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Second Circuit looks askance at $6 billion OxyContin settlement

Although a bankruptcy judge approved the OxyContin manufacturer's multibillion-dollar settlement, a district court judge rejected the deal over concerns of expansive protections shielding the wealthy Sackler family from future lawsuits.

MANHATTAN (CN) — Federal appeals court judges appeared hesitant Friday to revive a settlement plan with drugmaker Purdue Pharma that would shield individual members of the wealthy Sackler family from all current and future civil lawsuits over their roles in promoting the opioid epidemic.

The owners of OxyContin maker Purdue Pharma filed for bankruptcy in September 2019 while facing some 2,600 lawsuits — most from state and local governments — but a sweeping nationwide settlement was scuttled last December when a federal judge in New York rejected the deal for including generous individual liability releases for the Sacklers.

During a two-hour hearing on Friday, lawyers for the embattled drugmaker insisted that U.S. Bankruptcy Judge Robert Drain, who approved the earlier settlement last year, had tailored the releases “verbatim lifting words from Second Circuit case law” to ensure that the deal was up to snuff.

“The releases are not broad,” insisted Purdue attorney Marshall Huebner. “The reason they’re two-pages long is because they’re narrower,” said Huebner, of the firm Davis Polk & Wardwell.

U.S. Circuit Judge Lee responded that the proposed Purdue settlement includes “a broader release than prior cases have really addressed.”

The Biden-appointed judge also pressed Purdue’s attorney on the heightened risk of abuse with this type of release. “In a situation like this, where the parties being released are the ones determining the contribution and kind of driving the plan,” she said, “that suggests concerns about abuse, or even in future cases, the idea that the parties getting the benefit of this release are determining how much they give, how essential it’s going to be to the plan.”

Senior U.S. Circuit Judge Richard Wesley, a George W. Bush appointee, called some of that case law cited by Purdue’s appeal “kind of a flimsy ship” with which to steer their case.

Huebner insisted that the alternative to the settlement deal that includes the releases for the Sacklers would instead be a “firestorm” of the company’s liquidation and endless litigation that would not provide the promised addiction-abatement resources that are on the table with the current deal.

“Four years of my life have been devoted to doing the best I can for the victims of Purdue to get them the most money for abatement and victims to save lives,” he said during his brief rebuttal on Friday. “The notion that we should gamble, that an alternative that two estate fiduciaries and 11 groups spent years exploring every pathway — because they think it sort of might violate their vision of a gestalt of the code, because they have some generic cases that say normally bankruptcy is about the debtor — is an insult to 34 years of Second Circuit precedent and the victims of this case.”

Justice Department attorney Michael Shih spoke about the challenge from the U.S. Trustee to the bankruptcy court’s authority to bless the releases in the settlement.

“By not declaring bankruptcy, the Sacklers did not have to give up all of their assets, got broader relief — release for claims for fraud — than they would have gotten under bankruptcy all under the umbrella of bankruptcy,” Shih said. “And that’s the sort of assertion by the bankruptcy court that evades specific restrictions on what a discharge could do that the Supreme Court found so problematic in [Czyzewski v. Jevic Holding Corp.]”

In all, the plan could be worth more than $10 billion over time. It calls for members of the Sackler family to give up control of the Stamford, Connecticut-based company so it can be turned into a new entity with profits used to fight opioid abuse. The deal would not shield members of the family from criminal charges, although there’s no indication any are forthcoming.

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Following opposition by the attorneys general for eight states and the District of Columbia, U.S. District Judge Colleen McMahon rejected the prior settlement deal on the basis that bankruptcy judges lack the authority to grant legal protection to people who don’t themselves file for bankruptcy when some parties disagree. McMahon’s ruling reversed Judge Drain’s bankruptcy court order confirming the Chapter 11 plan of Purdue Pharma LP, and its affiliated debtors, holding that the Bankruptcy Code did not authorize the plan’s non-consensual third-party releases.

At Friday's hearing, Senior U.S. Circuit Judge Jon O. Newman angrily scolded attorney Roy T. Englert, who represents the states seeking affirmation of the deal and its third-party releases, which the lawyer acknowledged granted a very broad permission to bankruptcy courts.

“Please don’t shoot yourself in the foot by saying it’s the contributions of the Sacklers that make this plan lawful, don’t do that,” Judge Newman interjected. “The burden is on the objectors to find an applicable provision that says the bankruptcy court can’t do this, and your position is as you started is there is none.”

The three-judge panel adjourned Friday’s hearing without ruling on Purdue Pharma’s appeal.

After the initial deal was thrown out last December, Purdue went through two months of mediation to reach a new one.

Like the original settlement, the new one requires members of the Sackler family who own Purdue to give up their ownership. It would be turned into a new company known as Knoa Pharma, with profits being used to fight an opioid crisis that has been linked to the deaths of more than 500,000 Americans over the past two decades. Also, like the original deal, the new one calls for the Sacklers to contribute cash to fight the epidemic in exchange for protection from civil lawsuits.

The key difference is that the Sackler contribution would now be $5.5 billion to $6 billion, an increase of at least $1.2 billion from the previous plan. The exact amount would depend on how much they bring in by selling their international drug companies. “This decision leaves on the table a number of critically important issues that were briefed and argued on appeal — principal among them, whether the Section 10.7 Shareholder Release can or should be approved on the peculiar facts of this case, assuming all the other legal challenges to their validity were resolved in Debtors' favor,” McMahon noted in her ruling.

Judge Newman asked Purdue’s attorney on Friday whether it was “a fair inference that the mediators pushed the Sacklers up from their opening bid to $4.2 billion.” The Carter-appointed senior judge several times repeated his deduction that mediators had negotiated an enhancement of at least a billion more dollars to the settlement. “I’m giving you what I think is a softball question, which you’re standing there and letting go right over the plate,” he told Purdue’s lawyer on Friday.

The objecting states say the Sacklers have plenty of money. In sworn testimony, a restructuring consultant for Purdue said family members had received between $12 billion and $13 billion over time from the company.

More than $100 million is being set aside for medical monitoring and payments for children born in withdrawal from opioids, and Native American tribes are in line for more than $150 million. Advocates say the money is essential to stemming the crisis.

Kentucky and Oklahoma are not part of the deal because they both reached previous settlements with Purdue.

Overdose deaths have been on the rise in the U.S., exacerbated by the isolation of the Covid-19 pandemic and the widespread availability of illicit versions of the synthetic opioid fentanyl.

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