DoJ Bankruptcy Trustee Lambastes Provisions to Protect Sacklers in Purdue Bankruptcy Exit Plan as “Illegal”

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.

Last week, when I last wrote about the Purdue bankruptcy exit plan, it looked like the Sackler family would get to keep most of their fortune, and receive immunity from third-party lawsuits for claims related to the role they played in the opioids epidemic.

Fifteen states had signalled, including previous stalwarts of state opioids litigation Massachusetts and New York, they would drop their opposition to the proposed plan. These states later followed through and made that official.

It therefore looked increasingly likely that Judge Robert Drain  would approve the plan following a hearing scheduled for August 9 (see Purdue Bankruptcy Plan Moves Closer to Approval: Sacklers Would Make Out Well and Preserve Much of the Family Fortune, Despite the Opioids Crisis).

Forty states have now agreed to the plan, although significant holdouts remain, including Connecticut and the District of Columbia.

Yesterday, however, two arms of the DoJ, the DOJ’s U.S. Trustee program, which according to NPR, serves as a national watchdog over the federal bankruptcy system, and the U.S. Attorney for the Southern District of New York Audrey Strauss made separate court filings that raised constitutional and other concerns (see this NPR account, JJustice Department Blasts Purdue Pharma’s Bankruptcy Plan).

In his filing, U.S. Trustee William Harrington described the releases that purport to provide the Sacklers with immunity from lawsuits as “illegal”. In a separate brief, U.S. Attorney for the Southern District of New York Audrey Strauss also noted that she has “fundamental concerns” with the releases, according to Reuters, which was first out of the gate with the latest on the Purdue story, Purdue bankruptcy watchdog says protections benefiting Sacklers are ‘illegal’. Strauss’s brief raised constitutional concerns, arguing the proposed involuntary third party release violated due process by lacking sufficient notice and opportunity to be heard for the claimants.

From Harrington’s filing:

The United States Trustee objects to confirmation of the Plan because of two impermissible provisions: (1) the extraordinarily broad release of the Sackler Family and associates at section 10.7(b) from any and all claims related to the opioid crisis held by “all persons,” including direct claims of victims against the Sackler Family, which constitutes an impermissible discharge of hundreds (and possibly thousands) of non-debtors; and (2) the payment of up to $500 million in attorneys’ fees under section 5.8 without court oversight and approval or the opportunity for parties to object as required by section 503(b)(4) of the Code.<

From the U.S. Attorney’s brief:

Nonetheless, the United States has fundamental concerns with the proposed ShareholderRelease. First, the proposed involuntary third-party release violates due process because it deprives individuals and entities of their property rights without sufficient notice or a sufficient opportunity to be heard. Second, there is no authorization in the Bankruptcy Code for third-party releases outside of the asbestos context, and the Second Circuit’s ruling in In re Metromedia Fiber Network, Inc., 416 F.3d 136, 142-43 (2d Cir. 2005), that permitted a third-party release notwithstanding a lack of statutory authorization, was wrongly decided.. Nor can debtors make the required showing under Metromedia given the breadth and scope of the Shareholder Release. Third, if involuntary third-party releases are permissible, they must be approved by the district court de novo, as bankruptcy courts lack the adjudicatory and constitutional authority to enter final orders approving such releases [footnotes omitted].

Separately Connecticut state attorney general (AG) also filed papers objecting to the bankruptcy exit plan, on behalf of his state and eight other AGs, as also did the West Virgina state AG, on different grounds

The outlook for the Sacklers doesn’t look so rosy now – although it’s too soon to think that some measure of justice might finally be done, especially with white shoe powerhouse law firm Davis, Polk& Wardwell on the case. For which they are being well paid. Very well paid indeed – a fact to which Harrington also took exception, as noted above. Under the proposed exit plan, the firm would be paid more than $500 million in fees, without any opportunity for opponents to challenge this payday.

DoJ Objections

Harrington’s filing minced no words.  But first, some necessary context. From Reuters:

Purdue’s proposed plan would wind down the company and shift assets to a new entity, which would steer profits toward plaintiffs that have accused the company of aggressively marketing OxyContin while downplaying its risks. The plan also sets up trusts to distribute funds to opioid abatement programs around the country. As part of the deal, the Sackler family owners – who have not filed for bankruptcy – would contribute roughly $4.5 billion in exchange for releases from opioid-related litigation that could be filed against them.

Harrington’s prime objection:

But, in Harrington’s view, the “third-party” releases – which are often challenged by the U.S. Trustee’s office in large, corporate bankruptcies – go too far. The trustee called the protections “nothing less than an illegal, court-ordered discharge of a potentially limitless group of non-debtors.” He also said the definition of who exactly is releasing claims and who benefits from the releases is “incomprehensible.”

Harrington argued that such releases violate a provision of bankruptcy law that generally prevents a court from “extinguishing involuntarily” certain claims against non-bankrupt parties without the claim holders’ consent.

Now, to be sure, there are allowable exceptions to the general rule, for example, if parties to be released make “substantial contributions” to reorganization efforts. But Harrington didn’t think that was the case here, as the bankruptcy claimants aren’t being paid in full under the proposed exit plan and the releases extend to parties, e.g., the Sacklers, beyond those making the contributions, e.g., Purdue.

Instead of rebutting the devastating arguments advanced by Harrington and Strauss, Purdue relied on side-steps in a statement it issued, emphasizing two arguments. First, this settlement   is only following grown well trodden in mass tort bankruptcies, in which, as quoted by NPR, third party releases  “have long been allowed under the law in most jurisdictions.” Reuters noted the releases do not cover criminal liability.

I question whether emphasizing that the releases don’t cover criminal liability is a sound strategy, as this statement might provoke some enterprising state or federal prosecutor to pursue the criminal route. Although I imagine that the reason that such a red flag is waved in front of potential prosecutorial bulls is that the window for bringing criminal charges may have passed, and various statutes of limitations might have tolled.

The second argument the Sacklers and their attorneys think may be a clincher is that again according to NPR, the exit plan would “transfer billions of dollars of value into trusts for the benefit of the American people.” The promise of a big pot of money to buy their way out of their opioids legal troubles has seduced convinced many, including the state AGs of Massachusetts and New York, as I discussed in my post linked to above. But more hard-headed considerations may now prevail. Offering relatively modest amounts of cash alone – sums I point out which only shave the family fortune –  may no longer suffice to make these issues go away.

Over to Reuters again, describing Purdue’s laments in full spate:

Removing the releases in Purdue’s plan “would result in the destruction of billions of dollars of value that would otherwise go to state and local communities to abate the opioid crisis. Furthermore, it would in future cases allow a single entity to block a plan supported by and in the best interest of all other stakeholders,” the company said in its statement.

State AGs File Objections

Connecticut state AG William Tong has also filed objections to the exit plan and was joined by eight other AGs: California, Delaware, the District of Columbia, Maryland, Oregon, Rhode Island, Vermont and Washington. According to the Westchester & Fairfield County Business Journals, AG Tong files formal objection to Purdue Pharma bankruptcy plan:

The objections, which were filed in the U.S. Bankruptcy Court for the Southern District of New York as part of the Stamford company’s bankruptcy proceedings, are in reference to the $4.3 billion that the Sackler family will pay for its company’s role in the opioid crisis.

The attorneys general pointed out that the Sackler family made at least $11 billion in profits from producing and marketing OxyContin and that the Sacklers themselves are neither bankrupt nor claiming bankruptcy.

Furthermore, the attorneys general oppose a provision in the bankruptcy plan that would grant the Sacklers lifetime immunity from all liability, which would prevent the states from bringing consumer protection lawsuits against the family. And they highlighted a recent New York Times editorial that showed the Sacklers will continue to earn interest on their $4.3 billion as the settlement is paid out over nine years, thus ensuring they will be wealthier than they were when they started.

“Connecticut will not sit on the sidelines while the Sacklers raid their own charity funds and walk away with their personal wealth intact,” said Tong. “This plan represents an unprecedented legal maneuver to try to force states to give up our strong claims against the Sacklers. This plan is a far cry from justice, and we will not give up our fight for justice and accountability.”

On Sunday, West Virginia state AG Patrick Morrisey, as he objected to the amount of money his state would receive under the plan.

As 12 WBOY reported in WV Attorney General rejects Purdue Pharma bankruptcy plan:

“I remain vigorously opposed to a proposed allocation formula that would distribute settlement funds largely based on a state or local government’s population – not intensity of the problem,” said Attorney General Morrisey. “Any such allocation formula fails to recognize the disproportionate harm caused by opioids in our state. I look forward to arguing our case in court this August.”

In April, the Attorney General filed his objection in U.S. Bankruptcy Court for the Southern District of New York, arguing that Purdue’s failure to disclose how its multibillion-dollar proposal would be split among states undermined its desire to avoid court challenges to an inherently inequitable arrangement.

Purdue Pharma responded by disclosing publicly the once-closely held Denver Plan, which the Attorney General opposes since it would distribute settlement funds largely based on population – not intensity of the problem.

The Bottom Line

This movie is far from over – not by a long-shot. In the light of Harrington’s stinging objections, the constitutional concerns raised by Strauss, and the arguments made by the state (and DC) AG hold-outs, I don’t see how Judge Drain could sign off on the sweeping third-party releases as they now stand in the proposed exit plan. Especially as the Sacklers will retain the bulk of their fortune – and in fact, as the NYT editorial pointed out.

But I am not by any measure an expert on bankruptcy law.

So I cede the floor to readers for comments.