By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
Purdue Pharma, the manufacturer of OxyContin owned by members of the Sackler family and catalyst for the opioids crisis, filed for chapter 11 bankruptcy reorganization Sunday night.
The filing was part of a settlement agreed among 24 states – including Ohio, Tennessee, and Texas, 5 US territories, and numerous municipalities.
Today, the United States Bankruptcy Court for the southern district of New York, sitting in White Plains, will conduct the first hearing on this action.
If approved by the bankruptcy court and company creditors, the settlement would provide 10 to 12 billion dollars to reimburse states and local governments to address the opioids crisis, including 3 billion dollars from members the Sackler family, to be paid out over seven years. Purdue will be restructured as a public benefits trust, and will continue to sell OxyContin, the profits from which would be used to pay for addiction treatment and other responses to the opioids crisis. Members of the Sackler family would surrender their ownership stakes in Purdue.
Pending Litigation and State Opposition
Usually, bankruptcy courts grant an automatic stay of pending litigation as part of bankruptcy process. By filing for bankruptcy, the company is banking on all outstanding legal claims being moved to bankruptcy court.
But 24 other state attorney’s-general – including California, Massachusetts, New York, North Carolina, and Pennsylvania – as well as the District of Columbia, oppose both the settlement, and the efforts of Purdue’s lawyers to wield the bankruptcy shield to protect the personal assets of the Sacklers – none of whom has sought to declare personal bankruptcy.
As the Wall Street Journal reports in Purdue Pharma Looks to Extend Bankruptcy Shield to Sacklers:
Hours after seeking bankruptcy protection for the company Sunday night, Purdue’s lawyers said they would ask a judge to issue an injunction that would halt legal hostilities from attorneys general who won’t sign on to a settlement the drugmaker has offered. The company’s owners, members of the wealthy Sackler family, are entitled to a shield from litigation, Purdue said it would argue.
Government claims against the Sacklers, as well as Purdue’s directors and officers, are “inextricably intertwined” to litigation with the company directly, it said.
State AGs who oppose the settlement object to its omission of any admission of wrongdoing by the Sacklers, and argue the family has not committed sufficient funds to the settlement. According to the WSJ:
Massachusetts Attorney General Maura Healey, who has pursued the Sacklers in state court, said she would oppose the settlement and any attempt to stop her claims from going forward. The current settlement doesn’t go far enough to hold the Sacklers personally accountable, she said.
“If they think they can use bankruptcy to escape accountability, after creating the worst public health crisis of our time, they are mistaken,” Ms. Healey said in a statement.
In a Monday press conference, Healy elaborated on some of her objections to the settlement. According to The Hill, Holdouts vow to challenge Purdue Pharma settlement:
“Purdue has had all of its money sucked from it by the Sacklers, so the money is with the Sacklers,” Massachusetts Attorney General Maura Healy (D) said in a press conference Monday.
“This proposal is … not going to require the Sacklers to pay back any profits they took out from Purdue from the sales of OxyContin over the last 10 years,” Healy added.
The Hill emphasised that Healy is “incensed” by the provision of the settlement that allows the restructured company to continue to sell OxyContin, with profits designated to pay for addiction treatment:
“This settlement is only going to be made possible from the future and continued sales of OxyContin. I reject that. That’s offensive to me, that we will allow a settlement that allows Purdue and the Sacklers to sell [OxyContin] when every day, people in this country are dying of opioids,” Healy said.
Purdue claims that a settlement is the best way to use company assets to address the opioids crisis, rather than to contest litigation. It claims expenditure of $263 million in litigation expenses in 2019 alone. The Financial Times notes in Purdue Pharma files for bankruptcy as some states stall on opioid deal:
Steve Miller, the turnround specialist who became chairman of Purdue Pharma’s board last year, said the bankruptcy and settlement offer was “the best and only way to resolve the unmanageable litigation rapidly depleting the company’s assets and which threatens to ultimately destroy the entire value of Purdue”.
“Whatever else people might wish for is not on the table to be decided. Now, there is a stark choice,” he said. “We are hopeful of gaining the support of the rest of the states. The alternatives are to allow all the resources available to be devoted to communities in need or spend it all on litigation.”
As The New York Times reports Monday, however, in Would a Purdue Bankruptcy Protect the Sacklers? Good Question.:
“At least on a temporary basis, the court could grant a stay for the Sacklers, because this is a messy, high-stakes case and the court needs a little time to get everyone in the same room to figure out what’s happening,” said Lindsey D. Simon, an assistant professor at the University of Georgia School of Law who teaches bankruptcy and commercial litigation. “Otherwise, there could be a risk that the settlement, which includes a $3 billion contribution from the Sacklers, will go away.”
If the bankruptcy is approved, Ms. Simon added, the Sacklers could be permanently released from lawsuits.
But as another holdout AG, North Carolina’s Josh Stein, told the WSJ:
“I see no basis by which they’re entitled to a stay because they’re not declaring bankruptcy,” North Carolina Attorney General Josh Stein said Monday of the Sacklers, adding that he is preparing to sue family members. “They are trying to use bankruptcy to shield their assets.”
Courts have stayed litigation against leaders who are involved in running troubled companies, even if the executives themselves haven’t filed for bankruptcy.
“If the Sacklers are not necessary to the day-to-day operations of the debtor, it might be harder for them to get the protection of the stay,” [Jonathan Lipson, who teaches bankruptcy law at Temple University,] said.
Other Avenues for Recovery; Ongoing Sackler Shenanigans
There are at least three other avenues the state AGs could pursue. According to Monday’s NYT:
Melissa B. Jacoby, a bankruptcy law expert at the University of North Carolina at Chapel Hill, noted that these states have “plenty of grounds to argue that the company is not in financial distress.” The Purdue restructuring, she said, could be seen as “an end run rather than a legitimate use of the federal bankruptcy system.”
They may also argue that bankruptcy law itself offers a way for states to sue in their own courts.
There is a “police powers” exception to the automatic suspension of lawsuits in bankruptcy court. If a state is using that power to protect its citizens through a lawsuit against a company, often that case can continue even if the company has filed for bankruptcy. Here, for example, states could say they are suing Purdue and the Sacklers to protect public health or to guard against consumer fraud.
As to that police powers exception, the WSJ notes:
Purdue has proposed subjecting itself to an injunction against improper opioid marketing, a move designed to make it harder for the holdout states to fit through the police power loophole.
[Lipson] said the judge will look at whether the holdout state attorneys general are simply looking for more money from the Sacklers or protecting other public interests. The offer of a self-injunction, he said, could be a strategic move to persuade the judge to extend the stay to the states.
“If the court concludes these are pecuniary claims, then the government just starts looking like any other creditor,” Mr. Lipson said. “The whole point…is to force all the creditors into a single forum.”
In a court filing made on Friday, New York state attorney general Letitia James disclosed that members of the Sackler family made over $1 billion in wire transfers as an attempt to shield assets, according to an article in Friday’s New York Times, New York Uncovers $1 Billion in Sackler Family Wire Transfers:
The New York attorney general’s office said on Friday that it had tracked about $1 billion in wire transfers by the Sackler family, including through Swiss bank accounts, suggesting that the family tried to shield wealth as it faced a raft of litigation over its role in the opioid crisis.
The wire transfers are part of a lawsuit against Purdue and individual Sacklers in New York. Letitia James, now the state’s attorney general, had issued subpoenas last month to 33 financial institutions and investment advisers with ties to the Sacklers in an effort to trace the full measure of the family’s wealth.
“While the Sacklers continue to lowball victims and skirt a responsible settlement, we refuse to allow the family to misuse the courts in an effort to shield their financial misconduct,” Ms. James said in a statement. “Records from one financial institution alone have shown approximately $1 billion in wire transfers between the Sacklers, entities they control, and different financial institutions, including those that have funneled funds into Swiss bank accounts,” she added.
Forbes has estimated that the family fortune is worth $13 billion, a figure the family has not disputed, but many state attorneys general believe that the family has far more hidden away, as a safeguard against the cascade of litigation.
The Friday New York Times article includes a graphic, with the caption: “Members of the Sackler family on the board of Purdue Pharma, the maker of OxyContin, voted to pay their family over $4 billion from 2008–16.”
Yesterday, James issued the following statement:
“It shouldn’t come as a shock that Purdue’s bankruptcy filing comes just 48 hours after my office exposed about $1 billion in wire transfers involving Swiss bank accounts. In no uncertain terms, any deal that cheats Americans out of billions of dollars, allows the Sacklers to evade responsibility, and lets this family continue peddling their drugs to the world is a bad one, which is why New York remains opposed to it. My office will not be deterred in its lawsuit against the Sackler family, and will continue fighting to make this family pay for the death and destruction they inflicted on the American people.”
The state AGs could conceivably bring a claim for fraudulent conveyance: family members transferred money from the company to themselves before filing for bankruptcy. In other words, looting the company (see this Forbes account, The Sackler Family And Fraudulent Transfers, which unfortunately is maddeningly truncated, before getting to the gist). Alas, those are very difficult claims to prove.
The ball is now in the bankruptcy court. The key issue: How much protection will the court provide to the Sacklers?
According to Monday’s NYT account:
But legal scholars say that previous rulings by the United States Court of Appeals for the Second Circuit, which oversees the federal bankruptcy court in White Plains where Purdue filed its case, could be read in a light favorable to the position that lawsuits against the Sacklers as well as the company should be halted.
The battle, Ms. Simon said, is about whether states or the federal bankruptcy courts should hear these disputes.
Which is of course no doubt one reason that Purdue’s lawyers filed their cases in that court.
Another option available to a creative and ambitious state AG: file criminal charges. None have yet been filed. Monday’s NYT account quotes Simon as saying a bankruptcy proceeding wouldn’t serve to shield company or Sackler family members from criminal prosecution. So, even if the bankruptcy courts extends liberal protection to Sackler family assets as part of the Purdue chapter 11 proceeding, a state could still pursue a criminal charge.
Pass the popcorn.
Whither the MDL?
One final thought:
Litigation against other opioids defendants other than Purdue included in the pending multi-district litigation (MDL) proceeding will likely continue. The MDL consolidates thousands of opioids cases in the court of US federal district court Judge Dan Polster, sitting in Cleveland. A key trial is slated to commence in October. Polster’s clear preference for a settlement rather than a trial has attracted allegations of bias (for further background on the MDL, see DoJ Seeks to Participate in Settlement; for details on other opioids litigation developments, see Judge Issues $572 Million Verdict Against J & J in Oklahoma Opioids Trial: Settlements to Follow?)
The litigation against opioid makers is complicated by the fact that Purdue is just one of the defendants in the MDL. While a bankruptcy judge could put the MDL as a whole on hold, it’s possible that the claims against Purdue would be segmented off in bankruptcy court, as the rest of the MDL continues.