Tong: Rejection of Purdue opioid deal a ‘seismic event’

Connecticut Attorney General William Tong hailed a federal judge who has rejected OxyContin maker Purdue Pharma’s proposed settlement of several thousand lawsuits, while the Stamford-based company said it intends to appeal the decision — a scenario that could spell many more months of litigation for an alreadyprotracted case.

New York U.S. District Judge Colleen McMahon ruled that federal bankruptcy law does not give the judge who approved the settlement plan in September the authority to grant “third-party releases” from current and future lawsuits related to Purdue’s opioids to the Sackler family members who own the company, but who have not personally filed for bankruptcy. The opposition of Connecticut and the handful of other states that filed appeals focuses in large part on those releases.

“It’s a huge win for victims, survivors and their families — and a seismic event in bankruptcy law and bankruptcy court,” Tong said in an interview Friday. “This sends a signal that no, you can’t abuse the bankruptcy process, you can’t leverage the bankruptcy of a company to protect yourself if you’ve committed individual wrongdoing.”

In a statement announcing its planned appeal — which would go to the Second Circuit Court of Appeals — Purdue said it would “continue its efforts to forge yet further consensus around a plan.” The settlement framework has gained the support of more than 95 percent of about 120,000 voting creditors, including 43 states and territories. But the number of voting creditors comprised only approximately 20 percent of Purdue’s claimants.

Purdue values its settlement proposal at more than $10 billion — with the funds designated for efforts to tackle the national opioid crisis. The plan emerged when the firm filed for Chapter 11 bankruptcy in September 2019, following several thousand lawsuits filed by Connecticut and other local and state governments, which alleged the company fueled the opioid epidemic with deceptive OxyContin marketing. Despite its settlement offer, the company has denied those allegations.

“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,” Purdue Chairman Steve Miller said in a statement. “These funds are needed now more than ever as overdose rates hit record-highs, and we are confident that we can successfully appeal this decision and deliver desperately needed funds to the communities and individuals suffering in the midst of this crisis.”

The third-party releases — which would cover many other parties in addition to Purdue’s owners — are a condition of the Sacklers’ proposed contribution of about $4.3 billion in cash to the settlement. Tong has argued, however, the Sacklers would end up even wealthier after they finished paying that money over a nine-year period. Last year, Forbes estimated the Sackler family’s net worth to be nearly $11 billion.

Through a spokesperson, the family of late Purdue co-founder Mortimer Sackler declined to comment on McMahon’s ruling. A message left for a spokesperson of the family of late Purdue co-founder Raymond Sackler was not immediately returned.

The Sacklers are defendants in many of the complaints, including Connecticut’s, have denied the lawsuits’ accusations that they engaged in marketing and financial misconduct related to Purdue.

Debate about Sacklers’ legal protections

In her ruling, McMahon argued that she was obliged to vacate bankruptcy judge Robert Drain’s “confirmation” of Purdue’s settlement plan. She said the bankruptcy code did not allow releases of “non-debtor” parties that have not filed for bankruptcy beyond cases involving injuries related to the manufacturing and sale of asbestos.

“This court concludes that the bankruptcy code does not authorize such non-consensual, non-debtor releases: not in its express text (which is conceded); not in its silence (which is disputed); and not in any section or sections of the bankruptcy code that, read singly or together, purport to confer generalized or ‘residual’ powers on a court sitting in bankruptcy,” McMahon said in the ruling. “For that reason, the confirmation order (and the advance order that flows from it) must be vacated.”

Purdue officials said in their statement that McMahon’s ruling ran “contrary to more than 30 years of governing precedent approving third-party releases in appropriate circumstances.”

But a number of legal experts said McMahon’s ruling was defensible.

“I think her interpretation of the bankruptcy code is a reasonable and supportable one — but not a conclusive interpretation,” Robert Bird, a professor of business law at the University of Connecticut, said in an interview. “There is a possibility that the Second Circuit Court of Appeals will disagree. But I think Judge McMahon was on reasonable ground to rule the way she did.”

When he approved the plan, Drain acknowledged the widespread concerns about the proposal. But he ultimately consented — and allowed the third-party releases.

“It is without doubt the case that without these releases, the Sackler shareholder released parties would not agree to the payments under the plan,” Drain said during the Sept. 1 hearing when he announced his approval. “They understandably, I believe, are insisting on that because that is their consideration in return for the consideration they’re providing to the estate. I’ve already concluded that without the releases, the plan would unravel and, in all likelihood, the debtors’ case would convert to a case under Chapter 7 of the bankruptcy code.”

Drain’s argument did not persuade Connecticut and the plan’s other opponents. California, Delaware, the District of Columbia, Maryland, Oregon, Rhode Island, Vermont and Washington, as well as a bankruptcy-focused arm of the U.S. Department of Justice, also appealed.

“We are pleased with the District Court’s decision invalidating the Purdue Pharma bankruptcy plan,” U.S. Attorney General Merrick Garland said in a statement. “The bankruptcy court did not have the authority to deprive victims of the opioid crisis of their right to sue the Sackler family. The department remains committed to opioid abatement efforts and supporting victims of opioid abuse.”

Lengthy litigation

Assuming that Purdue appeals the ruling, the bankruptcy case could easily extend well into 2022.

“There have to be briefings and arguments. This process is months, not weeks. It could take over a year,” Bird said. “It’s going to take a long time.”

Tong said he would pursue the case for however long it took to achieve an equitable outcome. He has served in his current position since January 2019 — coincidentally taking office a couple of weeks after Connecticut filed its lawsuit against Purdue, under his predecessor George Jepsen. Tong, a Democrat, has not announced yet whether he will seek reelection next year.

“We’re prepared to fight all the way,” Tong said. “Purdue and the Sacklers can try to appeal — but at the end of the day, we’re right on the law.”

At the same time, Purdue’s bankruptcy has catalyzed efforts to reform bankruptcy law. U.S. Sen. Richard Blumenthal, D-Conn., is advancing legislation known as the SACKLER Act, which would prevent those who have not filed for bankruptcy from obtaining releases from lawsuits brought by government bodies.

“Judge McMahon’s opinion highlights the possible loopholes and uncertainties in the present law that argue strongly for the SACKLER Act, which I will continue to champion,” Blumenthal, who sued Purdue when he served as state attorney general, said in an interview. “We need to close whatever the loopholes are in the present law that would create any question about releasing a non-debtor.”