Purdue Pharma Fight Is Familiar Ground for US Bankruptcy Cop

The Justice Department’s opposition to Purdue Pharma‘s $6 billion opioid settlement underscores the tension of its US Trustee Program’s role, which often causes it to run afoul of other parties in large, corporate bankruptcies.

The US Trustee, the DOJ office tasked with overseeing the bankruptcy system, urged the US Supreme Court to halt Purdue’s bankruptcy settlement because it includes liability releases for members of the Sackler family who own the company. Those releases are not legal under the US Bankruptcy Code because they were included without the explicit consent of potential plaintiffs, the office argues.

The office has opposed such releases in bankruptcy plans, as well as other aspects it sees as running afoul of federal law. The agency’s goal, according to its mission statement, is to “promote the integrity and efficiency of the bankruptcy system for the benefit of all stakeholders.”

That mission can put the office at odds with parties in a bankruptcy who are focused on recovering money. The US Trustee is sometimes the lone major holdout against a deal that would end a Chapter 11 case, urging judges to address legal issues that it says are important but which other parties have lost interest in after they settle.

“They’re serving as guardians of the system,” said Christopher Sontchi, a former Delaware bankruptcy judge who now heads his own practice.

In 2023 alone, the Trustee has opposed key components of other large bankruptcies, including those of another opioid manufacturer, Endo International plc, and cosmetics company Revlon, Inc.

The Trustee’s decision to appeal the issue to the Supreme Court has the potential to create more harm, Purdue’s creditors said in a filing.

“Further delay of Plan implementation—either on account of a stay or a grant of certiorari—will unquestionably cause substantial and irreparable harm to individuals, families, and communities across the United States,” the filing said.

Purdue didn’t immediately respond to a request for comment.

Other Claimants

Besides litigation releases, the Trustee also keeps a close eye on fees requested by lawyers and consultants, bonuses for executives and information provided to creditors.

“You count on parties in a matter to bring attention to things that might not be quite right,” said Kevin Carey, a former Delaware bankruptcy judge who is now a senior counsel at Hogan Lovells. “And often the US Trustee is the only party that will do that.”

In a July motion in the US Court of Appeals for the Second Circuit, the Justice Department said it was advocating for the remaining portion of claimants who oppose Purdue’s plan, even though the overwhelming majority of individual victims and government entities voted to support it.

“Only the United States Trustee is defending the interests of the untold number of claimants who might oppose the Sackler release and whose claims against the Sacklers the release permanently extinguishes,” the DOJ said.

Not everyone has access to the justice system, understands what’s going on in a bankruptcy, and can afford lawyers, Melissa Jacoby, a law professor at the University of North Carolina, said in an email.

“I am not sure who is supposed to speak up if not the Department of Justice,” she said.

The US Trustee said in a statement that even though it “lacks a pecuniary interest” in particular outcomes, it “was created as a neutral ‘watchdog’ to allow it the freedom to enforce the law as Congress has written and to protect the rights of smaller creditors who cannot afford to participate actively in the case.”

Non-Consensual Releases

The US Trustee says claimants in the Purdue case should be allowed to actively opt in or out of releases that protect parties who are connected to a bankrupt entity but are not in bankruptcy themselves.

William Harrington, the Trustee overseeing Purdue and other New York-based bankruptcies, has brought similar objections in other cases. The Trustee’s office has opposed non-consensual releases for years.

The releases for the Sacklers, which were granted in exchange for the billions of dollars the family members contributed to the settlement, would protect them against future lawsuits accusing them of fueling the national opioid epidemic by pushing sales of OxyContin.

The settlement funds are the key to a proposal that came together only after other opponents agreed to the Sackler releases in order to complete the settlement.

Multiple states and the Trustee appealed a bankruptcy court’s order approving Purdue’s plan. But those states dropped their objections when the company announced the new $6 billion settlement, up from $4.3 billion previously.

“The UST’s views are actually at odds with those of government entities, which have made the real-world decision on behalf of their constituencies to support the plan,” an official group of Purdue’s creditors argued in a high court filing.

Nearly 97% of non-federal government entities involved in the case voted in favor of the plan.

Economic Interests

The Trustee’s decision to carry an appeal all the way to the Supreme Court underscores its unique role in the bankruptcy system. Because it does not have an economic interest, it has continued to oppose the plan, even after multiple state attorneys general dropped their opposition after the $6 billion settlement figure was reached.

In the Revlon bankruptcy, the Trustee challenged releases in the company’s restructuring plan, but a judge confirmed the plan anyway.

“No party with an economic interest” had objected to the plan, Revlon said in a filing.

Purdue’s lawyers have made a similar argument, and its creditors said in a Supreme Court filing that the trustee is “lacking any concrete interest.”

But, “it’s not their job to have an economic interest,” Carey said. “The benefit of their role is that they don’t have one.”

Bankruptcy lawyers are often frustrated with the Trustee for getting in the way of deals that they have worked hard to achieve. But bankruptcy settlements can result in language that is questionable under the code.

“Sometimes folks will come up with solutions that make perfect practical sense but don’t really have any bearing in the law,” said Nancy Rapoport, a law professor at the University of Nevada Las Vegas. said.

The US Trustee program has long sought to advance the “consistent application of the law” by applying the bankruptcy code in the courts and appealing when necessary, said Clifford White, who led the program for 17 years before retiring last year.

“The parties in a case don’t get to make up the law,” White said. “The judge doesn’t get to make up the law. Congress writes the law.”

The case is William K. Harrington v. Purdue Pharma LP, U.S., No. 23A87, 8/9/23.