A federal appeals court in New York reinstated a bankruptcy settlement that resolves opioid-related lawsuits against Purdue Pharma’s Sackler family owners for up to $6 billion and clears the way to end the OxyContin maker’s chapter 11 case.
Tuesday’s decision by the Second U.S. Circuit Court of Appeals in New York means the Sacklers’ settlement will likely go into effect, shielding family members who own Purdue from current and future civil opioid lawsuits in exchange for billions of dollars in funding for opioid-abatement programs and compensation for people harmed by its products.
Purdue has been striving to exit from its multiyear bankruptcy with backing from state attorneys general, local government officials and representatives of opioid-addiction victims who had negotiated the deal protecting the Sacklers from opioid litigation. Some interested parties, including the Justice Department’s bankruptcy watchdog, opposed the settlement plan.
Tuesday’s ruling affirms the power of bankruptcy courts to give broad legal immunity to shareholders and other parties who aren’t in bankruptcy themselves, such as the Sacklers, even when creditors object.
Whether bankruptcy courts have the power to issue such releases has divided federal appellate courts when companies are bankrupted by lawsuits stemming from alleged corporate misconduct.
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The Second Circuit said the bankruptcy court overseeing Purdue’s chapter 11 case had the authority to grant releases to the Sacklers, who sought broad immunity from opioid-related lawsuits in return for a settlement contribution of up to $6 billion over time.
Liability releases were also essential to bring an end to the Purdue reorganization that began in September 2019 and to provide necessary funding to help victims of the opioid crisis, according to the decision.
The Justice Department declined to comment Tuesday. It could ask the Supreme Court to review Tuesday’s ruling, though the high court isn’t guaranteed to take up any further appeal.
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This type of release for entities that aren’t in bankruptcy have grown controversial as companies such as 3M Co. have recently attempted to use bankruptcy to drive settlements of mass litigation alleging their products caused health problems.
Purdue filed for chapter 11 in 2019 to address an onslaught of lawsuits against the company and its family owners alleging that aggressive marketing of OxyContin fueled opioid addiction. The Sacklers also faced litigation alleging they exacerbated the opioid crisis and took improper distributions from Purdue, which they deny.
Such releases have “heightened potential for abuse” and aren’t “a merit badge that somebody gets in return for making a positive contribution to a restructuring,” nor are they “a participation trophy” or a “gold star for doing a good job,” the appeals court said Tuesday.
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But in Purdue’s case, the settlement received support from more than 95% of the victims who cast ballots, the court said in its ruling. In addition to the $6 billion in payments, the Sackler family agreed to leave the opioid business.
“The Sackler families believe the long-awaited implementation of this resolution is critical to providing substantial resources for people and communities in need,” said the families of the late Dr. Mortimer Sackler and the late Dr. Raymond Sackler, who were co-chief executives before their deaths.
Michele Sharp, a Purdue spokeswoman, said the Second Circuit’s ruling is a victory for Purdue creditors, including the states, local governments and victims who overwhelmingly support the reorganization plan. It includes billions of dollars for victim compensation, opioid crisis abatement and overdose rescue medicines, and is the fairest way to resolve litigation, she said.
Lawyers at the Justice Department’s bankruptcy watchdog have argued that Purdue’s chapter 11 plan went too far by giving the Sacklers broader protections than they could have received by filing bankruptcy themselves—for example, by releasing claims based on allegations of fraud that normally can’t be discharged in bankruptcy.
The Second Circuit disagreed, saying the liability releases don’t cover all the Sacklers’ liabilities, only those related to Purdue’s bankruptcy case.
Since filing for bankruptcy, Purdue has racked up nearly $760 million in professional fees through the end of April to administer its chapter 11 case, including for the 13 months its appeal was pending before the Second Circuit.
Purdue also pleaded guilty in 2020 to three federal felonies related to the marketing and sale of OxyContin. Civil lawsuits against the company and the Sacklers have been on hold since it filed for bankruptcy, and would end under the chapter 11 plan.
Under the plan, Purdue is poised to be transformed into a public benefit company with no further involvement from the Sacklers. The company would still sell opioids under strict guidelines and monitoring, but it would also focus on providing opioid addiction medicine and overdose treatments.
The business has been facing the threat of liquidation after a federal judge in 2021 rejected broad liability releases for the Sacklers.
The Sacklers have said they didn’t anticipate the wave of litigation when Purdue distributed more than $10 billion to them from 2008 to 2017, roughly half of which went toward taxes or was reinvested in the business.
Following years of negotiations, Purdue and the Sacklers reached a $4.5 billion settlement with most state attorneys general. The bankruptcy court approved the deal over the objection of a handful of attorneys general who argued the Sacklers weren’t paying enough.
In late 2021, Judge Colleen McMahon of the U.S. District Court in New York threw out the proposed settlement, saying that legal releases for the Sacklers weren’t permitted by the bankruptcy code.
In her ruling, McMahon questioned if the distributions collected by the family represented an abuse of the bankruptcy system because the Sacklers took so much money out of the company that it forced Purdue to accept their settlement offer in exchange for broad protection from opioid lawsuits.
The judge said about half of the distributions were either invested in offshore companies owned by members of the Sackler family or deposited in trusts that couldn’t be reached in bankruptcy.
The Sacklers denied they abused the bankruptcy system. Purdue and a creditor committee that investigated the distributions said the settlement extracts more money from the family than victims would get in litigation and delivers funds to them more quickly.
The creditor committee alleged the distributions were part of a deliberate scheme by Purdue and its owners to hinder future judgments over opioids, but still supported the settlement over proceeding with litigation that could yield a lower return.
Purdue later reached a settlement with a higher payment from the Sacklers to win support from opposing state attorneys general.
Tuesday’s ruling reversed Judge McMahon’s decision, affirming the bankruptcy court’s earlier approval of Purdue’s plan.
—Andrew Scurria contributed to this article.
Write to Becky Yerak at [email protected], Alexander Gladstone at [email protected] and Jonathan Randles at [email protected]