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Purdue Pharma Tests Limits of Liability Shields in Bankruptcy

Aug. 30, 2021, 2:00 PM

Purdue Pharma LP’s insistence on a bankruptcy settlement that would shield its billionaire owners from civil lawsuits related to OxyContin’s role in the opioid epidemic—while allowing the Sacklers to avoid filing for bankruptcy themselves—is pushing the limits of a common tool in Chapter 11 cases.

At issue is a plan for Purdue’s owners to contribute $4.35 billion to the company’s bankruptcy estate, but only if the family members and hundreds of related individuals or companies, including the Sacklers’ grandchildren, consultants, and financial advisers, also receive immunity.

The company has submitted three new versions of its plan in the past week in order to enhance its chances of confirmation. The plan now limits the liability shield to conduct directly related to opioids and reduces the number of parties outside of the Sacklers themselves who would get protection.

The Sacklers still would enjoy very broad litigation releases.

The releases in the case, which have been heavily criticized, could spur other organizations with mass tort claims to try similar tactics, bankruptcy watchers say. They could erode creditors and tort litigants’ faith in the Chapter 11 proceedings, and may even drive Congress to take action.

Purdue is using the bankruptcy system “to effect national opioid policy,” said Melissa Jacoby, a bankruptcy law professor at the University of North Carolina at Chapel Hill. “The language for confirmation here is not just about dollars and cents; they’re talking about access to opioid abatement resources,” she said.

It’s rare for bankruptcy cases to involve litigation releases for companies or individuals that have been accused of wrongdoing. But in court testimony this month, former Purdue board member David Sackler made it clear the family would withhold its $4.35 billion financial contribution unless it got blanket legal immunity, even though they and their assets aren’t before the bankruptcy court.

Traditionally, bankrupt companies offering releases to non-bankrupt parties do so in exchange for a financial contribution to the Chapter 11 plans. In many cases, those releases are consensual because creditors approve them when they vote on the plan.

The publicity of the Purdue case could damage the integrity of the Chapter 11 process, in addition to raising constitutional concerns, Jacoby said.

“I worry about how people will perceive the system,” she said. “Will they perceive it as not being fair, irrespective of whether it actually was fair?”

$10 Billion Settlement

The company’s plan would pay about $10 billion to settle possibly trillions of dollars in claims stemming from the opioid crisis.

It “represents the culmination of extensive efforts over many years to achieve a resolution of Purdue’s opioid liability that will deliver the most value, most effectively, to the parties most in need,” a group of state and local governments said in a court filing supporting the plan.

But liability releases for non-bankrupt parties like the Sacklers confer the benefits of bankruptcy without subjecting them to the bankruptcy court’s scrutiny, objectors say. The releases also allow them to dodge the possible appointment of an independent trustee to take over assets or business operations.

The Sacklers have been publicly accused of contributing to the opioid epidemic. Purdue Pharma itself previously pleaded guilty to felonies related to misbranding OxyContin and misleading physicians about the drug’s addiction risks.

Attorneys for Purdue declined to comment. Attorneys for the Sacklers didn’t respond to a request for comment.

Congressional Action

The Purdue case is likely to prompt more lawyers to find creative ways to take advantage of the bankruptcy system in cases involving mass torts—as opposed to most cases that involve only financial insolvency—like the Boy Scouts of America and USA Gymnastics, Jacoby said.

That is, unless Congress steps in.

The Nondebtor Release Prohibition Act (S. 2497), introduced July 28 by Sens. Elizabeth Warren (D-Mass.), Dick Durbin (D-Ill.), and Richard Blumenthal (D-Conn.), would prohibit releases for parties whose assets aren’t subject to creditors’ reach in bankruptcy court.

A companion measure (H.R. 4777) was introduced in the House the same day by Reps. Jerrold Nadler (D-N.Y.) and Carolyn Maloney (D-N.Y.).

“Non-debtor releases have become a weapon used by corporate insiders to deprive the people they’ve harmed of the rights and remedies they deserve,” Nadler said in a statement issued at the bill’s introduction.

“The bankruptcy process is supposed to provide a fresh start, not a license for the powerful—from the Sackler family to Harvey Weinstein to the people who enabled years of abuse of Olympic gymnasts, boy scouts, and young parishioners—to prey on ordinary Americans,” he said.

Constitutional Questions

Third-party releases provide an economically expeditious resolution to complex legal questions, “but the Constitution doesn’t care about economic efficiency,” Jacoby said.

There are legitimate due process concerns when it’s not clear which claims a bankruptcy plan is releasing and how much they’re worth, she said.

About 95% of more than 120,000 votes cast were in favor of plan approval, including almost 97% of 5,000 state and local governments that voted, according to Purdue.

“The preliminary voting results demonstrate a broad consensus among every organized creditor group in these proceedings, and we will continue to work for even greater consensus ahead of the confirmation hearings,” company Chairman Steve Miller said in a statement.

But more personal injury claimants in the Purdue case didn’t vote at all than voted in favor of the plan, perhaps because it was too much for them to digest or they simply never got notice despite the company’s outreach efforts, Jacoby said. Reading a bankruptcy plan is a daunting task even for trained lawyers, let alone members of the public.

Purdue’s plan—which would block government legal actions as well as private suits—also raises federalism concerns because it involves a federal court calling the shots for state and local governments, Jacoby said.

The objecting states—which include Connecticut, Maryland, and Washington—pointed out “how extraordinary it is for a bankruptcy plan to enjoin a state attorney general from doing its consumer protection job against third parties that weren’t even in bankruptcy,” she said.

No Justice?

The lawmakers behind S. 2497 characterized the legislation as a way to “expand access to justice for those harmed by bad actors.”

But that’s not what bankruptcy and litigation releases are about, said Lindsey Simon, a professor at the University of Georgia School of Law.

Rather, Chapter 11 is designed to maximize assets and reorganize the business, paying creditors in an organized manner, Simon said. It gives a company breathing room to negotiate debt, right-size operations, and come up with ways to survive.

Bankruptcy also prevents a “race to the courthouse” among competing creditors, Simon said.

In Purdue’s case, failing to release the Sacklers and the other non-bankrupt released parties would spur a host of opioid litigation in any number of state or federal courthouses. And whoever gets there first would have a much better chance of collecting, Simon said.

The Sacklers also wouldn’t be willing to contribute what amounts to nearly half the entire amount administered through the plan without getting these broad releases in return.

“Justice is not a core bankruptcy concept,” Simon said. “What a lot of people want—holding alleged wrongdoers accountable—isn’t what the process is designed to do.”

To contact the reporter on this story: Daniel Gill in Washington at dgill@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com