might lead to a more selective process by the SEC in determining enforcement efforts. In any event, the decision allows regulated parties to avoid the home court advantage enjoyed by agencies in in-house enforcement proceedings. This decision also calls into question whether other agencies can still perform in-house proceedings to enforce civil penalties.
Sharon D. Stuart is a founding partner of Christian & Small and has been with the firm since 1993. She devotes her practice to civil trial work and arbitration. She focuses on complex commercial and insurance litigation, and she handles a variety of pharmaceutical and medical device products liability litigation as national, regional or local counsel. Sharon’s trial experience includes a wide range of business tort claims, contract disputes, commercial and insurance fraud and bad faith suits, and wrongful death cases. She has defended dozens of class action lawsuits in areas as diverse as product liability/toxic tort, financial products, insurance, and employment law.
Bill D. Bensinger focuses his practice on commercial dispute litigation, bankruptcy and restructuring litigation. He represents creditors, franchisors, landlords, unsecured creditors’ committees and financial institutions in a wide variety of matters, including preference and avoidance actions, workout transactions and insolvency matters. Bill represents franchisors in bankruptcy, including matters concerning the assumption of franchise agreements, and represents landlords in bank matters concerning the assumption of commercial leases.
Contributors Katie Applebaum and Eric Posas, Christian & Small Summer Law Clerks
About Christian & Small
Christian & Small LLP represents a diverse clientele throughout Alabama, the Southeast, and the nation with clients ranging from individuals and closely held businesses to Fortune 500 corporations. By matching highly experienced lawyers with specific client needs, Christian & Small develops innovative, effective, and efficient solutions for clients. With offices in Birmingham, metro-Jackson, Mississippi, and the Alabama Gulf Coast, Christian & Small focuses on the areas of litigation and business, is a member of the International Society of Primerus Law Firms, and is a Mansfield Rule™ Certified Plus Law Firm. Our corporate social responsibility program is focused on education, and diversity is one of Christian & Small’s core values. Please visit www.csattorneys.com for more information.