Purdue Pharma LP and its owners, members of the billionaire Sackler family, are betting big on a controversial area of bankruptcy law.
The OxyContin maker has for nearly two years been working toward federal court approval of its landmark opioid settlement, which would hand all of its assets—along with more than $4 billion from its owners—to cities, states and counties fighting the U.S. opioid crisis. But the plan, which will finally be floated to its bankruptcy judge in the coming weeks, hinges on permanently insulating its owners from opioid lawsuits by way of a divisive legal maneuver.
So-called third-party releases embedded in Purdue’s bankruptcy plan would shield a lengthy list of Sackler family members, commercial entities and trusts from opioid-related lawsuits forever, even though they have not themselves filed for bankruptcy. The plan would also force creditors who are opposed to it—notably, attorneys general from almost 10 states—to relinquish their legal claims against Purdue’s owners.
Critics say the proposal is illegal, but federal judges have approved similar deals in the past.
“In the wrong court, Purdue would have a lot of trouble,” said Adam Levitin, a law professor at Georgetown University. “But Purdue is not in the wrong court.”
Whether the deal goes through will ultimately be decided by Judge Robert Drain, the sometimes-cantankerous bankruptcy judge that has overseen Purdue’s bankruptcy since 2019. He has repeatedly indicated a desire to approve a settlement and put money to work abating the opioid crisis. Plus, he has already said he doesn’t think the releases are flatly illegal—more than 20 states earlier this year presented that argument, which Drain overruled. Most of those states dropped their opposition to the deal shortly after.
Still, federal courts are split on how and when releases like the ones Purdue is proposing can be granted. They’re frequently allowed when creditors agree to them. In some regions, forcing them on unwilling parties is a clear no-no, but in the Southern District of New York—where Purdue’s case is playing out—rulings have cut both ways.
“You can argue that it’s established law, and you can argue that it’s legally murky and open to challenge,” said Lindsey Simon, a bankruptcy law professor at the University of Georgia. “The hard part about this is you have to imagine a reality where the deal doesn’t happen. There is a perspective that if this doesn’t go through, and it all falls apart, everyone will be worse off.”
By now, almost every state in the U.S. has dropped its opposition to the settlement, voluntarily agreeing to give up their legal claims in exchange for the cash. But attorneys general from states including Washington and Connecticut are fighting until the bitter end, arguing in court papers this week that they can’t be forced to stop suing members of the Sackler family over their alleged role in the opioid crisis. The U.S. government itself has likewise submitted a statement calling the proposed releases unconstitutional and overly broad.
Purdue’s lawyers have argued previously that the proposed releases are a perfectly legal and essential part of the settlement, in court papers calling them a “lynchpin” to a deal that’ll devote billions of dollars to abating the opioid crisis. They will likely make similar arguments again in a bankruptcy hearing set to begin on August 9.
“Third party releases have long been allowed under the law in most jurisdictions because they play a critical role in the successful resolution of mass tort bankruptcies in the United States,” Purdue said in an emailed statement, adding that the releases in its plan apply only to civil—not criminal—claims for past conduct. “Any party who believes that the overwhelming majority of creditors got it wrong and the settlement is not reasonable has the opportunity to so prove at the confirmation hearing.”
A representative for the Mortimer Sackler side of the family declined to comment. Representatives for the Raymond Sackler side didn’t respond to a request for comment. Members of the family have previously denied all wrongdoing.
Political Scrutiny
Win or lose, Purdue’s proposal has already brought intense political scrutiny to an esoteric corner of bankruptcy law. Two Democratic lawmakers in March introduced legislation aimed at explicitly outlawing the kinds of releases contemplated by Purdue’s settlement. Senator Elizabeth Warren is now sponsoring a similar bill set to be introduced next week, according to a Warren spokesperson. New York’s Jerrold Nadler—chairman of the House Judiciary Committee—is sponsoring a companion bill in the House.
The House Judiciary Committee this week announced a series of hearings on bankruptcy law reform, including third-party releases. The first hearing, which will cover “Abuses of the Chapter 11 System,” is set for Wednesday.
“When you’re talking about governmental agencies, the bar is higher and it should be, because these aren’t garden variety commercial claims,” said Tom Salerno, a bankruptcy lawyer with Stinson LLP who isn’t representing anyone in the case. “It’s not just a creditor saying ‘I want to sue you, get $100 and line my pocket.’ It’s a police and regulatory sort of thing.”
The bankruptcy case is Purdue Pharma LP, 19-23649, U.S. Bankruptcy Court for the Southern District of New York (White Plains).
This article was provided by Bloomberg News.
