Why the Sacklers are shielded from future opioids lawsuits
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Why the Sacklers are shielded from future opioids lawsuits
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The Second Circuit Court of Appeals cleared the way for Purdue Pharma’s Chapter 11 bankruptcy plan last month.
Reversing a lower court ruling, the plan would settle thousands of lawsuits tied to the opioid epidemic, including those against the company’s owners, the Sackler family, even though they did not file for personal bankruptcy. The decision also shields the family from any future claims.
The Sacklers described this immunity, known as “third-party release,” as essential to their participation in the settlement, which requires the family to personally contribute between $5.5 billion and $6 billion in cash.
The bankruptcy legal system was originally designed to settle debts between creditors and debtors. But Melissa Jacoby, a law professor at University of North Carolina, Chapel Hill, said bankruptcy is becoming a “Swiss Army knife” to creatively resolve many other problems — and to minimize consumer protection responsibilities.
We talked with Jacoby about the unique aspects of the Purdue Pharma case, and what problems can arise when companies get creative with declaring bankruptcy.
The following is an edited transcript of the conversation.
How were Chapter 11 bankruptcies designed to work? Why do they exist?
Melissa Jacoby: Chapter 11 bankruptcy was designed for companies that borrowed too much, they have too much debt, or they made some bad or unprofitable business decisions. It was thought that if there’s a viable company, and if enough creditors who are willing to work with this company and say, “Yes, we are willing to get paid over a longer period of time or at a different interest rate,” if a majority of creditors were willing to sign on to [some kind of] deal, then bankruptcy law would help make that happen. And that would save jobs and preserve customer relationships and continue companies that were doing presumably useful things for the world.
How has the use of Chapter 11 bankruptcy evolved or expanded?
Jacoby: Asbestos manufacturers [in the 1980s] are thought to be the first step in opening the door to using bankruptcy as products liability management … sort of the origin story of mass tort bankruptcy. But it’s interesting how much narrower the relief was that was being requested, especially if you think about this issue of who else gets to ride sidecar on the bankruptcy.
In asbestos cases, they were looking at making sure insurance proceeds from insurance policies were put into a trust and [then told] everybody, “Don’t go after the insurance company because they already put the money in the pot.” That’s much more closely tied to sort of traditional bankruptcy, because that insurance is part of what’s called the bankruptcy estate, property rights that go with the company that’s in bankruptcy.
That’s very different from when the Sacklers are being sued for their independent wrongdoing, not just because they happen to be associated with Purdue.
What is special or unique about Purdue Pharma’s bankruptcy case?
Jacoby: So one of the most notable features of the Purdue bankruptcy has actually fallen out of it a bit because all of the states settled. But early on, Purdue Pharma [asked] the bankruptcy court to tell states that they can’t exercise their police and regulatory powers, you know, just across the board.
Purdue Pharma says, “I want the bankruptcy court to tell the states to stop doing everything that they’re doing, including their police and regulatory activity relative to us. Oh, and by the way, we want the Sacklers to be protected against the states as well.”
State attorneys general have the responsibility to protect us and they often do so when the federal government has just dropped the ball. The idea that bankruptcy can be used to stop those things is something people should be aware of.
Otherwise, I think it’s unique because the Sacklers have become so publicized, are known to have so much money, had their names on all the buildings. But it’s also pretty clear that they pulled a lot of money out of the company in the decade leading up to the bankruptcy.
So, they don’t look worthy of bankruptcy protection in the same way someone else might. And if this was a low-income individual consumer just trying to get some basic debt relief, those facts would matter a lot.
What are the legal arguments for and against these nonconsensual third-party releases?
Jacoby: I think the real issue is how much residual authority and discretion you give judges to sort of fill the gaps in a law. We generally hear the Supreme Court [say] pay close attention to the text and do not add a lot of other stuff. Now, sometimes a statute will say, “for cause,” you could do this “for cause.” That’s inviting the judge to exercise discretion about what “cause” means.
There are pieces of the bankruptcy code that say things like judges need to be able to fill in some gaps; they have general “equitable powers.” But the Supreme Court has said over and over again, you can’t use it to just add completely new stuff to the bankruptcy code, especially if it conflicts with the existing law.
So this issue really has come down to the idea that these releases [for the Sacklers] are essentially matching a discharge. The law is very clear, you don’t imply that you can go around giving third parties discharges if it’s not already in the law. That means that the bankruptcy code does not authorize the Sacklers to get this protection.
Others have said, “There is this flex in the joints. And when it’s really necessary, courts are allowed to do some extra stuff.” And that’s where the Second Circuit came in, to say we see enough here that doesn’t flatly conflict with something else, so we’ll allow it to stand.
Who are the people that are included in these third-party releases? Who will be shielded from future lawsuits because of this decision?
Jacoby: That’s a great question. There’s a very long appendix somewhere in the tens of thousands of pages. It’s been a while since I’ve seen it.
They’re protecting their heirs. They’re protecting parties who have some relationship to some of their other companies within the Sackler corporate ambit, other companies that the Sacklers have a hand in.
It’s worth noting that it’s not just the three [Sackler family members] who were forced to watch the hearing with opioid survivors telling their stories. It’s a big list of people who are getting bankruptcy relief without filing bankruptcy.
With the recent Second Circuit ruling, states and individuals who had lawsuits against Purdue Pharma and the Sacklers could see some money sooner rather than later. This could seem like some kind of justice.
Jacoby: I respect the idea that some people who have been harmed by OxyContin and the opioid crisis are ready to settle. And that’s why they signed on to the settlement and voted for it. So that was never the question. People can agree to waive their rights against third parties, whether in bankruptcy or out of bankruptcy. The question is whether I can make my neighbor waive her rights, just because I’m ready to be done. Is that fair? That’s really what’s at stake here. There were tens of thousands of people who didn’t vote and all of their rights are being waived too.
It’s one thing to go to a system that’s about mostly creditors who have intentionally extended credit, and debtors who have intentionally borrowed money, and things have gone wrong. Everyone sort of knows they’re in that commercial realm. Ultimately, what they want to do is collect money. With tort claimants, yes, some of them really want money, but some want to get to confront the person who hurt them. They wanted to uncover more information. They want to tell their story to a judge. And there’s a lot of research to support this, that people don’t necessarily just want money.
Bankruptcy really doesn’t have great mechanisms to deal with dignitary [or non-monetary] interests. It’s just not baked into the structure, because this just wasn’t what it was designed for.
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