Supreme Court reviews Sacklers’ $6 billion exchange for opioid crisis immunity

WASHINGTON (CN) — The Supreme Court is set to review a multibillion-dollar settlement for OxyContin-maker Purdue Pharma next week, teeing up a major bankruptcy ruling that will decide if company executives like the Sacklers can shield themselves from future lawsuits.

Ravaging families and communities across the country, the opioid epidemic is responsible for the deaths of 700,000 Americans — nearly 300,000 of whom died from prescription opioid overdoses — making it a lethal public health crisis.

But legal experts say allowing a $6 billion settlement aimed at abating those harms to move forward would result in a hazard of the moral variety.

“For all the supposed virtues of the plan trumpeted by its proponents, the decision below, if affirmed, will produce a terrible moral hazard,” Adam Levitin, a Georgetown University Law Center professor focused on bankruptcy and financial restructuring, told the court in an amicus brief.

Levitin says it will set a worrying precedent if company owners like the Sacklers can engage in misconduct while draining money from their companies when they recognize that the business is in trouble because of that very misconduct.

“Company owners will know from the get-go that they can always piggyback on the company’s future bankruptcy and get releases that cap their own liability, including for receiving fraudulent transfers,” Levitin wrote.

Purdue is blamed for fueling the opioid crisis not only with its creation and distribution of OxyContin, but also by aggressively marketing the drug to patients while disregarding addiction concerns. These efforts were headed by the Raymond and Mortimer Sackler families, who controlled and ran Purdue until 2018.

As the Sacklers began to worry about impending litigation, the family moved money from Purdue into trusts and holding companies. The government says this “milking” scheme removed $11 billion from the company and left it in a significantly weakened financial position. The Sacklers note that nearly half that money went towards taxes.

In the meantime, thousands of lawsuits were filed against Purdue and the Sacklers declaring their liability for the opioid epidemic. These suits were filed by individual victims of opioid overdoses, Native American tribes, local governments, and several states.

In 2019, Purdue filed for Chapter 11 bankruptcy with the intention of reorganizing the drugmaker. By this time, there were almost 3,000 actions against the company and 400 against the Sacklers themselves amounting to over $40 trillion. Purdue’s bankruptcy filing blocked all litigation against the company.

Litigation against the Sacklers was not paused, however. Instead of also filing for bankruptcy, the Sacklers negotiated a settlement. The plan would make Purdue a public-benefit company focused on opioid abatement. Money remaining in the estate would be paid out to various trusts that would compensate opioid victims and the communities impacted by the crisis.

Under the settlement, individual victims or their families could expect to receive between $3,500 and $48,000, minus attorneys fees and expenses. Billions would also be paid out to the tribes, cities and states behind the lawsuits.

Aside from money within the bankruptcy estate, the Sacklers agreed to pay $6 billion into the trusts. In exchange, the family would gain a liability shield, blocking all future lawsuits. The release relates to anyone bringing Purdue-related opioid claims and did not require the consent of the nondebtors.

Against the objections of the government, eight states, D.C., and some individuals, a bankruptcy court approved the plan, but a federal court vacated the order. A divided appeals court reversed. The government asked the Supreme Court for immediate action to block the settlement from taking effect. The justices agreed to pause the appeals court ruling and review the case themselves.

The government argued the Sacklers should not have been able to shield themselves from liability without filing for bankruptcy.

“If the Sacklers themselves had filed for bankruptcy, they would not have been able to shield billions of dollars from their creditors because — absent individual creditor consent — debtors must devote substantially all assets to the payment of creditors and may be held to account for any fraudulent or constructively fraudulent transfers they may have made,” U.S. Solicitor General Elizabeth Prelogar wrote in the government’s brief.

Instead of being forced to give up their assets by declaring bankruptcy, the government says the Sacklers were able to hide their wealth.

“By permitting the Sacklers, who would otherwise have faced claims asserting trillions of dollars in damages to obtain full repose while keeping billions of dollars that they drained from Purdue in the years before these Chapter 11 proceedings, the plan violates the basic tradeoff of bankruptcy that, in exchange for a fresh start, a debtor must commit essentially all assets to satisfying claims against it,” Prelogar wrote.

The government says the Sacklers’ $6 billion settlement is not nearly enough to mitigate Purdue’s harms, citing the company’s poor financial state after shifting billions into family trusts. According to the government, the Sacklers drained Purdue’s assets by 75%, leaving its solvency cushion reduced by 82%.

As the negotiators of the settlement, the creditors' committee claims the plan secured the best result for all involved. The creditors represent personal injury victims including babies with neonatal abstinence syndrome, hospitals, insurance ratepayers, employers, states, tribes and public school districts. And the committee is clear that none of these parties accepted the settlement with any sympathy for the Sacklers.

“But those most harmed by the debtors and by the Sacklers have made the considered choice to support the plan as the only means of getting billions of dollars in life-changing and live-saving funds from the debtors and the Sacklers that are desperately needed today,” Pratik Shah, an attorney with Akin Gump representing the committee, wrote in the group’s brief before the court.

The Sackler family declined to submit its own brief before the court.

The question before the justices likely will not focus heavily on the Sacklers or victims of the opioid epidemic; instead, the court will be focused on a specific provision in the Bankruptcy Code used in asbestos cases.

The committee argues bankruptcy courts are empowered to enjoin third-party suits that would slow walk reorganization.

“In Chapter 11 proceedings specifically, 11 U.S.C. § 1123(b)(6) imbues courts with a flexible power to approve ‘any’ plan provision that is ‘appropriate’ and ‘not inconsistent’ with applicable provisions of the code,” Shah wrote. “At a minimum, a release is ‘appropriate’ where (as here) the overwhelming majority of creditors agrees (and the court finds) that it presents the only viable path to a fair, meaningful, and timely recovery.”

The Justice Department argues that this is a misreading, and the Bankruptcy Code prohibits these kind of releases.

“The Sackler release permanently extinguishes Purdue-related opioid claims against the Sacklers and other nondebtors without the affirmative consent of the affected claimants and without an opportunity for an objecting claimant to opt out of the release,” Prelogar wrote. “In that way, it contravenes the ‘deep-rooted historic tradition that everyone should have his own day in court.’”

Law experts in the area dispute the committee's claim that this settlement is the way to get the most money for victims, arguing the case’s own proceedings prove that the Sacklers would pay more if forced to confront future claims.

“Subsequent to the district court ruling prohibiting nonconsensual releases, the Sacklers went back to the negotiating table and increased their offer: On top of their original contribution of $4.325 billion, the Sacklers agreed to pay creditors an extra $1.175 billion in guaranteed payments and up to $500 million in contingent payments in order to obtain the consent of an additional nine states to their releases,” Levitin wrote.

The creditor committee claims that if the Supreme Court reverses the appeals court ruling, the settlement will be blown up and victims will be left without the funds they need to survive. The government argues that the justices can not ignore the constitutional issues presented to achieve the committee's desired outcome. The government also claims that a new settlement can be negotiated under different terms that would not remove the ability of other victims to bring claims against the Sacklers.

The justices will hear oral arguments on Dec. 4.

Follow @KelseyReichmann

Categories / Appeals, Courts, Financial, Health, National

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Supreme Court reviews Sacklers’ $6 billion exchange for opioid crisis immunity

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