'A Bitter Result': Purdue Pharma, a Sackler Bankruptcy Filing, and Improving Monetary and Nonmonetary Recoveries in Mass Tort Bankruptcies.

AuthorOrganek, William

TABLE OF CONTENTS Introduction I. Case Background and the Argument for a Sackler Bankruptcy Filing A. PreTiling Ownership and Control, Background on Bankruptcy Filing, and Approved Plan of Reorganization. B. The Argument for a Sackler Bankruptcy Filing II. A Sackler Bankruptcy Filing Would Harm Creditor Recoveries and Fraudulent Transfer is Not the Answer-- But, De Facto Substantive Consolidation Provides a Solution. A. The Reality of a Sackler Filing: Multiple Individuals, Spendthrift Trusts, Foreign-Domiciled Trusts, Divided Ownership, and Collections Issues B. Weaknesses in Fraudulent Transfer Remedies Limit Potential Monetary Recoveries C. De Facto Substantive Consolidation Maximizes Financial Recovery III. Financial and Factual Disclosure, Bans on Business and Charitable Activities, and Achieving Nonmonetary Goals Without a Sackler Bankruptcy Filing A. Financial and Factual Disclosure B. Divestments and Injunctions C. Voluntary Agreements Help Realize Creditors' Nonmonetary Goals IV. Targeted Reforms to Improve Mass Tort Bankruptcies A. Reforms for Spendthrift Trusts to Increase Monetary Recoveries B. Achieving Mass Tort Creditors' Nonmonetary Goals Through Required Disclosures, and Appointment of Trustees and Examiners Conclusion. INTRODUCTION

On September 15, 2019, Purdue Pharma, (1) the maker of the notorious opioid pain medication OxyContin[R], filed a Chapter 11 bankruptcy case (2) seeking to resolve OxyContin[R]'related liability from the more than 2,600 lawsuits brought against Purdue and members of the Sackler family (who owned and controlled the company). (3) OxyContin[R] was alleged to have con' tributed substantially (4) to the opioid crisis, which from 1999 to 2019 claimed more than 500,000 lives nationwide. (5) OxyContin[R] was also profitable: during the ten years preceding Purdue's bankruptcy, the Sacklers pulled more than $10 billion of value out of the company and transferred much of it to spendthrift trusts (6) in an alleged attempt to shield assets from creditors. (7) Two years after filing, a reorganization plan was confirmed (8) based on a settlement framework proposed even before the case commenced: (9) in exchange for a financial contribution of several billion dollars (10) by the Sackler family and relinquishment of their ownership in Purdue, the Sacklers would be released from all civil liability associated with Purdue and OxyContin[R]. (11)

Individual claimants, (12) state attorneys-general, (13) the United States Trustee, (14) the Department of Justice, (15) Congress, (16) academics, (17) and others criticized the settlement as an abuse of the bankruptcy system. In return for payments as small as $3,500 for individuals, (18) the Sacklers would be able to preserve (or even increase) their wealth and be immunized from future opioid-related liability. (19) These parties and others contended that granting this immunity over their objections--known as a third-party release (20)--was an unfair remedy. Instead, critics asserted that the Sacklers should be required to file for bankruptcy themselves to obtain such extraordinary relief. A bankruptcy filing by the Sacklers, they claim, would increase creditor recoveries and ensure that certain nonmonetary objectives, which are particularly important in mass tort bankruptcies, could be achieved.

This Article argues that these criticisms rely on a deeply problematic assumption: on closer inspection, it is not at all clear that Sackler bankruptcy filings would result in better monetary or nonmonetary outcomes for creditors, and may actually detract from these goals. This Article highlights how a Sackler bankruptcy filing would undermine creditors' monetary and nonmonetary goals by focusing on underappreciated aspects of Purdue's ownership structure, weaknesses in fraudulent transfer remedies, limits on a bankruptcy court's powers, and the need for Sackler consent to implement key nonmonetary goals. When considered together, these facts challenge assertions that the result in the case constitutes a miscarriage of justice, and instead suggest that a Sackler bankruptcy filing could run counter to both the monetary and nonmonetary interests of creditors.

First, demands for a Sackler bankruptcy filing ignore the factual complexity entailed and the ways that such a call might actually decrease creditor recoveries. Collectively, the Sacklers may be worth many billions of doblars, (21) but the family is comprised of dozens of individuals with their own finances (22) and varying degrees of involvement in the company. (23) Most of their wealth is held in spendthrift trusts, including trusts located outside of the United States, raising jurisdictional and collections issues. (24) Discounts for illiquid, minority interests affected by developments in the bankruptcy case would further reduce creditor recoveries. (25) Finally, weaknesses in remedies against the family for fraudulent transfers (likely the most valuable creditor claims) (26) militate against a bankruptcy filing. (27) To overcome these obstacles, the parties in Purdue's bankruptcy agreed to a consensual de facto substantive consolidation, bringing all Sackler assets into a common pool to maximize the size of the 'estate' available to creditors. (28) This likely would have been difficult or impossible to implement had the Sacklers themselves declared bankruptcy.

Next, critics of the Purdue settlement point to certain important nonmonetary goals sought by creditors. For example, financial disclosures may not directly provide monetary value, but are particularly important for in' creasing creditor recoveries where, as here, financial malfeasance is alleged. (29) Other nonmonetary aims, possibly even more than additional settlement dollars, also motivated creditors. (30) Most creditors wanted an unexpurgated history of the alleged role of Purdue and the Sacklers in the opioid crisis. (31) Other creditors sought guardrails around Purdue's sales and marketing tactics, prohibitions on future involvement by the Sacklers in opioid businesses, forced divestitures of the Sacklers' existing opioid businesses, and limitations on their ability to whitewash their alleged complicity through large charitable donations. (32) Objectors noted their belief that without an independent bankruptcy filing by the Sacklers, these would be unobtainable. (33) However, it seems more likely that a Sackler bankruptcy filing, by pitting some family members against others, would make factual disclosures and bans on opioid' related activities more difficult to achieve. Although the Sacklers have not filed for bankruptcy, during the case the family made extremely broad consensual factual disclosures (backed by the threat of required additional disclosure under the Bankruptcy Rules). (34) In addition, the Sacklers agreed to voluntary limitations on opioid activities and charitable contributions, and creation of a voluminous post-Confirmation document repository. (35)

Though some criticism of Purdue's bankruptcy may be wrongheaded, Purdue's bankruptcy and the actions taken by the Sacklers highlight obstacles to maximizing financial recoveries and achieving justice for mass tort creditors. This Article ends by suggesting reforms--many of which could be implemented without congressional intervention--to aid monetary and nonmonetary recoveries for mass tort creditors. Purdue's bankruptcy underscored the potential harms of foreign spendthrift trusts, so this Article proposes limitations on their use in bankruptcy. The company's bankruptcy also demonstrates the limits on a bankruptcy court's ability to require certain disclosures and agreements from the Sacklers, and shows that one of the very few levers the court has to encourage compliance by the Sacklers is the availability of a third-party release. This Article suggests ways that courts could rebalance the negotiating leverage in mass tort cases through more aggressive (though statutorily authorized) use of powers to order disclosure and appointment of trustees or examiners. These reforms would better assist creditors in maximizing their monetary recoveries and achieving their nonmonetary goals than a simplistic requirement for bankruptcy filings by third parties.

This Article proceeds as follows. Part I provides relevant background on the bankruptcy case and summarizes the arguments made by critics in favor of a Sackler bankruptcy filing. Part II describes how a bankruptcy filing by the Sacklers would harm the financial recoveries of creditors, explains the weaknesses of creditors' fraudulent transfer remedies, and illustrates how a de facto substantive consolidation improves monetary outcomes. Part III examines several of the nonmonetary objectives of creditors, analyzes why a Sackler bankruptcy filing would make achieving these goals more difficult, and outlines how the voluntary agreements reached in the case furthers these goals. Building on the first three parts, Part IV suggests targeted reforms-most of which are achievable under existing law--that could address some of the most troubling aspects of the Purdue case to improve outcomes in future mass tort bankruptcies. The Article then briefly concludes.

  1. CASE BACKGROUND AND THE ARGUMENT FOR A SACKLER BANKRUPTCY FILING

    This Section gives a brief overview of the ownership and control of Purdue, as well as background on the case and the broad contours of the proposed plan of reorganization that has raised so much consternation among observers. Next, this Section summarizes the case for a bankruptcy filing by the Sacklers, and examines the numerous complications that would arise from such a filing. Finally, this Section conceptualizes the actual outcome of the case as an example of a de facto substantive consolidation, and considers the implications of this analysis.

    1. PRE-FILING OWNERSHIP AND CONTROL, BACKGROUND ON BANKRUPTCY FILING, AND APPROVED PLAN OF REORGANIZATION

      Pre-Filing Ownership and Control: Purdue...

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