Editor’s note: This article was originally published on In Homeland Security.
By James J. Barney, Associate Professor of Legal Studies, School of Security and Global Studies, American Military University
Over the past decade, the opioid crisis has impacted the lives of millions of Americans. As a result, numerous states and individuals have sued Purdue Pharma, a pharmaceutical firm that manufactured and distributed the painkiller Oxycontin, for its role in the opioid crisis.
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Facing years of litigation across the United States and potentially hundreds of billions of dollars of liability, Purdue Pharma recently entered into a settlement with numerous states and private plaintiffs. To effectuate the agreement, Purdue Pharma filed a Chapter 11 bankruptcy petition in New York. A Chapter 11 bankruptcy allows a company or entity to reorganize its debts so that the company can continue as an ongoing concern.
Commentators and Several States Oppose the Bankruptcy Plan
In the immediate aftermath of the settlement announcement and bankruptcy filing, commentators like Mother Jones’ Julia Lurie condemned the settlement. In addition, several states have lined up to oppose it. These critics argue that the settlement lets Perdue Pharma and the heirs of the founding Sackler family off the hook too lightly.
However, such assessments may be premature. Purdue Pharma’s bankruptcy filing does not end litigation against the company, the possible criminal exposure of the company and its representatives, or conclusively resolve the status of the Sackler heirs. Instead, the bankruptcy filing may be just the beginning of a multi-year legal saga.
The Immediate Effects of the Chapter 11 Filing
Purdue Pharma’s bankruptcy filing has three immediate effects.
First, Purdue Pharma’s bankruptcy filing will impose an automatic stay that will halt, at least temporarily, the numerous civil lawsuits against the company now pending in courts across the United States. An automatic stay is a court order issued by the bankruptcy court that prevents any outside parties from taking adverse actions against a company with a Chapter 11 bankruptcy filing.
Second, litigation against Purdue Pharma will shift from the various courts across the United States to one centralized location, the Bankruptcy Court in New York.
Third, if the bankruptcy judge approves the Chapter 11 plan, Purdue Pharma will be allowed to continue business as a reorganized company.
As proposed by the settlement, the reorganized company would act as a trust to repay the expenses caused by the opioid crisis as well as pay for future claims against the company. Purdue Pharma proposed that the new company or trust would dedicate a portion of its future earnings to pay claimants. Also, in a press release issued by Purdue Pharma on September 16, 2019, the reorganized company or trust has committed to “contributing millions of doses of life-saving opioid overdose reversal medications.”
Litigation against Purdue Pharma Likely Will Continue in Bankruptcy Court
Despite some popular press commentary to the contrary, Purdue Pharma’s bankruptcy filing will not end litigation against the Stamford, Connecticut-based company. Thus, claimants against the company should not expect any immediate payment. Instead, the bankruptcy filing merely commences a new stage of litigation that could last for years.
For example, immediately after the announcement of Purdue Pharma’s settlement, several states and other parties that were not party to the settlement, announced that they opposed the proposed settlement. Purdue Pharma’s Chapter 11 plan ultimately will have to be approved by the presiding bankruptcy court judge.
Opposition to the settlement will also result in a series of adversary proceedings filings against Purdue Pharma that will likely take years to fully resolve. An adversary proceeding is a lawsuit by a claimant against a company that has filed for bankruptcy; an adversary proceeding is very similar to a civil trial.
The complexity of the Purdue Pharma’s bankruptcy proceeding has been compared to the administration of the decades-long cases against various asbestos and tobacco companies. Those cases lingered for several decades and involved thousands of lawsuits. Thus, it is likely that a resolution of all current and future claims against Purdue Pharma, even if the proposed settlement agreement is finalized, will take years to resolve and more years to administer.
Any confirmed plan will likely require the reorganized company to set aside funds to pay for future claims and for the long-term damage caused by the opioid crisis. The administration of these future claims will linger for many years to come.
Finally, given the degree of opposition to the proposed settlement, it is not clear whether the presiding bankruptcy judge will ultimately approve Purdue Pharma’s plan and settlement. Before confirming any Chapter 11 plan, the bankruptcy judge will evaluate numerous factors, including an evaluation of the fairness of the plan. Moreover, there is no guarantee that a bankruptcy judge will approve a plan put forth by Purdue Pharma. Failure to approve a Chapter 11 plan could result in the liquidation of the company and its assets via a Chapter 7 filing.
Bankruptcy Filing Likely to Result in More Litigation against Sackler Heirs
The filing of a bankruptcy petition will likely result in prolonged litigation over the assets of Mortimer and Raymond Sackler, the owners of Purdue Pharma who left their heirs billions of dollars in assets derived from profits from Purdue Pharma.
Creditors of Purdue Pharma will likely argue that certain monies inherited by the Sacklers’ heirs or transferred out of the company before the bankruptcy filing should be clawed back into the bankruptcy estate to pay the creditors. They might argue that certain transfers or bequests were fraudulent conveyances; that is, improper transfers of funds made before a bankruptcy filing.
Fraudulent transfers are designed to avoid assets from becoming part of the bankruptcy estate; that is, the pool of money that is subject to creditor claims. A claw-back is an attempt to recover those assets improperly transferred out of a bankruptcy estate prior to the bankruptcy filing. In recent days, the Sacklers have expressed an unwillingness to participate in the proposed settlement. Thus, a prolonged fight over the assets will likely play a significant role in the Bankruptcy Court.
Purdue Pharma or Its Representatives Still Face Criminal Exposure
It should also be noted that the Purdue Pharma bankruptcy filing does not protect the company and its officers from future state or federal criminal exposure for any unlawful acts committed by the company or its officers or representatives during the opioid crisis. Thus, the numerous state and federal criminal inquiries into the possible actions against both Purdue Pharma and its representatives will continue despite the bankruptcy petition.
Chapter 11 Filing Allows Claimants and Creditors an Opportunity for Partial Recovery
Despite the initial negative commentary surrounding Purdue Pharma’s bankruptcy, the bankruptcy filing does not end the litigation against the company and those who may have benefited from Purdue Pharma’s role in the opioid crisis. Any deal proposed by Purdue Pharma will have to be approved by a bankruptcy judge, and it is very likely that a confirmed Chapter 11 plan will likely differ significantly from the proposed settlement.
Moreover, much of the commentary ignores how a Chapter 11 proceeding, while flawed, is better than the alternative — the immediate liquidation of the company. Without at least an attempt at reorganization, present and future claimants as well as creditors of Purdue Pharma — including many municipalities across the country and millions of people affected by the opioid crisis — would probably have no opportunity to recover any funds from Purdue Pharma.
About the Author: James Barney is an Associate Professor of Legal Studies in the School of Security and Global Studies. In addition to possessing a J.D., James has several master’s degrees, including in American foreign policy. He is currently completing his Ph.D. in History. James serves as one of the faculty advisors of the Phi Alpha Delta law fraternity as well as the Model United Nations Club and acts as the pre-law advisor at AMU. Currently, he is working on a year-long research project that focuses on Justice Brett Kavanaugh’s impact on the Supreme Court. He can be reached at IPSauthor@apus.edu. For more articles featuring insight from industry experts, subscribe to In Public Safety’s bi-monthly newsletter.