Victor A. Sahn, Esq.
The Purdue Pharma Chapter 11 case, which has been pending since 2019, has unfolded as a complex legal saga that revolves around the notorious manufacturer and distributor of the opioid pain medication, OxyContin. This blog post delves into the intricate details of the case, exploring the reasons behind its initiation, the legal disputes that have arisen from it, and the potential implications for future Chapter 11 bankruptcy cases.
Purdue Pharma’s role in the opioid epidemic is prominent. Portrayed vividly in the television dramatization “Dope Sick,” the OxyContin epidemic caused widespread addiction and devastation. The misleading marketing of the drug has been identified as a catalyst for the crisis, prompting mass tort class actions by court-constituted victims of addiction and by various States, that bore the burden of using their health systems to pay for the care of their addicted citizens or which could in the future bear the costs of care for victims of addiction to OxyContin. The Chapter 11 case was triggered by the overwhelming number and amount of these claims which ultimately totaled 618,194 claimants. This left Purdue Pharma vulnerable, lacking the necessary assets to pay these claims. This was due, in part, to the transfers by the Sackler Family Members (family members of Mortimer and Raymond Sackler) from privately owned Purdue Pharma to themselves over the eleven years prior to the filing of the Bankruptcy cases. The amount of these transfers was estimated to be $11 billion—this was significantly responsible for leaving Purdue Pharma unable to pay anything toward the damage claims of the various personal injury constituencies.
Plan of Reorganization and Third-Party Releases
From the outset, the Chapter 11 case was highly litigious and much of the litigation in the bankruptcy case was over the billions of dollars in profits that the Sackler Family, who owns Purdue Pharma, had siphoned out of the company over the years. These profits were subject to scrutiny and potential return to the bankruptcy estate for at least two reasons. The distributions were excessive and violated Delaware law regarding the circumstances under which shareholders could take distributions from their company. In related law, the distributions came while Purdue Pharma was insolvent when calculating the claims of the personal injury claimants, the claims of the rest of the claimants against the Company, and those distributions were therefore recoverable. Further, and perhaps independent of the claims against them by the Company, there were direct claims against the Sacklers including fraud and misrepresentation in connection with the marketing and sale of OxyContin.
After years of legal wrangling, a consensual Plan of Reorganization emerged. Under this plan, the Sackler Family agreed to contribute a sum of less than $4.325 billion toward the reorganization. Ownership of Purdue Pharma, previously held privately by the Sacklers, was to be transferred to the company’s creditors. In exchange for their contributions, the Sackler Family sought “Third-Party Releases” or “Non-Debtor Party Releases,” effectively seeking protection from claims against them.
Circuit Splits and Supreme Court Review
A pivotal issue arose regarding the legality of these Third-Party Releases. There is no explicit authorization in the Bankruptcy Code for such releases without the consent and vote of each affected claimant in favor of the plan. This lack of consent raised concerns about the constitutionality of the releases, leading to appeals against confirmation of reorganization plans that included them. The legal landscape became even more complex due to a split among different Federal Circuits. While some, such as the Second and Fourth Circuits, deemed non-consensual Third-Party Releases permissible, others, like the Ninth Circuit, insisted on creditor consent. This “split” prompted the Supreme Court to grant review, with the aim of resolving the issue definitively. The specific issue that they asked the parties to brief to the Court was “Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.”
The Bankruptcy Court’s initial confirmation order whereby the Sacklers were to contribute $4.325 billion over a period of years in exchange for releases from the bankruptcy estate and third-party releases from all claimants holding actual or potential claims against them was appealed to the U.S. District Court for the Southern District of New York. The District Court Judge (District Judge Colleen McMahon), hearing the appeal of the confirmation order, reversed the Order and held that the third-party releases violated the Bankruptcy Code. This was appealed by the Debtor and others who supported confirmation of the Plan to the Second Circuit Court of Appeals. Before the matter could be heard by the Second Circuit, the parties reached an agreement whereby the Sacklers agreed to increase their payment to the creditor body up to as much as $6 billion. This time, all the dissenting creditor representatives who did not previously consent to Plan Confirmation had now consented. Appeals were taken by the United States Trustee and the Justice Department of which the US Trustee is a part on the same basis as the reasons discussed above (i.e., Non-Consensual Third-Party Releases are unconstitutional), and the confirmation order was upheld by the Second Circuit Court of Appeals and the opinion of the District Court Judge reversed.
Review of the Second Circuit’s affirmance of the confirmation order was taken to the Supreme Court. The Supreme Court’s intervention came in the form of both granting review and a stay on the confirmation order, halting the relief and releases that the Sackler Family sought. Oral argument on the Appeal will take place during the upcoming 2023-2024 United States Supreme Court term.
The Purdue Pharma Chapter 11 case not only sheds light on the opioid epidemic’s devastating consequences but also presents a critical juncture in Chapter 11 bankruptcy practice. The ability to force creditors to accept releases of claims that they held against third-party insiders and others responsible for a Company’s demise, a lynchpin of many major Chapter 11 cases, could undergo a seismic shift. If the Supreme Court rules against the Respondent on the issue identified above, the result will be that the dynamics between debtors, third parties particularly insiders, and creditors will undergo a significant transformation, altering the negotiating and litigation landscape in Chapter 11 cases.
 See Order Granting Application for Stay and Granting of Certiorari, Justice Sotomayor, August 10, 2023