Once in a very great while, the system works. We’ve embedded a ruling by Judge Colleen McMahon of the Southern District of New York in favor of a group of plaintiffs, including the states of Connecticut and seven other states, opposing the Purdue Pharma settlement because it shielded the Sackler family, which had already stripped Purdue Pharma of most of its assets before putting it in bankruptcy. I strongly urge you to read the decision. The first few pages are clearly and forcefully written and set forth the logic of Judge McMahon’s decision.
A short background on the settlement and why it was open to challenge from Associated Press:
Purdue sought bankruptcy protection in 2019 as it faced thousands of lawsuits…
Through the bankruptcy court, it worked out a deal with its creditors. Members of the Sackler family would give up ownership of the company, which would transform into a different kind of entity that would still sell opioids — but with profits being used to fight the crisis. It would also develop new anti-addiction and anti-overdose drugs and provide them at little or no cost.
Sackler family members also would contribute $4.5 billion in cash and charitable assets as part of an overall deal that could be worth $10 billion, including the value of the new drugs, if they’re brought to market…
In return, members of the wealthy family would get protection from lawsuits over their role in the opioid crisis — both the 860 already filed and any others in the future.
Most state and local governments, Native American tribes, individual opioid victims and others who voted said the plan worked out in the bankruptcy court should be accepted.
But the U.S. Bankruptcy Trustee’s office, eight state attorneys general and some other entities have been fighting the deal. They argue that it does not properly hold members of the Sackler family accountable and that it usurps states’ ability to try to do so.
A bankruptcy court judge approved the plan over the objections in September. But the opponents appealed to McMahon’s court.
The main issue on the appeal was the lawfulness of the measures that would extend legal protections to family members.
Such “third-party releases” are not used in most bankruptcy cases, but they are common in cases such as Purdue’s, in which the companies involved are burdened with lawsuits and have relatively little value — but their wealthy owners could contribute.
We are quoting liberally from a post at Credit Slips by Georgetown law professor, bankruptcy expert, and sometimes comrade in arms Adam Levitin on why the settlement stank. I strongly urge you to read it in full; even the lengthy excepts represent only some bits of Levitin’s argument.
The short version, as Levitin called out in earlier posts, is that Purdue shamelessly judge-shopped; there was no bona fide basis for the case being heard in White Plains. I am hoisting nearly in total Levitin’s explanation of the “poison pill” in the Purdue settlement, something the press has skipped over and not unpacked in Judge McMahon’s overview of her decision. From Levitin:
Jonathan Lipson and Gerald Posner have an important op-edabout the Purdue bankruptcy in the NYT and how the DOJ settlement with Purdue is likely to benefit the Sacklers. What’s going on in Purdue is troubling, but not just for its own facts. Purdue illustrates a fundamental breakdown of the checks and balances in the corporate bankruptcy system.
The basic problem is that debtors can pick their judges in a system that precludes any meaningful appellate review. That lets debtors like Purdue push through incredibly inappropriate provisions if they can get a single non-Article III judge of their choice to sign off. This happening in as high-profile and important a case as Purdue should be an alarm bell that things have gone off the rails in large chapter 11 practice. Where Purdue goes, chapter 11 practice in other cases will surely follow.
Purdue is perhaps the most extreme illustration of the confluence of three trends in bankruptcy each of which is problematic on its own, but which in combination are corrosive to the fundamental legitimacy of the bankruptcy court system.
- First, there is a problem of debtors attempting to push ever more aggressive and coercive restructuring plans.
- Second, there is the lack of effective appellate review of many critical bankruptcy issues.
- And third, there is the problem of forum shopping, particularly its newest incarnation, which is about shopping for individual judges, not just judicial districts.
Put together this means that debtor are picking their judge, knowing that certain judges will be more permissive of their aggressive restructuring maneuvers and that there will never be any meaningful appellate review of the judges, who are free to disregard even clear Supreme Court decisions. A single judge of the debtor’s choosing is effectively the only check on what the debtor can do in chapter 11. That is a broken legal system.
Problem 1: Coercive Restructurings
The idea of debtors attempting coercive restructuring plans is nothing new, and standing on its own is not a problem….As long as there is a meaningful judicial check on debtor (and creditor) overreach, the fact that some parties play hardball isn’t itself a systemic problem.
Purdue’s Sub Rosa Plan and Poison Pill
Purdue, however, takes the coercive restructuring approach to a previous unseen level, namely by including a “poison pill” in a settlement that effectively precludes any restructuring other than the one envisioned by Purdue. The operation of the poison pill are complicated, and I am simplifying things a bit, but here’s the basic idea. Purdue entered into a settlement with the Department of Justice for its civil liability (False Claims Act stuff, etc.):
- The settlement fixed the amount of the DOJ’s previously disputed claim. That’s fine and normal.
- The settlement also provided for the separate classification of the DOJ claim and the treatment of the DOJ claim (a “super priority administrative expense claim”–whatever that chimera is). To my mind that’s intruding on plan territory, but it’s not enough to get my dander up.
- The settlement also provides that Purdue will restructure itself into a “public benefit corporation” or the like, but that under no circumstance may DOJ be given the stock in this PBC entity. Again, getting more aggressive—the settlement is dictating what looks like a plan outcome and is not just dictating the treatment of DOJ, but also the treatment of other creditors (who must be separately classified and some of whom must get directly or indirect the residual interest in the PBC). In other words, the settlement functions as a sub rosa plan.
- The settlement also provides that DOJ can walk away from the settlement at any time for any reason, including the failure to restructure as a PBC. That alone isn’t a big deal.
But then there’s the kicker: the settlement provides that if DOJ walks away, its claim will not go back to its prior disputed, unliquidated status, but will instead revert to its nominal massive amount of some $18 billion—far more than the value of Purdue. What’s more, that claim won’t even really be a claim, but will be civil asset forfeiture rights. That’s super-duper priority, as civil asset forfeiture results in a forfeiture of title to assets to the US government upon the commission of the wrong-doing. (The assets subject to forfeiture aren’t really even part of the Purdue estate!) The effect of DOJ walking away from the settlement, then, would be that DOJ would get all of Purdue’s assets, which would go into the US Treasury’s general fund, rather than being available for states and local governments and opioid victims, who could use the funds for opioid abatement.
That’s the “poison pill” provision—if DOJ isn’t happy, it walks away and leaves no value for anyone else. That meant that if the settlement were approved, the only way Purdue’s other creditors could ever see a distribution would be if they played along with what DOJ and Purdue want. A sub rosa plan in a settlement is aggressive enough, but the additional “poison pill” was an incredibly coercive provision that I have never seen in a bankruptcy previously and which no court to my knowledge has ever previously blessed, much less in a case like this one. Purdue’s taking hardball to a new level.
To recap: Purdue proposed a sub rosa plan embedded in a pre-plan settlement, and that sub rosa plan is locked in through a “poison pill.” It’s impossible (I think) to square this with the Supreme Court’s recent ruling in Czyzewski v. Jevicthat there is no end-running plan protections. And all of this got decided through hurry-up motion practice, without notice to most of Purdue’s thousands of creditors.
So what’s the big deal here? Doesn’t everyone come out ahead if Purdue restructures as a PBC and money goes to opioid abatement rather than the US Treasury’s general fund? Not quite.
First, restructuring Purdue as a PBC precludes other alternative restructurings, such as a sale followed by a liquidation.
Second, many of Purdue’s creditors do not want to own—directly or indirectly—a public benefit corporation. These are opioid victims. They do not want any continued association with an opioid manufacturer, which they see as a public burden corporation.
Third—and this is the key—the poison pill gives Purdue the ability to settle its fraudulent transfer claims with the Sacklers for a relatively low value and for Purdue to confirm a plan with nondebtor releases for the Sacklers. That means that Sacklers would be able to avoid their civil liability to the states and individual opioid creditors for a relatively low cost and without having to have gone through bankruptcy themselves. The Sacklers will be able to walk away from Purdue keeping most of their allegedly ill-gotten gains without having had to open the disclosure kimono that bankruptcy requires.Not only does that mean that opioid victims might not get as much of the abatement funds as they should get because the full extent of the Sackler’s assets and ability to pay might not be known, but it also means that we will never know the full story about what went on at Purdue, and that matters because this sort of mass tort bankruptcy is as much about dignitary interests as it is about money. Without the poison pill, creditors might well have voted against a plan that included releases for the Sacklers. With the poison pill, they are unlikely to vote against the plan.
While Purdue is proposing creating a document archive to be publicly available after the bankruptcy, there are real questions about what will be included in that archive, as DOJ will have to sign off on what is released, privileged documents cannot be included, and there may be questions of document ownership—and most importantly no one will know at the time of voting on a plan. If you are concerned about dignitary interests, this is a problem.
It’s outrageous that the bankruptcy court would approve this sort of settlement provision outside of a plan (and there was no good reason that the court had to rule now; it could easily have waited and considered the settlement as part of plan confirmation). The bankruptcy court seems to think that the PBC structure contemplated is good for society. That really shouldn’t be a judicial concern here—courts are supposed to be referees, not conductors—but this sort of coercive plan provision—whether in a settlement or a plan—should be absolute off limits. This shouldn’t have been a close call.
Please read the rest of Levitin’s post; he does a fine job of making legal issues accessible and lively. And with that as a foundation, the importance of Judge McMahon standing up to settlements that go well beyond what appear to be the proper purview of bankruptcy courts can’t be overstated.00 re Purdue Pharna appeal ruling December 16 2021
The successful objection by US attorneys to the lack of potential jail time synchs impressively with their stance as presented in Dopesick, the Hulu show. Recommended. Show’s also good for calling out abettors, eg Mary Jo White.
The question is what will the SUPREME COURT say. This is just a road bump on the way to the SC. There is a circuit split and once the 2nd circuit rules sometime next year, it will easily be 2023 or beyond before the SC rules on this type of release being constitutional or not.
tl;dr – Perdue and the Sacklers will spend hundreds of millions on legal fees throughout the appeal process on the way to the SC and by the time something final this way comes, it will be (1) SC approving the confirmation, or (2) having to go back to square one and spend another several hundred million in legal fees, with it likely dragged out long enough for the Sackler money to disappear all together . . .
Isn’t it uncommon to have the supreme court overturn a ruling from a lower court? Of course in this case Purdue has very deep pockets with which to fund their attorneys…
Of course in this case Purdue has very deep pockets with which to
fundbribe their attorneysthe judges… There FFA.
The “justices” will find an obscure reason to reduce the fine and let the Sacklers off.
Recommended reading “Corruption in America” by Sarah Chayes.
The Sacklers do not have friends any more. Their name was removed from all the galleries in the Met that they funded.
Moreover, had you bothered reading the ruling, it keyed of a Supreme Court decision. The SC would have to invalidate a recent decision to find for the Sacklers.
Plus the DoJ joined the plaintiffs.
I’m nearing the end of watching the Dopesick series which I agree is excellent. It provides an good overview of the attempts to find justice for Purdue’s victims. Richard Sackler in particular comes across as a total sociopath. I’m happy he is still alive to watch this latest chapter unfold.
Bankruptcy judges aren’t considered “Article III judges” under Article III of Constitution.
To the extent we have an independent federal judiciary, it is due to the protections given by article iii. Judges appointed under that article are constitutional officers, and have protections such as lifetime appointment, removable by impeachment. While their formation and appointment may involve political factors, the goal was to insulate their future employment concerns from factors arising during their work: they could decide on particular cases without worrying the decision would implicate their future continuation in office.
Non article iii judges, by contrast, are essentially federal employees. They may include bankruptcy judges, but also special masters, referees, or magistrate judges. They are usually hired for a fixed term, but there are periodic reviews or renewals of contracts at which a disappointed, but powerful, litigant could potentially influence the future employment decision by exerting influence with the federal official in charge of that particular decision.
I don’t think the difference is in qualifications or professionalism, just institutional designs and potential sources of stress in decisions. As we saw in a recent links, there is a statistical case to be made that some small minority of article iii judges are influenced by their stock holdings, or at least their holdings give the appearance of judge influence. So the system is not perfect. But that is just what it is.
Great article by the way. I much appreciate the coverage of law and economics without the “law and economics” doctrine. :).
Lawyers (mainly male?) sure love that “open the kimono” metaphor about corporate disclosure. Cracked me up when I heard a guy say this during a CLE. Apparently not considered offensive, which is interesting.
Great post, thank you!
At a company I worked, one division repeatedly signed customer development agreements that had penalty clauses for non-delivery, ensuring that the division had to get the development resources. This practice was repeatedly referred to as ‘getting pregnant’ by senior management, despite being told by several employees that they found the reference offensive. Shirley the OTK metaphor would be more inappropriate, as it brings to mind an erotic visual… to me at least.
I expect this to go to the Supreme Court, the judge clearly framed this in a way to make this likely, and I would expect the Supreme Court to rule in the Sackler’s failure, because 6 of the 9 believe that rich people should never be held accountable.
What MIGHT happen though is that this will keep the decision from being finalized for a long enough time for Congress to pass the “Sackler Act” which explicitly bans these arrangements.
With apologies for being an old conspiracist: This info is just too coincidental. We were having all sorts of economic dysfunction and deregulation blowback in the 90s. It was the wild, wild west. Leading, of course, to 2008. So in 1996 who cranks up the production of “time release oxycontin” but the Sacklers – owners of a closely held (aka above accountability) corporation named Perdue Pharma. It starts out briskly making 1m$/yr for them – but by 2001 (a very auspicious year and only 5 years on) it has skyrocketed to 1bn/year – 1000 times more. How does that happen without addiction? (It doesn’t.) I’d be willing to guess that it also doesn’t happen without the government looking the other direction. Because, for starters, the price of opium should have likewise skyrocketed – making it a very lucrative commodity for whoever was providing it. Gee, I wonder who that was? I’m guessing this license was impervious to “article iii judges” and anybody else. So even though class action lawsuits were filed as early as 2003 – showing how quickly the social problems became obvious – nothing really stopped the production and sale of Oxy. The Courts usually denied “class” standing. Amazing. And even more amazing is that the action against Perdue and the Sacklers really didn’t get traction until 2017 – when it was more than obvious that the US had decided to get out of Afghanistan. And above we learn that the DOJ went along with a secretive settlement – literally protecting the defendant from disclosing all sorts of stuff. The DOJ allowed it. It doesn’t matter to the Sacklers because they’ve already looted Perdue – starting in 2008 – no doubt because there was just too much profit not to, or maybe some payoffs. And none of this matters to the Sacklers anyway because they are all richer than god and if the DOJ was in their pocket the Supremes will be a cakewalk. Never mind.
At the risk of overselling it, Dopesick addresses this thoroughly, beginning with the FDA decision to back the nonaddictive claim. The FDA guy who fudged the ruling went on to work for Perdue. Real “put ’em in the stocks and let’s find some rocks” stuff.
“Through the bankruptcy court, it worked out a deal with its creditors. Members of the Sackler family would give up ownership of the company, which would transform into a different kind of entity that would still sell opioids — but with profits being used to fight the crisis.”
This is like how in PA the state lottery funds services for senior citizens.
Maybe this isn’t so bad. I mean how many customer lawsuits can Purdue Pharma really expect?
It’s not as if they and their Pharma competitors sent out 76 billion oxycodone and hydrocodone pills to distribute throughout the United States, which was enough to give approximately 33 opiate pills per year to every man woman and child in the United States over a 7 year time period.
No wait – that’s exactly what they did. This is bad.
The real costs to will never be known. States alone are going to pay trillions over the next decade dealing with the long tail
In the document above, Canada was at first included with the Americans but decided to have their own prosecutions separate from the US.