A $6 Billion Settlement Threatens to Upend US Bankruptcy Deals

(Bloomberg) -- Members of the Sackler family who profited from the sale of OxyContin may inadvertently upend the way almost every big settlement is carried out in bankruptcy court.

The Supreme Court on Monday will consider the Biden administration’s bid to scuttle a $6 billion accord between bankrupt drugmaker Purdue Pharma LP and its billionaire owners. The deal would protect members of the Sackler family from future opioid lawsuits by way of an oft-used legal mechanism that the high court is now scrutinizing for the first time. 

If upheld, the settlement would snuff out an inferno of civil lawsuits blaming Purdue’s owners for the company’s aggressive marketing of OxyContin and, in exchange, route billions of dollars to victims, states and communities harmed by the nation’s addiction crisis. The proposal won overwhelming support from opioid crisis victims who voted on it, but there remains a vocal contingent bitterly opposed to letting Purdue’s billionaire owners put the lawsuits behind them. 

Detractors may get their way because of the challenge from a unit of the Justice Department. At issue is a component of the settlement that forces all opioid victims to give up their claims against the Sacklers even if they’d prefer to take their chances with a jury. Congress authorized similar maneuvers decades ago in bankruptcies related to asbestos lawsuits and, over time, lawyers and bankruptcy courts reasoned the mandate could be expanded to an array of corporate wrongdoing. 

Similar deals have ended mass litigation over dangerous products and waves of sex abuse claims against Catholic dioceses, the Boy Scouts of America and USA Gymnastics. They even appear in some mundane acquisitions of bankrupt firms. But federal appeals courts are split over whether the linchpin of these agreements — provisions called non-consensual third party releases — are lawful.

The use of such releases to resolve more and more kinds of liabilities meant it was only a matter of time before the Supreme Court weighed in, said Pamela Foohey, a professor at Yeshiva University’s Cardozo School of Law. Foohey and several law professors have told justices the Sackler settlement isn’t permitted by the bankruptcy code.

“Bankruptcy attorneys have been stretching the doctrine for years, in many cases,” Foohey said.

Industry groups and other bankruptcy scholars say prohibiting these deals would result in corporate owners paying victims less money because it would put global settlements out of reach. A small number of holdouts must sometimes be forced to take these deals so bankrupt companies’ limited assets are distributed fairly and quickly, they argue.

But critics contend Purdue’s settlement and similar agreements go too far by stripping victims of their rights to jury trials and overstep the power Congress gave bankruptcy courts. 

At stake is billions of dollars that could help people hurt by addiction. The legal challenge, led by a division of the Justice Department monitoring bankruptcy courts, also imperils a related proposal to turn Purdue into a public benefit corporation that would develop and distribute medications that reverse overdoses and treat opioid addiction. 

The Biden administration’s top courtroom lawyer, Solicitor General Elizabeth Prelogar, said in a November court filing that forcing Purdue’s owners back to the civil justice system could result in their paying more than the $6 billion currently offered. The existing bankruptcy deal may even leave the family members richer than they were at the start of the bankruptcy ordeal, Prelogar argued.

“Indeed, the Sacklers’ payments under the plan are so drawn out that, even after they make all their payments, they will likely be worth billions more than before the bankruptcy,” Prelogar said.

‘Emphatically Dispute’

Members of the Sackler family in court papers said they “emphatically dispute all allegations of wrongdoing against them” and said the settlement averts time-consuming and expensive civil litigation that may not succeed. Purdue has said the releases were sought by victims and other company creditors, not its owners.

Representatives for members of the Sackler family declined to comment on the Supreme Court proceedings. 

Even if litigation were successful, Purdue creditors would face additional legal obstacles because much of the family’s wealth is housed in offshore trusts, a branch of the Sackler family said in court papers. Purdue’s bankruptcy judge, when approving the deal in 2021, described it as a “bitter result.” 

A bankruptcy committee representing Purdue creditors, which includes opioid victims, said the Biden administration’s challenge also misses an important point: the settlement only resolves civil claims against the Sacklers and doesn’t prevent federal or state authorities from bringing criminal charges.

Members of the Sackler family have consistently denied wrongdoing and have never been criminally charged. In 2020, family members agreed to pay the Justice Department $225 million to settle civil claims while Purdue pleaded guilty to three federal felonies related to its marketing of OxyContin.

“Nothing in the release prevents the United States from using other means — including federal criminal prosecution — to seek ‘justice’ against the Sacklers,” the creditor committee said in an October court filing. “Blowing up the plan, however, accomplishes no such thing; it only deprives victims of the funds they need to survive and foments victim-versus-victim disputes over competing claims”

The case is Harrington v. Purdue Pharma, 23-124.

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