Purdue Pharma, a Sackler Bankruptcy Filing, and Improving

By William Organek (Harvard Law School)

William Organek

Purdue Pharma, the maker of OxyContin, filed for bankruptcy in 2019 to resolve thousands of opioid-related lawsuits.  Two years after filing, a reorganization plan was confirmed: in exchange for a financial contribution of several billion dollars by the Sackler family and relinquishment of their ownership in Purdue, the family would be released from all civil liability associated with their ownership and control of Purdue.  Individual claimants, state attorneys general, the United States Trustee, the Department of Justice, Congress, academics, and others criticized the settlement as an abuse of the bankruptcy system.  These parties contended that granting this immunity over their objections–known as a third-party release–was an unfair remedy.  They stated that such a plan would reduce creditors’ financial recoveries and make it more difficult to achieve their goals of learning about Purdue’s role in the opioid crisis and preventing future corporate malfeasance.  Instead, if the Sacklers were to receive immunity, critics suggested that the Sacklers should be required to file for bankruptcy.  A Sackler bankruptcy filing, they claimed, would increase creditor recoveries and ensure that creditors’ nonmonetary goals would be met.

This Article argues that these criticisms rely on a deeply problematic assumption: on closer inspection, it is not at all clear that a Sackler bankruptcy filing would result in better monetary or nonmonetary outcomes for creditors, and could actually detract from these goals.

From a monetary perspective, demands for a Sackler bankruptcy filing overlook the factual complexity that this would entail, and the corresponding weaknesses in remedies available to creditors under bankruptcy law.  The Sacklers engaged in sophisticated asset protection strategies that limited creditors’ financial recoveries by spreading ownership and control of Purdue, as well as their other holdings, across dozens of domestic and international spendthrift trusts to benefit scores of family members.  Demands for a Sackler bankruptcy filing ignore collections issues, the illiquidity of their holdings, the discounts that might be applied to recoveries of minority interests, and the limitations on creditors’ fraudulent transfer remedies.  To overcome these problems and maximize financial recoveries, the parties agreed to a “de facto substantive consolidation”: a consensual dissolution of the legal barriers separating the assets of individual members of the Sackler family, their trusts, and Purdue.  This ad hoc solution, while effective, depended on Sackler acquiescence.

Achieving creditors’ nonmonetary goals, such as broader disclosure, restrictions on the opioid businesses of Purdue and the Sacklers, and limitations on Sackler charitable donations, would probably have been made more difficult by a Sackler bankruptcy filing.  A bankruptcy filing likely would have pitted family members against one another, making disclosure or other consensual resolutions more difficult.  Courts also have limited ability to force debtors to divest assets or refrain from participating in business or charitable endeavors.  Instead, the Sacklers agreed to these undertakings because it was clear from the commencement of the case that the availability of a third-party release was contingent upon their cooperation.  Only by being able to offer what the Sacklers wanted–civil immunity–could creditors and the court cajole the Sacklers into agreement.

This Article demonstrates the institutional limits faced by the bankruptcy system in addressing certain kinds of monetary harms and nonmonetary objectives.  It ends by proposing reforms to fraudulent transfer law that would close the international spendthrift trust loophole that was so critical to the strategy pursued by the Sacklers to limit creditors’ monetary recoveries.  It also argues that the price of achieving creditors’ nonmonetary goals can be reduced in future mass tort bankruptcy cases by mandating expanded disclosure by parties seeking third-party releases, more consistent appointment of trustees to manage the debtor in mass tort bankruptcies, and appointment of examiners to uncover information about the causes of a mass tort.

The full article is available here.  Comments to the author are welcomed: worganek [at] law [dot] harvard [dot] edu.

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