A federal judge has overturned Purdue Pharma's $4.5 billion bankruptcy settlement, citing a provision protecting the controlling Sackler family from civil liability over the opioid epidemic.
Judge Colleen McMahon of the Southern District of New York said the bankruptcy court hearing the case had overstepped its authority, writing: “This court concludes that the Bankruptcy Code does not authorise such non-consensual non-debtor releases,” referring to the practice of shielding parties not in bankruptcy from civil claims.
As part of the settlement, the Sackler family, which owns Purdue, had agreed to contribute the $4.5 billion from their fortune to fund “abatement trusts” to pay victims and fund campaigns to alleviate the opioid crisis.
The assets of Purdue were to be transferred to a new company that would develop treatments for opioid abuse and manufacture non-painkiller drugs. In return, family members would be protected from all lawsuits over their alleged role in fuelling the US opioid crisis.
The restructuring plan was agreed by a wide range of stakeholders including US states, localities and victims.
However, a handful of objectors, including eight states and the US attorney for the Southern District of New York, pointed to analysis presented in the bankruptcy court that showed that the family had taken more than $10 billion out of Purdue between 2008 and 2017.
The objectors argued that the Sacklers were getting the benefits of the bankruptcy process without having personally filed for Chapter 11 protection themselves.
Purdue, maker of the powerful painkiller OxyContin, had filed for bankruptcy in New York in 2019 amid a wave of litigation from cities, states, individuals and others over its alleged role in the opioid epidemic that has killed 500,000 Americans.
The court-supervised restructuring was used to halt lawsuits against Purdue and the Sacklers in order to facilitate a global settlement.
As a requirement for the Sackler’s contribution, the family demanded that they could no longer be legally pursued. Lawyers for Purdue warned that without such a settlement, years of constant litigation would delay payments to victims and shrink the available pot.
Judge McMahon wrote: “It is indeed unfortunate that this decision comes very late in a process that, from its earliest days in 2019, has proceeded on the assumption that releases of the sort contemplated in Section 10.7 of the Debtors’ Plan would be authorised.”
She added: “I also acknowledge that the invalidating of these releases will almost certainly lead to the undoing of a carefully crafted plan that would bring about many wonderful things, including especially the funding of desperately needed programmes to counter opioid addiction.”
The practice of granting liability shields has become one of the most controversial aspects of Chapter 11 cases in recent years. Settlements either in product liability cases or where private equity firms faced allegations of asset-stripping have often been reached where money contributed to creditor recoveries was exchanged for the prohibition on future legal claims.
The practice has varied across federal bankruptcy courts. Judge McMahon wrote: “It should not be left to debtors and their creditors to guess whether such releases are statutorily authorised.”
Purdue said in a statement on Thursday night that it would appeal against the ruling.
“While the district court decision does not affect Purdue’s rock-solid operational stability or its ability to produce its many medications safely and effectively, it will delay, and perhaps end, the ability of creditors, communities, and individuals to receive billions in value to abate the opioid crisis,” said Steve Miller, chair of Purdue Pharma.
One representative for the Sackler family declined to comment.
“This opinion reflects an incredibly careful read of the existing law in a case where the stakes are very high. The law of releasing non-debtor parties has been a game of whisper down the lane for far too long”, said Melissa Jacoby, a law professor at the University of North Carolina, who has been following the case.
Copyright The Financial Times Limited 2021