Purdue Pharma Bankruptcy: A Battle Over Much More Than Dollars and Cents

Posted on: August 10th, 2022 by Michael A. Morris, ABLS Blog Contributor

In 2019, opioid manufacturer Purdue Pharma filed bankruptcy in the Southern District of New York. A large portion of the debt listed on its bankruptcy schedules came from judgments and potential lawsuits against it for its role in the opioid epidemic. Purdue’s owners, the Sackler family, were named in many of those lawsuits and would likely have been named in many more. Within Purdue’s bankruptcy the Sackler family obtained protection from lawsuits against its members for claims related to Purdue Pharma while the bankruptcy was pending, protection that they continue to enjoy to this day. However, this was only the beginning of the protections the Sacklers sought through Purdue’s bankruptcy.

OxyContin, one of the drugs involved in the opioid epidemic.

As part of a settlement agreement the Sacklers sought releases from liability for any lawsuits related to Purdue Pharma, even after the bankruptcy concluded. The Sacklers wanted what are known as nonconsensual third-party releases—releases from liability for non-debtors (since none of the Sacklers have filed for bankruptcy) on claims by creditors of the bankruptcy debtor without those creditors’ consent. In exchange for their third-party releases the Sacklers agreed to pay billions of dollars into Purdue Pharma’s reorganization plan. Indeed, Purdue Pharma’s reorganization plan was built around the Sacklers’ payments and liability release. Multiple creditors objected to the reorganization plan as it was proposed to the court, but after careful consideration Judge Robert Drain confirmed the plan over those objections in September of 2021. Judge Drain noted that approving the proposed plan, with nonconsensual third-party releases for the Sackler family, seemed to address the needs of all creditors, including the personal injury claimants, as thoroughly as possible considering the financial status of the company. After Judge Drain’s ruling it appeared that any future claimant seeking to recover damages in relation to the opioid epidemic would not have the option to file suit against the Sacklers directly.

On Appeal

It didn’t take long for confirmation of Purdue’s Chapter 11 plan to be appealed, and in December of 2021, District Court Judge Colleen McMahon pointed a fresh set of eyes at the situation. In her opinion, she lingered on the fact that members of the Sackler family withdrew upwards of $11 billion from Purdue Pharma in advance of the bankruptcy filing and that these same members knew of the pending wave of litigation headed their way. Then, in exchange for paying $4.35 billion into the bankruptcy settlement, the Sackler family and other “Shareholder Released Parties” received the assurance that all future personal injury claims against them would be channeled through the trusts created by the plan. Though on the surface that seemed like a fair treatment, further examination revealed that the trusts created under the plan would not permit payment to parties with claims against any of the Shareholder Released Parties, so those claims were essentially extinguished without any recourse for the claimants. Though the glaring unfairness made the confirmed plan problematic, Judge McMahon’s decision to vacate Judge Drain’s ruling boiled down to whether the bankruptcy court had the statutory authority to grant the non-debtor release in the first place. With respect to that issue, she held that the Bankruptcy Code did not authorize such third-party releases in any way, so regardless of how well Judge Drain thought the reorganization plan would have handled claims, the bankruptcy court could not legally confirm it. Despite having already spent almost three years embroiled in the bankruptcy process, Purdue Pharma and the Sacklers were sent back to the drawing board to find an acceptable reorganization plan that the court could and would confirm.

Unintended Consequences

Though vacating Judge Drain’s confirmation order seems to avoid allowing responsible parties to evade liability, determining whether this was a net positive is difficult. While waiting for their appeal to be heard in the 2nd Circuit Court of Appeals, Purdue Pharma and members of the Sackler family have been actively engaged in mediation with the objecting creditors to find a settlement that would help to alleviate the opioid crisis. In the meantime, personal injury claimants are playing a different waiting game. The previously confirmed reorganization plan would have allowed victims of the opioid epidemic to start receiving payments from the newly established trusts as early as 2022. However, because the trusts will not be established until a plan is confirmed, those payments will, at the very least, be significantly delayed, if they happen at all. If the parties are ultimately unable to reach a settlement that creates an avenue for claimants to receive payment, victims of the opioid crisis that wish to recover directly from the Sackler family and other Purdue shareholders will be left to fight that battle in the court system.

The Sackler family has not filed for bankruptcy. This is one of the complaints about the nonconsensual third-party releases they wanted—they granted the Sacklers protection like they would have received through a bankruptcy (indeed, perhaps even broader than they could have received in a bankruptcy) without subjecting them to the scrutiny bankruptcy entails. However, this is a double-edge sword. Since the Sacklers have not filed bankruptcy they still have ample resources to hire the best and brightest attorneys to litigate the claims against them. Every dollar the Sacklers spend on attorneys is one dollar less that could be paid to opioid victims. Not only would getting a judgment for a personal injury claim against any of the Sacklers be an uphill battle, but enforcing that judgment would be difficult, as the Sacklers have many assets that are not subject to easy collection—for example, the assets are overseas. A judgment without means to enforce it is worth about as much as the paper on which it is printed. The unpleasant reality is that securing the Sacklers’ participation through Purdue Pharma’s bankruptcy reorganization may be the most efficient way to get funds to the families and individuals that have suffered harm as a result of the aggressive marketing of dangerously addictive opioids.

A Dangerous Precedent

No matter what the final outcome of the Sackler appeal is, it will have a tremendous impact on bankruptcy reorganizations, particularly if the appeal goes all the way to the United States Supreme Court. A decision that third-party releases are not a permissible part of a bankruptcy reorganization plan, following District Court Judge McMahon’s ruling, may limit an entity’s ability to effectively reorganize in Chapter 11. Shareholders who might otherwise have been incentivized to personally contribute to a bankruptcy settlement in exchange for some release of liability, thereby increase the entity’s resources and ability to successfully reorganize, would no longer have that motivation. On the other hand, a ruling that allows third-party releases as part of a reorganization, following Bankruptcy Court Judge Drain’s decision, would leave the door open for abuses like those alleged in Purdue Pharma with respect to the Sacklers. Shareholders hoping to evade litigation may seek shelter under the umbrella of a related entity’s Chapter 11 bankruptcy by contributing a fraction of the amount for which they would be liable if each claim was tried individually in exchange for a release from existing and future claims. Regardless of the outcome, the results of the Purdue Pharma bankruptcy will have effects that reach far beyond the court room and even beyond those individuals affected by opioid addiction. The case should be on everyone’s radar, both for its implications for bankruptcy & mass tort law and because of the tremendous and heartbreaking toll the opioid crisis has taken on communities, families, and individuals throughout the country.