Charles Krupa/AP Photo
Protesters gather outside a Boston courthouse, August 2, 2019, where a judge was to hear arguments in a lawsuit against Purdue Pharma over its role in the national opioid epidemic.
Opioid maker Purdue Pharma’s plan to emerge from bankruptcy rests on an awesome idea: that the judge will agree to extend the greatest power of bankruptcy—forgiving a company’s debts and obligations—to the individual members of the Sackler family who own and controlled Purdue for decades.
In exchange, the Sacklers would pay out $4.3 billion over a nine-year period for opioid treatment and victims, and transform the company into a public trust with the idea of using it for good, rather than profit.
Among the lawsuits filed against Purdue, hundreds name Sackler family members personally, based on claims they personally drove many of Purdue’s decisions to aggressively market OxyContin—a drug that can be twice the strength of morphine—to sell to more users, at greater doses, for a longer period of time.
Those lawsuits filed against Sackler family members will be simply wiped out with the stroke of a pen, with no hearing on the merits, if the bankruptcy judge agrees to a plan based on one Purdue Pharma proposed earlier this month.
Purdue has twice admitted to the Justice Department to illegally marketing OxyContin when Sackler family members served on the board. The Sackler family members insist, as David Sackler testified to Congress, the family has “acted legally and ethically.”
Purdue’s bankruptcy is the sign of a “broken Chapter 11 system.”
So what is wrong about this bankruptcy deal? Isn’t this a simple way to get the Sackler family members to pay for any bad acts and avoid, in the bankruptcy judge’s words, a “litigation festival”?
Here is what is wrong. With one exception (asbestos cases), nothing in the Bankruptcy Code allows for treating people’s rights to seek justice as though those rights were property under the control of the bankruptcy court. Nothing in the Code says it can be used to extinguish the rights of victims seeking justice from people like the Sacklers, just because their company has filed for bankruptcy. Nothing in the Code says its power to forgive debts (another word for liability) can extend to people like the Sacklers, who are not in bankruptcy.
The Bankruptcy Code actually says that when it’s used to forgive a bankrupt company’s debts and obligations, it does not change the liability of anyone else. That’s why courts in many parts of the country don’t allow these liability releases for people who aren’t in bankruptcy.
But unless there’s a miracle in Congress or the courts, the Sackler family members are likely to get a liability release anyway.
Purdue’s bankruptcy is the sign of a “broken Chapter 11 system,” as Adam Levitin has written.
It’s also a sign of how bankruptcy has become the haven for dispensing with the mass torts that come out of mass corporate wrongdoing. “To think that the Bankruptcy Clause of the United States Constitution, barely a skinny sentence, is the basis for an entire alternative justice regime,” bankruptcy professor Melissa Jacoby said on Twitter recently.
How did things get to this point?
It was the problem of asbestos—and of compensating a tidal wave of victims—that gave rise to the idea of protecting people who aren’t in bankruptcy from liability.
To help deal with the massive costs of paying asbestos victims in the case of Johns Manville Corp., the bankruptcy judge allowed Manville’s insurer to pay an agreed-upon amount for its insurance policies, and then barred anyone from suing the insurer on those policies. What the judge was aiming for was a fair distribution of money to Manville’s victims.
That made sense, said Ralph Brubaker, a law professor at the University of Illinois. “The central idea of bankruptcy is to gather up all the debtor’s property and distribute it to creditors in an orderly manner,” he said.
The U.S. Court of Appeals for the Second Circuit found the asbestos arrangement was legal, because the insurance policies were the property of Manville’s estate. So the bankruptcy court had full power over that property.
What happened, Brubaker says, is that lawyers began convincing some judges to use the idea of a liability release to go beyond protecting the property of the bankrupt company, to protecting people who aren’t in bankruptcy.
“It’s been twisted to do something that wasn’t originally intended: to release somebody from personal liability,” Brubaker told me.
The Second Circuit has noted that a free pass on liability for those not in bankruptcy “lends itself to abuse.”
As Brubaker has explained in his work, this kind of liability release is, at bottom, a sleight of hand. Let’s use Purdue and the Sackler family members as an example:
In the guise of something designed to protect property, a liability release for the individual Sacklers does something radical. It forcibly converts the rights of victims to seek redress for personal misconduct by the people who owned Purdue into a kind of property of Purdue. Property that Purdue can dispose of any way it wants as part of its bankruptcy—if the judge agrees.
There are other problems.
With these liability releases, a bankruptcy judge is claiming the power to extinguish lawsuits he does not have the power to hear and rule on.
A bankruptcy judge is not a life-tenured federal judge who derives his powers from Article III of the Constitution. He’s a limited-tenure judge, like an immigration judge or a federal magistrate.
As such, he doesn’t have the power to rule on the merits of lawsuits by victims, like those alleging wrongs by the Sackler family members. That is the work of Article III judges.
But with a liability release like the Sackler family members are seeking, the bankruptcy judge in effect is ruling on those lawsuits—by extinguishing them. So, he’s claiming the power of an Article III judge, even though he is not one.
And he is claiming it over people like Jenny Scully, a mother whose six-year-old daughter was born addicted to OxyContin and other opioids doctors prescribed her before and during her pregnancy. Scully’s suit naming the Sackler family members speaks to their personal liability, not to the source of the judge’s power: the bankruptcy estate of Purdue.
That leaves Scully and others who are seeking answers from the Sackler family members themselves—the people behind Purdue—with nowhere to be heard. In the words of an Oklahoma bankruptcy judge, this has “the effect of a judgment … accomplished without due process.”
And it leaves the Sackler family members with unknown billions of dollars—unknown because the individual Sacklers are not in bankruptcy—now protected from any future lawsuits, or civil investigations, over the opioid epidemic that helped make their fortune.
The Second Circuit, which includes the financial capital of New York, and where Purdue’s case lies, has been mostly friendly toward these liability releases. But even the Second Circuit has lately noted that a free pass on liability for those not in bankruptcy “lends itself to abuse.” So far, the Supreme Court has chosen not to resolve the issue.
Until that changes, it comes down to the judge—a judge who does not have the power to rule on the very lawsuits seeking justice, morality, and accountability that he can still keep from ever being heard in any court anywhere in America.
