The Purdue Pharma Saga Continues
The Business Advisor
Litigation arising out of mass torts (e.g., asbestos, talc, sexual abuse, products liability, etc.) invariably leads to bankruptcy. Opioid-related litigation is no different. Several producers of opioid painkillers have turned to bankruptcy to get out from under an onslaught of claims by those alleging that they or loved ones were injured by the use (and abuse) of opioid painkillers. Perhaps the most highly publicized opioid bankruptcy has been the Purdue Pharma bankruptcy, which was fueled by claims arising out of damages caused by the prescription and use of Purdue Pharma’s flagship product, OxyContin®.
It was always clear that a resolution of the Purdue Pharma bankruptcy would require a significant contribution by Purdue Pharma’s owners, the Sackler family. It was equally clear that the Sacklers expected, as a condition of their contribution, broad releases of claims alleging injuries from OxyContin® use. Indeed, much of the Purdue Pharma case focused on negotiating a settlement with the Sacklers, who were protected during those negotiations by an injunction against third party OxyContin®-related litigation. Ultimately, a settlement was reached with the Sackler family and memorialized in a Shareholder Settlement Agreement. By signing Shareholder Settlement Agreement, the Sackler family agreed, inter alia, to contribute more than $4.325 billion toward funding creditor recoveries and other relief under a Chapter 11 plan of reorganization (“Plan”). In exchange, they were to receive broad releases of third party claims arising out of the prescription and use of OxyContin® (“Shareholder Releases”).
On September 17, 2021, Judge Robert E. Drain of the U.S. Bankruptcy Court for the Southern District of New York reluctantly confirmed the Plan as the best deal available, but only if the scope of the Shareholder Releases was narrowed. The Shareholder Releases generated intense controversy, and Judge Drain’s order confirming the Plan (“Confirmation Order”) was appealed to the U.S. District Court for the Southern District of New York by eight states and the District of Columbia (collectively, the “Nine”). By memorandum and order dated December 16, 2021, Chief District Judge Colleen McMahon vacated the Confirmation Order. The crux of Judge McMahon’s ruling was her conclusion that no statutory authorization of the Shareholder Releases existed.
Recognizing that she would not have the last word on the issue, Judge McMahon directed the Nine to seek an expedited appeal. On the motion of the Purdue Pharma Debtors and other Plan supporters, Judge McMahon certified her decision for immediate appeal to the United States Court of Appeals for the Second Circuit. The Second Circuit granted petitions for leave to appeal and for an expedited appeal.
Meanwhile, Judge Drain directed the Purdue Pharma Debtors, certain Sackler family members, certain trusts controlled by the Sackler family, and the Nine to mediate the Shareholder Release issue. To facilitate mediation, Judge Drain also extended the injunction protecting the Sacklers. By order dated January 3, 2022, Judge Drain appointed Judge Shelley C. Chapman of the Bankruptcy Court as mediator. Mediation resulted in a settlement with the Nine summarized in a term sheet (“Term Sheet”)1 that, inter alia, increased the Sackler family’s contributions under the Plan to between $5.5 to $6 billion. The sum of $5.5 billion represents 97 percent of the distributions by the Purdue Pharma Debtors to Sackler family members since 2008.2 The settlement summarized in the Term Sheet ( “Term Sheet Settlement”) will be memorialized in one or more definitive agreements, and the Shareholder Settlement Agreement will be modified accordingly. On March 3, 2022, the Purdue Pharma Debtors filed a motion seeking approval of the Term Sheet (“Term Sheet Motion”).
The $1.175 billion to $1.675 billion in monetary commitments by the Sackler family set forth in the Term Sheet will be in addition to the $4.325 billion in monetary commitments previously made under the Plan. The Purdue Pharma Debtors represent in the Term Sheet Motion that the Sackler family’s increased contributions will provide creditors with distributions equal to or greater than the distributions provided under the confirmed Plan.3 The Sackler family’s increased contributions comprise the following:
- A guaranteed payment of $723,111,111.13 as additional consideration under the Shareholder Settlement Agreement to the Master Disbursement Trust (MDT) that was established under the Plan;
- Payments to the MDT of up to an additional $500 million from 90 percent of the net proceeds of the sale of certain of the Sackler family’s foreign independent associated companies (IACs) in excess of $4.3 billion;
- In lieu of the requirements under the Plan concerning the change in control of the RBS Foundation and the RBS Fund (as defined in the Plan), the payment of $175 million to the MDT on the Effective Date of the Plan; and
- The payment of $276,888,888.87 into a supplemental opioid abatement fund (SOAF) to be devoted exclusively to opioid abatement, to be established, structured, and administered following the consummation of the Plan by the Nine (and the State of New Hampshire).
Id., ¶ 2. Consistent with the Plan, the Sackler family’s contributions of $723,111,111.13 to the MDT and $276,888,888.87 to the SOAF will be made over time. The final installments on those contributions are due on July 30, 2039.
The Sackler family has also agreed that, following the effective date of the Plan, they will not contest the removal of the Sackler name from: (i) physical facilities; (ii) academic, medical, and cultural programs; (iii) scholarships; and (iv) endowments, provided that certain procedural requirements are met and that the removal is not used to disparage the Sacklers. The Sackler family has also agreed to issue a statement acknowledging their approval of the Term Sheet Settlement and, although not admitting to any wrongdoing, expressing their regret for the role OxyContin® has played in the opioid crisis. The Purdue Pharma Debtors have agreed to supplement a Public Record Depository, established pursuant to the Plan, by waiving privilege with respect to certain classes of documents related to lobbying, public relations, compliance advice, and legal review and advice in connection with OxyContin®. They will also pay the reasonable and documented attorneys’ fees of the Nine incurred in connection with the Purdue Pharma bankruptcy cases.
In exchange for the Sackler family’s additional funding of the Plan, the Nine will not oppose the appeal by the Purdue Pharma Debtors and other Plan supporters of Judge McMahon’s order vacating the Confirmation Order. The effectuation of the Term Sheet Settlement is, in fact, expressly conditioned on the issuance by either the Second Circuit or the District Court of an order approving consummation of the Plan as modified by the Term Sheet Settlement).4 Additionally, the Nine and New Hampshire will consent to the Shareholder Releases upon the effective date of the Plan.5
The response to the Term Sheet Motion was immediate, intense, and unfavorable. By the March 9, 2022 hearing date, more than 30 parties (collectively, “Opponents”), including more than 20 states and the United States Trustee for Region 2 (“U.S. Trustee”), had filed opposition to it. Most of the Opponents joined in the opposition filed by the State of Florida6, and none of the opponents raised any objections not raised by either the State of Florida or by the U.S. Trustee in his opposition to the Term Sheet Motion.7
As the Debtors noted in their omnibus reply8 in support of the Term Sheet Motion, none of the opponents objected to either the Sacklers’ the guarantied additional contributions, aggregating $898,111,111.13, into the MTD or the potential $500 million contribution from the net proceeds of the liquidation of the IACs. Similarly, no express objection was made to the proposal to eliminate, in exchange for the Sackler family’s guarantied contribution of $175 million into the MDT, the Plan requirement that members of the family be removed from the control of the RMB Foundation and RMB Fund. Instead, the opposition to the Term Sheet Motion focused for the most part on the Sackler family’s proposed contribution of $276,888,888.87 to the SOAF (“SOAF Contribution”), as opposed to the MTD, and the Purdue Pharma Debtors’ agreement to pay certain legal fees and expenses of the Nine.
The SOAF and the SOAF Contribution together proved to be a lightning rod for opposition to the Term Sheet Motion. Characterized as a “‘side deal’ whereby affiliates of the Debtors are going to pay substantial monies to the [Nine] to essentially drop their appeals,”9 the SOAF and the SOAF Contribution were condemned as effectuating a violation of 11 U.S.C. § 1123(a)(4), which generally requires equivalent distributions to each member of the same creditor class under a plan. According to the Opponents, moreover, the SOAF and SOAF Contribution effectively modified: (i) the Plan’s model for the allocation of distributions thereunder; (ii) the Plan’s release provisions; (iii) the provisions for the payment of attorneys’ fees; and (iv) the treatment of creditors in Class 4 of the Plan. In doing so, the Term Sheet Settlement substantively modified the Plan and functioned as an attempted end run around the requirements for obtaining creditor consent to plan modifications and an amended plan. It functioned as a sub rosa plan imposed on creditors of the Purdue Pharma Debtors without according them the protections to which the Bankruptcy Code entitles them in connection with the modification or amendment of a plan of reorganization. It bears noting, however, that the Opponents did not object to the size or existence of the SOAF Contribution, only to distribution therefrom being limited to the Nine and the State of New Hampshire.10 In other words, it appears that, were the SOAF Contribution to be contributed to the MTD for distribution according the allocation scheme provided by the Plan, it would not have generated objection by the Opponents.
The Opponents also contended that the appeal of the Confirmation Order divested the Bankruptcy Court of subject matter jurisdiction over the issues raised in the Term Sheet Motion. Absent a final resolution of that appeal, therefore, the Term Sheet Motion did not present the Bankruptcy Court with an issue ripe for decision, reducing any decision on that motion to nothing more an improper advisory opinion.
In addition to the SOAF and SOAF Contribution, the Opponents objected to the Purdue Pharma Debtors’ proposal to pay the Nine’s attorneys’ fees, the scope of which they contended lacked any meaningful limits or parameters. They rejected the Purdue Pharma Debtors’ contention that the Nine were entitled to the payment of their fees under11 U.S.C. § 503, because they made a substantial contribution to the estate by, inter alia, increasing the Sackler family’s contribution under the Plan. According to the Opponents, the Nine were acting only out of self-interest in connection with the collection on their pre-petition claims. Additionally, the Opponents contended they could discern no sound business purpose that would permit the payment of the Nine’s attorneys’ fees pursuant to 11 U.S.C. § 363(b).
In addition to the objections raised by the State of Florida, the U.S. Trustee expressed his concern that the Term Sheet Settlement double, from nine to 18 years, the payout terms for the Sackler family’s contributions under the Plan and that the Sackler family’s statement of regret still maintained that OxyContin® “continues to help people” and only “unexpectedly became part of an opioid crisis.”11 Of more importance, however, he noted that Judge McMahon’s holding in support of the vacation of the Confirmation Order – that there was no statutory authority for the Shareholder Releases – is the law of the Purdue Pharma case, which bars the relief sought by the Term Sheet Motion.12
In reply to the Opponents, the Purdue Pharma Debtors contended that effectively, the objections raised to the Terms Sheet Motion are only to the SOAF, the SOAF Contribution, and the proposal to pay the Nine’s attorneys’ fees. However, as the Purdue Pharma Debtors pointed out, non-debtor Sackler family members will contribute their own funds to the SOAF, which will be distributed among the non-debtor Nine. Moreover, distributions from the SOAF will not be made through the Purdue Pharma Debtors or pursuant to the Plan. Instead, the distributions will be governed by a separate Direct Settlement Agreement between the Sacklers and the Nine. As such, neither the funds in the SOAF nor the SOAF Distribution could ever constitute assets of the Purdue Pharma Debtors’ bankruptcy estates. In point of fact, the only relief the Term Sheet Motion seeks with respect to the SOAF and the SOAF Contribution is a determination that they don’t violate prior orders of the Bankruptcy Court or provisions of the Bankruptcy Code. The motion does not seek approval of the SOAF. Accordingly, the Purdue Pharma Debtors concluded that the Opponents’ opposition was without merit.
Because distributions from the SOAF will not be made by or through them, the Purdue Pharma Debtors rejected the Opponents’ contentions that the Term Sheet Settlement impacts the distribution models currently incorporated into the Plan. Except for the Sackler family’s contribution of between $900 million and $1.4 billion in additional consideration to the MDT and the securing of the payment of the SOAF Contribution by the same collateral as that securing the Sackler family’s $5.5 billion to $6 billion contributions to the MDT, the Term Sheet Settlement does not negatively impact distributions under the Plan, but actually increases them. The only potentially negative impact on distributions according to the Purdue Pharma Debtors is the minor dilution of the value of the collateral securing the MDT contributions by making it available to secure the payment of the much smaller SOAF Contribution.
Because neither the SOAF nor the SOAF Contribution could ever constitute assets of their bankruptcy estates, the Purdue Pharma Debtors rejected the Opponents’ contention that the SOAF and the SOAF Contribution violate the equal treatment provisions of 11 U.S.C. § 1123(a)(4). For similar reasons, they also rejected the Opponents’ characterization of the Term Sheet Settlement as either a sub rosa plan or an amended plan requiring re-solicitation of creditors. In addition, they distinguished the issues addressed by the Term Sheet Motion from the issue being addressed on the appeal from the Confirmation Order – the Bankruptcy Court’s authority to approve the Shareholder Releases – and concluded that the Term Sheet Motion does not address any of the issues on appeal and, therefore, Judge Drain enjoyed subject matter jurisdiction to rule on it. That being the case, the issues raised in the Term Sheet Motion were ripe for consideration and decision. Nevertheless, the Purdue Pharma Debtors acknowledged that the propriety of the Shareholder Releases remains on appeal, and Judge Drain would have lacked jurisdiction to address the issue had it been raised. Judge Drain agreed with the Purdue Pharma Debtors and, on March 10, 2022, granted the Term Sheet Motion.13
Hurdles remain before the Term Sheet Settlement can be consummated. The vacation or reversal of Judge McMahon’s order is an express condition to consummation. The question whether Judge Drain had statutory authority to approve the Shareholder Releases, however, is no longer before Judge McMahon, but is on further appeal to the Second Circuit. A decision by the Second Circuit’s that Judge Drain lacked such statutory authority would derail the consummation of the Term Sheet Settlement, as well as the Plan. The question remains whether the Second Circuit will rule on the issue of the propriety of the Shareholder Releases in the face of the Opponents’ withdrawal of their opposition to the appeal or simply dismiss the appeal as moot and direct Judge McMahon to vacate her order. In any event, with oral argument on the appeal currently scheduled for the last week of April, a decision should be forthcoming.
The author is Counsel to Gibbons P.C. in its Financial Restructuring and Creditors’ Rights Group. Please contact Mr. Crapo at (973) 596-4523 or firstname.lastname@example.org with any questions concerning this issue.
1 A copy of the Term Sheet is attached as Exhibit B to the Motion of the Debtors Pursuant to 11 U.S.C. §105(a) and 363(b) for Entry of an Order Authorizing and Approving Settlement Term Sheet (“Term Sheet Motion”). See In re Purdue Pharma L.P., et al., USBC SDNY Case No. 1923469, ECF No. (“Purdue Pharma ECF No.”) 4410, ¶ 4.
2 Purdue Pharma ECF No. 4410, at ¶ 3.
4 Purdue Pharma ECF No. 4410, ¶ 1.
5 Id., ¶6.
6 See Purdue Pharma ECF No. 4413 for The State of Florida’s Objection to Motion of Debtors Pursuant to 11 U.S.C. § 105(a) and 363(b) for Entry of an Order Authorizing and Approving Settlement Term Sheet.
7 See Purdue Pharma ECF No. 4484 for the United States Trustee’s Opposition and Reservation of Rights to Debtors’ Motion Authorizing and Approving Settlement Term Sheet.
8 See Purdue Pharma ECF No. 4491 for the Debtors’ Reply in Support of Motion for an Order Authorizing and Approving Settlement Term Sheet.
9 Purdue Pharma ECF No. 4413 at p. 2.
10 See, e.g., Purdue Pharma ECF No. 4413 at p. 3.
11 Purdue Pharma ECF No. 4484, p. 2.
12 Id., pp. 2, 9-11.
13 See Judge Drain’s Order Pursuant to 11 U.S.C. §§ 105 and 363(b) Authorizing and Approving Settlement Term Sheet at Purdue Pharma ECF No. 4503.