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Bankruptcy has long been considered the province of experts — an area of law so specialized that bankruptcy courts enjoy a great deal of deference within the larger legal system. When the Bankruptcy Code conflicts with other law and legal doctrine, it often prevails. 

The Supreme Court has long sought to change this, and two recent rulings pose a particular threat to this bankruptcy first-way of doing things, according to Duke Law School professor Jonathan Seymour. In the same week, the court not only rejected a Purdue Pharma settlement that had been approved by a federal bankruptcy court but struck down a longstanding rule of court deference to agencies with specialized knowledge. 

“Bankruptcy is a structured process for getting to a value-maximizing negotiated deal that keeps a business operating and repays creditors more than if it were broken up,” Seymour explained.  

“But so much of what’s important in bankruptcy isn’t in the statute. It’s stuff that a small subset of lawyers has pieced together over the years in service of this supposedly mutually beneficial goal, which means that bankruptcy has its own rules, norms, and practices that you won’t find actually written down anywhere.” 

In his paper Bankruptcy in Conflict, Seymour, a former bankruptcy litigator, challenges the “exceptionalist” view of bankruptcy law held by its practitioners who, he says, tend to view even run-of-the-mill legal questions in light of the Bankruptcy Code. In fact, much of what fills a bankruptcy court’s docket doesn’t require specialized legal knowledge and could just as easily be handled a regular court.  

“If you’re used to seeing all the problems in front of you as bankruptcy problems, you can miss it when a problem that’s also faced by other areas of law already has a solution figured out. A lot of what happens in bankruptcy overlaps completely with what is resolved outside bankruptcy.” 

That puts its autonomy at risk with the Supreme Court’s “recent and dramatic intervention into statutory interpretation and administrative procedure” that gives little regard to specialized expertise, Seymour writes. Scholars have long drawn analogies between rulemaking by federal agencies and bankruptcy laws, and the court’s decision in Loper Bright v. Raimondo essentially reversed 40-year-old guidance directing federal courts to defer to executive agencies when interpreting ambiguous laws.  

“Just as courts defer to specialized and expert agency administrators, so too might they defer to specialized bankruptcy judges,” Seymour writes. However, he continues, “the Supreme Court is currently engaged in a far-reaching project to remake the law of deference in agency adjudication.” Specialist courts are unlikely to fare better, he adds. 

Justices overrule bankruptcy court on Sacklers’ opioid liability

This kind of skepticism was on full display in the court’s ruling, issued a day before Loper Bright, on a challenge to Purdue Pharma’s proposed reorganization plan. The justices invalidated the plan over a provision that discharged the Sackler family, the majority owners of Purdue, from any current or future claims related to the company’s addictive painkiller OxyContin or the alleged fraudulent transfer of more than $11 from Purdue as the drug fueled the U.S. opioid crisis. In the proposed plan, the Sacklers agreed to return about $4.3 billion in exchange for release and injunction from liability — without the consent of third-party opioid victims. 

Such a provision isn’t authorized by the Bankruptcy Code, the Supreme Court said in the  opinion rejecting the plan. So why did the federal bankruptcy court approve it?  

Bankruptcy judges have a lot of discretion to make rulings based on their view of the special needs of cases, through a “rough justice” application of ideas of equity, Seymour explains. In this case, the bankruptcy court viewed the Sackler discharge as the most expedient way to get settlement money to opioid victims, despite the objections of some, and approved the provision to facilitate the deal.  

Ultimately that discretion was curbed by the Supreme Court, though, and a new $7.4 billion agreement was reached that does allow opioid victims to sue the Sackler family. A confirmation hearing on that deal is scheduled for late 2025. 

After Purdue, bankruptcy practitioners will no longer be able to use nonconsensual third-party releases — like that offered to the Sacklers — to resolve cases, Seymour writes in Bankruptcy Appeal Barriers. 

The case illustrates Seymour’s central critique of bankruptcy law culture — and perhaps a need to reassess its autonomy. 

“The interesting thing about Purdue was this insistence that the preferred bankruptcy culture solution was the only way that could possibly work,” Seymour said.  

“Getting the maximum number of dollars into victims’ pockets as quickly as possible is a perfectly plausible framing for the value-maximizing negotiated deal. But critics of Purdue would say it dismisses other important interests, like giving an opportunity for all the victims to be heard or maximizing the potential for deterrence of bad behavior going forward.  

“What bankruptcy folks assume is a good outcome might not necessarily be what other parts of the legal system think is a good outcome.”