Purdue bankruptcy watchdog says protections benefiting Sacklers are 'illegal'

REUTERS/George Frey
  • Bankruptcy law bars these types of shields, U.S. Trustee says
  • Challenge comes after Purdue shores up more settlement support

(Reuters) - The U.S. Department of Justice’s bankruptcy watchdog on Monday objected to Purdue Pharma LP’s proposed reorganization plan and opioid settlement, saying the legal protections it provides to the members of the Sackler family who own the OxyContin maker are too broad.

U.S. Trustee William Harrington filed his objection with the U.S. Bankruptcy Court for the Southern District of New York three weeks ahead of a scheduled hearing on the proposed plan and settlement, which recently garnered support from 15 states that had previously opposed the deal. U.S. Attorney for the Southern District of New York Audrey Strauss said in a court filing on Monday that she has "fundamental concerns" with the releases as well.

Purdue, represented by Davis Polk & Wardwell, filed for bankruptcy protection in September 2019 to address nearly 3,000 lawsuits accusing the company of fueling the national opioid epidemic through deceptive marketing.

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.

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.

There are exceptions to that rule if the parties being released have made “substantial contributions” to reorganization efforts. But the Purdue releases do not fall into that exception, the trustee said, because they extend to people beyond those making the contributions and because claimants are not being paid in full.

Purdue said in a statement that third-party releases are routinely approved in mass tort bankruptcies like Purdue's and do not cover criminal liability.

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.

Representatives for the Mortimer and Raymond Sackler families declined to comment.

Harrington also took issue with the payment of Purdue’s attorneys’ fees, saying they could receive up to $500 million without an opportunity for opponents to object.

The settlement, which Purdue says is worth more than $10 billion, is backed by about 40 states as well as a slew of municipalities, local government entities, Native American tribes and hospitals, among others. Critics of the deal say the Sackler family members should pay more.

A hearing on the Purdue plan and settlement is set for Aug. 9 before U.S. Bankruptcy Judge Robert Drain. In addition to the bankruptcy settlement funds, the Sackler family members have agreed to pay $225 million to settle a civil investigation from the DOJ. They have not been criminally charged.

The case is In re Purdue Pharma LP, U.S. Bankruptcy Court, Southern District of New York, No. 19-bk-23649.

For Purdue: Marshall Huebner, Benjamin Kaminetzky, Timothy Graulich, Eli Vonnegut and James McClammy of Davis Polk & Wardwell; and Paul Breene, Ann Kramer, Anthony Crawford and Lisa Szymanski of Reed Smith

For the U.S. Trustee: DOJ trial attorney Paul Schwartzberg

Read more:

15 more U.S. states reach settlement in OxyContin maker Purdue bankruptcy

Purdue Pharma to use public trusts, Sackler cash to settle opioid litigation

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Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.