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Purdue Pharma: New deal with the Sackler family raises questions over who stands to benefit this time around

Purdue Pharma, according to an announcement on Thursday (23 January) by New York State Attorney General Letitia James, has reached a new deal with the Sackler family and various other parties in interest to replace the old deal that fell apart after the US Supreme Court ruled that the releases contained in Purdue Pharma’s Chapter 11 plan in favor of the Sackler family members could not be imposed on Purdue’s creditors without their consent. While the deal has yet to be memorialized in a written agreement made available to the public, much less an amended Chapter 11 plan (which Purdue’s mediators have said will be forthcoming in the next few weeks), what has been made public about the new deal raises questions (and perhaps eyebrows), particularly when compared to the prior deal. In this article, the Debtwire court and legal analyst teams review what we know so far and highlight several questions about the benefits of the deal.

Purdue’s confirmed Chapter 11 plan

In September 2019, Purdue filed its hotly anticipated Chapter 11 case, hoping to use the bankruptcy court as a forum to manage over 2,600 lawsuits against it, its employees and its owners, the Sackler family,[1] over the company’s alleged responsibility for the opioid crisis. When entering bankruptcy, Purdue had a settlement that was agreed to in principle with 24 state attorneys general, officials from five US territories and the co-lead counsel and plaintiffs’ executive committee in a multi-district litigation that was set to go to trial soon. While there were many other parties that had not yet agreed to a settlement, Purdue’s lawyers concluded that “bankruptcy is the only way to resolve the litigation rationally.” At the time of the bankruptcy filing, the company had a commitment that the Sacklers would contribute at least USD 3bn to public and private efforts to combat the opioid crisis in the US.

The case has been marked by contention since the outset, due in large part to the company’s alleged role in fueling the opioid epidemic while the Sacklers had moved billions of dollars out of the debtors’ reach before the Chapter 11 case. In November 2019, Judge Robert Drain of the US Bankruptcy Court for the Southern District of New York – who oversaw the case initially before transferring it to Judge Sean Lane upon his retirement in early 2023 – entered a preliminary injunction protecting certain non-debtor third parties, like the Sacklers, from opioid litigation. Purdue’s argument for the injunction was that allowing the litigation to continue against the Sacklers and others would hurt Purdue itself as they were intertwined and disrupt the case. That “preliminary” injunction is still in place, five years later.

As the case dragged on over the years, the company continued negotiations in order to bring as many parties onto supporting a reorganization plan as possible. Ultimately, the plan Purdue sought and obtained confirmation of in September 2021 was based on a complex series of settlements between Purdue, the Sacklers and public and private creditors with opioid-related claims. The Sacklers agreed to contribute USD 4.325bn under that plan – a number that was increased from what the Sacklers initially intended to provide through subsequent settlements with government entities and states that had previously opposed the plan. At confirmation, nine states and the District of Columbia argued that that contribution from the Sacklers was not enough to absolve them of further civil liability via the granting of third-party releases, given the extent of the wealth they had generated from Purdue in the years prior to its bankruptcy filing. The following table lays out distributions Purdue made to the Sackler family beginning in 1996.

Chart showing Purdue Pharma cash distributions for benefit of Sacklers, 1996-2019

Source: UCC Draft Complaint

The US Trustee also staunchly opposed the releases. Notwithstanding opposition to the releases, Judge Drain confirmed the plan but insisted that the releases be narrowed to capture only opioid-related liability, and not other conduct that had nothing to do with the Sacklers’ ownership of Purdue. More specifically, the plan enjoined third parties from (i) pursuing their current claims against the members of the Sackler family (and their investment companies and trusts, collectively referred to as the Sacklers) and (ii) commencing future litigation against any of the Sacklers and their related entities, so long as (a) those claims were based on or related to the debtors, their estates, or the Chapter 11 cases, and (b) the “conduct, omission or liability of any [d]ebtor or any [e]state is the legal cause or is otherwise a legally relevant factor.”

The appellate journey and mediation 

The US Trustee’s office and multiple states appealed confirmation of the plan and in December 2021, Judge Colleen McMahon of the US District Court for the Southern District of New York issued a decision vacating the confirmation order and finding that a bankruptcy court cannot, on a non-consensual basis, bar third parties from asserting non-derivative claims against a non-debtor.

After that, with the case remanded to bankruptcy court again, retired US Bankruptcy Court Judge Shelley Chapman was appointed as a mediator. In addition to her work in Purdue, Chapman has served as the mediator in several high-profile and contentious Chapter 11 mega cases, including Rite Aid, Robertshaw and Whittaker Clark & Daniels.

Following mediation efforts, the Sacklers agreed to increase their contribution to the plan, to at least USD 5.5bn and to dedicate 100% of the debtors’ assets to opioid abatement and the victims of the opioid crisis. In March 2022, despite continuing wide opposition to the increased settlement, Judge Drain agreed to sign off on the new deal for the plan with the increased contribution from the Sacklers. The US Trustee ultimately took the fight to the US Supreme Court. In October 2023, the Supreme Court announced that it would hear the fight over Purdue’s third-party releases.  At the time, despite securing confirmation of the plan, Purdue had not yet consummated the deal as it moved through the appellate process.

In a decision issued on 27 June 2024, as the Debtwire legal analyst team discussed more thoroughly, the Supreme Court rejected Purdue’s reorganization plan’s nonconsensual, non-debtor third-party releases granted to the Sacklers.[2]In short, the Supreme Court held that the Bankruptcy Code does not authorize a release and injunction via a Chapter 11 plan of reorganization plan that effectively discharges claims against a non-debtor without the consent of the affected claimants. The ruling sent the parties back to the drawing board with respect to crafting a new deal and a new Chapter 11 plan, and back to the Bankruptcy Court and mediation, overseen again by former Judge Chapman, Senior Counsel at Willkie Farr & Gallagher, and Eric Green of Resolutions, LLC. The mediation period was extended multiple times in the coming months as negotiations inched closer to an amended plan with a larger contribution from the Sacklers. During this time period, Judge Lane had also granted continued extensions of the preliminary injunction protecting the Sacklers from litigation.

Comparing the settlements

As noted above, Letitia James announced that Purdue and the Sacklers have agreed to a USD 7.4bn settlement. James issued a press release and held a press conference offering details on the settlement, which provides for the Sackler family to pay up to USD 6.5bn over 15 years and for Purdue to pay nearly USD 900m upon court approval, according to James. Of the settlement funds, USD 1.5bn would be paid out as a first payment, with USD 500m after one year, another USD 500m after two years, and USD 400m after three years, per the press release. James also stated that this new settlement will end “the Sacklers’ control of Purdue and ability to sell opioids in the United States,” while providing funding to communities for opioid addiction treatment, and that Purdue would be prevented from lobbying or marketing opioids.

According to The New York Times, a group of 15 states has signed on to the deal, under which “the Sacklers would not receive immunity from future opioid lawsuits.” Instead, “[c]laimants, including states, municipalities and individuals, would have to set aside as much as $800 million in an account akin to a legal-defense fund for the billionaires to fight such cases, according to people familiar with the negotiations.”

This new deal can better be evaluated by comparing it to the old deal, pursuant to which, in exchange for the releases discussed above, the Sacklers agreed to contribute an aggregate USD 5.5bn to USD 6bn to a fund that would be used to resolve both public and private civil claims as well as both civil and criminal settlements with the federal government.[3] Purdue and the US had also separately entered a civil settlement and plea agreement, pursuant to which the US obtained a USD 2bn “superpriority” claim, but agreed to credit USD 1.775bn to be distributed to state and local governments for opioid crisis abatement. In addition, the Sacklers agreed to the dedication of two charities worth at least USD 175m for abatement purposes. If the prior plan had gone effective, over USD 1.3bn would have been disbursed immediately, with the remaining billions to have followed in stages.

Some of the bigger comparisons are that under the old deal, USD 1.3bn would have been paid out upon effectiveness, whereas USD 1.5bn is set to be paid out as the first payment under the new deal, plus an additional USD 900m upon court approval, which means that more money would be paid out sooner under the new deal. However the biggest change is the reported swapping out of the Sackler releases for an USD 800m legal defense fund. Because consensual releases are permitted under the US Supreme Court’s ruling, we would expect the revised Chapter 11 plan to contain releases benefitting the Sacklers that are comparable to the releases under the prior plan, with the exception that they apply only on a consensual basis. Thus, if the parties that have signed on to the deal consent to these releases, the amount of claims that could be brought against the Sacklers would be dramatically reduced as a result. We note, however, that the County of Nassau, New York and the State of Maryland are opposing the continuance of the “preliminary” injunction, and therefore may not be part of the new deal. Nassau County argued that it had not been included in mediation efforts, while Maryland asserted that the protections offered to the Sacklers harm creditors and “impair the pursuit of justice that protects the public.” The State of Maryland has opposed the extension of mediation multiple times, arguing that Congress did not authorize the bankruptcy court to restrain a state’s exercise of its traditional police powers over non-debtors.

In terms of who stands to benefit from these changes, we begin by noting that the deal was announced not by the parties to the mediation as a group, Purdue Pharma, or the mediators, but by New York State’s attorney general, though a press conference, praising the deal as preventing the Sacklers from playing any leadership role in the company or engaging in the sale of opioids, even though these were also terms under the prior deal. Also, one of her own constituents, Nassau County, may be opposing the deal, arguing that they have been left out of the settlement talks. That aside, it appears that arguably the most significant takeaway is that the creditor groups that do not consent to the deal and the releases benefitting the Sacklers (which releases we would expect to see in the revised Chapter 11 plan), would be able to pursue claims against the Sacklers. They would have this right regardless of the deal though as a result of the Supreme Court’s ruling. This time, however, the Sacklers would have the benefit of an USD 800m fund (in addition to their own reportedly considerable assets) to combat these claimants.

In light of the Supreme Court’s ruling, the Sacklers likely had a target percentage of creditors they would want to agree to a new deal, leaving them with reduced exposure litigation, and now with an added war fund. For victims of the opioid crisis, we also note that only a minority of these creditors actually voted on the prior plan (reportedly about 20%), but those who did vote overwhelmingly chose to accept it. Thus, while only a small portion of opioid victims voted on the plan, most of those who did voted to accept it, thereby agreeing to the releases. It remains to be seen how many of these creditors will refuse the deal and will actively pursue claims against the now better-funded Sacklers. Putting that USD 800m war chest into perspective, we note that according to Debtwire’s mass tort report that tracked fees incurred in mass tort Chapter 11 cases in US bankruptcy courts from 2016 to 2023 and was published in March 2024, Purdue topped the chart at that time with over USD 700.7m in fees incurred. The Raymond Sackler family has been represented in the Chapter 11 cases by Gerard Uzzi of GHU Associates and Alexander B. Lees, Eric Stodola, and Daniel Porat of Milbank.

Today (24 January), Purdue is set to appear in Bankruptcy Court on the contested continuation of the preliminary injunction. If approved, the extension of the ongoing mediation period and the preliminary injunction protecting the Sacklers from litigation would be extended to 28 February as talks on the amended plan – which would likely incorporate the settlement James announced – continue. Given how many extensions have been approved since the case came back to Bankruptcy Court, and that the parties appear close to finalizing this new deal, it is very likely Judge Lane will sign off on the deal, despite limited opposition.

 

Prior to joining Debtwire, Sara was a law clerk to two judges in the United States Bankruptcy Court, S.D.N.Y. and practiced in the Financial Restructuring Group at Clifford Chance, where she represented financial institutions (as secured and unsecured creditors, defendants in adversary proceedings, and participants in DIP financings) in high-profile restructurings. She also represented foreign representatives in Chapter 15 cross-border cases.

Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.

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[1] According to a draft complaint filed by the unsecured creditors committee, the “descendants of Mortimer D. Sackler and Raymond Sackler, respectively, own the company through family trusts. The two branches of the family – which sometimes refer to themselves as ‘Side A’ (the Mortimer side) and ‘Side B’ (the Raymond side) – share ownership of Purdue to this day, and at all relevant times completely dominated and controlled the company.” According to Purdue Pharma’s prior Chapter 11 plan, “Sackler Family Members” means (i) Raymond R. Sackler and Mortimer D. Sackler, (ii) all Persons who are descendants of either Raymond R. Sackler or Mortimer D. Sackler, (iii) all current and former spouses of any individual identified in the foregoing clause (i) or (ii), and (iv) the estate of any individual identified in the foregoing clause (i), (ii) or (iii).

[2] Supreme Court Justice Neil Gorsuch wrote the decision, which was supported by Justices Clarence Thomas, Samuel Alito, Amy Coney Barrett and Ketanji Brown Jackson. Justice Brett Kavanaugh filed a dissent, supported by Justices John Roberts, Sonia Sotomayor and Elena Kagan.

[3] In May 2007, Purdue and its top three executives entered into a criminal plea and settlement with the Department of Justice and pled guilty to criminal misdemeanor charges of misbranding OxyContin. Pursuant to the settlement, Purdue paid USD 600m which, according to the Complaint, at the time, was the largest amount a pharmaceutical company had ever paid. Its three executives paid an additional USD 34.5m, which was reimbursed by Purdue. In October 2020, Purdue pled guilty yet again to multiple felonies arising from its aggressive marketing and sale of opioids, which according to the complaint was driven by members of the Sackler family. More specifically, Purdue admitted to a three-count felony information and agreed to a criminal fine of USD 3.544bn and an additional USD 2bn in criminal forfeitures. Also, the Sacklers agreed to pay another USD 225m in respect of False Claims Act claims against Richard Sackler, David Sackler, Mortimer Sackler Jr, Kathe Sackler, and the estate of Jonathan Sackler.