Every once in a while, the system will work. We have embedded a ruling by Judge Colleen McMahon for the Southern District of New York that favors a group of plaintiffs, including Connecticut and seven other states, against Purdue’s settlement agreement because it protects Sackler Family, the latter has divested most of Purdue Pharmaceuticals’ assets before going bankrupt. I strongly urge you to read this decision. The first few pages are written clearly and forcefully, expounding the logic of Judge McMahon’s decision.
A brief background on the settlements and why you are open to challenges From the Associated Press:
Purdue sought bankruptcy protection in 2019 because it faces thousands of lawsuits…
Through the bankruptcy court, it reached an agreement with creditors. Members of the Sackler family will give up ownership of the company, and the company will be transformed into a different type of entity that will still sell opioids-but the profits will be used to respond to the crisis. It will also develop new anti-addiction and anti-overdose drugs and provide them with little or no charge.
The members of the Sackler family will also contribute $4.5 billion in cash and charitable assets as part of an overall transaction valued at $10 billion, including the value of new drugs, if they are brought to the market…
In return, members of wealthy families will be protected from litigation for their role in the opioid crisis-whether it is the 860 cases that have already been filed, or any other case in the future.
Most state and local governments, Native American tribes, individual opioid victims, and other voters said they should accept the plan made in bankruptcy court.
But the U.S. Bankruptcy Trustee’s Office, eight state attorneys general, and other entities have been opposed to the deal. They argued that it did not properly hold members of the Sackler family accountable and that it usurped the ability of the states to try to do so.
The bankruptcy court judge approved the plan in a dissenting opinion in September. But opponents appealed to McMahon’s court.
The main issue of the appeal is the legality of measures to extend legal protection to family members.
This “third-party disclaimer” is not used in most bankruptcy cases, but it is common in cases such as Purdue. In these cases, the company involved bears the burden of litigation, and the value is relatively small-but its Wealthy owners can contribute.
We freely quoted from an article on the Credit Slips of Adam Levitin, a Georgetown law professor, bankruptcy expert, and sometimes even comrade-in-arms Adam Levitin, why the settlement was so bad. I strongly recommend that you read the full text; even lengthy exceptions represent only part of Levitin’s argument.
As Levitin said in the previous post, the short version is that Purdue University shamelessly judged; the case tried in White Plains has no real basis (the “non-third” in the post refers to Is the third federal evidence rule). I’m almost entirely in Tillelewiting’s explanation of the “poison pill” in the Purdue settlement, which was omitted from the media’s summary of Judge McMahon’s decision. From Levitin:
Jonathan Lipson and Gerald Posner An important columnRegarding the New York Times’ bankruptcy of Purdue and how the Justice Department’s settlement with Purdue might benefit Sacklers. What happened at Purdue is disturbing, but not just because of its own facts. Purdue University explained the fundamental collapse of the checks and balances in the corporate bankruptcy system.
The basic problem is that debtors can select their judges in a system that excludes any meaningful appeal review. If debtors like Purdue can get a non-Article 3 judge of their choice to sign, then they can pass extremely inappropriate clauses. This happened in a high-profile and important case like Purdue, and should be a wake-up call to show that things have derailed in the large-scale practice of Chapter 11. Where Purdue University goes, the practice of Chapter 11 in other cases will definitely follow.
Purdue University may be the most extreme example of the convergence of three bankruptcy trends, each of which has its own problems, but their combination will corrupt the basic legitimacy of the bankruptcy court system.
- First, there is the problem of debtors trying to implement a more aggressive and mandatory restructuring plan.
- Second, many key bankruptcy issues lack effective appeal review.
- Third, the issue of forum shopping, especially its latest version, is shopping for individual judges, not just judicial districts.
All in all, this means that debtors are choosing their judges because they know that certain judges will be more tolerant of their aggressive restructuring strategies and will never conduct any meaningful appeal review against judges. They are even free to ignore the Supreme Court’s clear Decide. In Chapter 11, the single judge chosen by the debtor is actually the only check on what the debtor can do. This is a broken legal system.
Question 1: Forced reorganization
The idea of ??debtors trying to force a reorganization plan is nothing new, and independence is not a problem… As long as there is a meaningful judicial review of debtors (and creditors) over expansion, the fact that certain parties take a strong attitude is not that the problem itself is systemic problem.
Purdue Arosa Plan and poison pill
However, Purdue has raised the method of mandatory reorganization to an unprecedented level, that is, adding “poison pills” to the reconciliation, effectively eliminating any reorganization other than the reorganization envisaged by Purdue. The operation of the poison pill is very complicated, I simplified it a bit, but this is the basic idea. Purdue reached a settlement with the Ministry of Justice regarding its civil liability (false claims law, etc.):
- The settlement determined the amount of DOJ’s previously disputed claim. This is fine and normal.
- The settlement agreement also provides for the separate classification of DOJ claims and the processing of DOJ claims (“Super Priority Administrative Expenses Claims”-in either case). In my opinion, this violated the realm of planning, but it was not enough to make my dander surface.
- The settlement agreement also stipulates that Purdue will reorganize itself into a “public welfare company” or similar organization, but under no circumstances shall it provide the Department of Justice with shares of the PBC entity. Similarly, becoming more radical-and fixing what looks like the result of the plan, not only determines the treatment of the DOJ, but also the treatment of other creditors (they must be classified separately, and some of them must directly or indirectly obtain the remaining Interest of the People’s Bank of China).In other words, the function of settlement is Arosa plan.
- The settlement agreement also stipulates that the Ministry of Justice can withdraw from the settlement agreement at any time for any reason, including failure to reorganize into PBC. This alone is not a big deal.
But next is the key: the settlement agreement stipulates that if the DOJ leaves, its claims will not be restored to the previously disputed unliquidated state, but will be restored to its nominal amount of about 18 billion US dollars-far exceeding Purdue University’s Value. More importantly, the claim is not even a real claim, but a civil asset forfeiture. This is a super priority, because civil asset confiscation will result in the confiscation of asset ownership by the US government for misconduct. (The confiscated assets are not even part of Purdue’s estate!) Then, the effect of the Department of Justice’s departure from the settlement will be that the Department of Justice will obtain all of Purdue’s assets, which will go into the general fund of the U.S. Department of the Treasury instead of being provided to the state. And local governments and opioid victims, they can use these funds to reduce opioids.
This is the “poison pill” clause-if the Department of Justice is not satisfied, it will go away and has no value to anyone else. This means that if the settlement agreement is approved, the only way for other creditors of Purdue University to see the distribution is to act in accordance with the requirements of the Department of Justice and Purdue University.One Arosa The plan in the settlement is radical enough, but the additional “poison pill” is an incredibly mandatory clause. I have never seen it in bankruptcy cases before. As far as I know, no court has supported this before. Regulations, let alone cases like this. Purdue took toughness to a new level.
Recap: Purdue proposed a Arosa The plan is embedded in the pre-planned solution, and Arosa The plan was locked in by the “poison pill”. It’s impossible (I think) to reconcile it with the recent Supreme Court ruling Czyzewski v. JevicThere is no final operating plan protection. All of this was decided through quick action and practice, and most of Purdue University’s thousands of creditors did not notice.
So what’s the big deal here? If Purdue is reorganized into the People’s Bank of China and the funds are used to reduce opioid emissions instead of the general fund of the US Treasury Department, wouldn’t everyone lead? Incomplete.
First, the reorganization of Purdue into the People’s Bank of China ruled out other alternative reorganizations, such as liquidation after the sale.
Second, many of Purdue’s creditors do not want to directly or indirectly own a public welfare company. These are victims of opioids. They don’t want any ongoing contact with opioid manufacturers, they see it as a public charge company.
Third-this is also the key-the poison pill enables Purdue to resolve its fraudulent transfer claims with the Sacklers at a relatively low price, and has Purdue University confirm a plan to provide non-profits for the Sacklers. The debtor is released. This means that Sackler will be able to avoid civil liability to state and individual opioid creditors at a relatively low cost without having to go bankrupt himself. The Sacklers will be able to leave Purdue and retain most of the allegedly ill-gotten wealth without having to open the disclosure kimono required for bankruptcy.This not only means that opioid victims may not be able to get the funds they deserve to reduce emissions because they may not know the full scope of Sackler’s assets and ability to pay, but it also means that we will never know the full story about what happened at Purdue. Things, this is very important, because this kind of large-scale infringement and bankruptcy is as important as dignitaries and money. If there is no poison pill plan, creditors are likely to vote against a plan that includes the release of members of the Sackler family. With the poison pill, they are unlikely to vote against the plan.
Although Purdue University proposes to create a publicly available document archive Rear After the bankruptcy, there is a real problem with what content will be included in the archive, because the DOJ must sign the published content, cannot contain privileged documents, and there may be file ownership issues-most importantly, no one will know that they are voting on the plan Time. If you care about the interests of the dignitaries, this is a problem.
It is outrageous that the bankruptcy court will approve this settlement clause outside of the plan (and the court has no good reason to rule now; it can easily wait and treat the settlement as part of the plan confirmation). The bankruptcy court seems to think that the envisaged structure of the People’s Bank of China is good for society. This really shouldn’t be a judicial issue—the court should be the judge, not the command—but such mandatory planning provisions—whether in settlements or plans—should be absolutely prohibited. This should not be a close call.
Please read the rest of Levitin’s post; he has done a good job of making legal issues easy to understand and lively. On this basis, the importance of Judge McMahon’s support for reconciliation far exceeds the appropriate authority of the bankruptcy court, and cannot be overemphasized.