The Economist explains
What is the bankruptcy “loophole” used in the Purdue Pharma settlement?
A controversial legal arrangement shields the owners of companies from personal liability
ON SEPTEMBER 1ST a long legal wrangle in America’s opioid epidemic, which continues to kill thousands of people a year, at last came to an end. A federal judge in New York approved the bankruptcy plan of Purdue Pharma, which developed and manufactured OxyContin, a highly addictive painkiller. The deal settles thousands of lawsuits against the firm filed by states, localities, tribes and individuals. Purdue will be re-organised as a public-benefit company called Knoa Pharma, and its future profits will go towards alleviating the damage done by opioid addiction. Members of the Sackler family, who own Purdue, will relinquish control of the firm and pay $4.5bn to plaintiffs. But nine states and Washington, DC opposed the final deal and some—Connecticut, Washington state and the District of Columbia —will appeal against it. Their objections stem from a legal arrangement shielding parties associated with bankrupt companies (which have not filed for bankruptcy themselves) from liability, which many people want to change.
Bankruptcy comes with costs and benefits. The debtor must disclose all assets, which are distributed to creditors. But in return the debtor—in this case Purdue—is freed of legal liability. As a condition of their participation in the deal, the Sacklers sought and won immunity from civil lawsuits related to the opioid epidemic without declaring bankruptcy themselves. The arrangement is known as a non-debtor release from liability (or a third-party release). It originated in the 1980s to protect insurers in bankruptcies arising from asbestos liability, and was codified by Congress as a protection in those cases. As a result of the settlement, the Sacklers (not all of whom were involved in the management of the company) will neither reveal nor relinquish most of their fortune, estimated at $11bn. Richard Sackler, Purdue’s former president and chairman, last month told a court that neither he nor his family nor the company is responsible for America’s opioid crisis.
Meanwhile, people who say they were harmed by the Sacklers’ behaviour cannot seek to hold them responsible and claim additional damages. Last year four members of the family paid $225m to settle civil charges brought by the federal government that they sold OxyContin while knowing it to be “unsafe, ineffective and medically unnecessary”. Lots of states and individuals would probably file similar suits if they could. But the Sacklers’ immunity means no such opportunity will arise. Significantly, the terms apply to all parties with a claim against the Sacklers, even if they did not participate in the deal or assent to it. Only a fraction of people who used OxyContin did take part: just under 61,000. The number of potential personal-injury victims is probably ten times that, if not a hundred, estimates Adam Levitin of Georgetown University Law Centre. The Department of Justice said the deal denied potential claimants the “opportunity to be heard” and the “right to due process”.
The use of a non-debtor release has also been mooted in the reorganisation of two groups that filed for bankruptcy amid child-abuse lawsuits: The Boy Scouts of America and USA Gymnastics. For defendants in sprawling litigation, moving to bankruptcy court and securing a non-debtor release is appealing: it binds absent parties, foreclosing future claims from victims who have not yet come forward. Some Democrats in Congress want to ban the arrangement, which they say has been perverted beyond its original narrow intent. In July a group of senators, including Elizabeth Warren of Massachusetts, introduced a bill intended to close what they call a loophole used by “bad actors” to escape accountability. In the case of Purdue, the settlement does at least mean that money will be disbursed quickly and with certainty. But those who had hoped to see the family wrung dry will be disappointed. “The Sacklers negotiated how much money they would turn over, and it’s as little as they thought they could get away with,” says Lindsey Simon of the University of Georgia. The settlement will probably survive an appeal, bringing an unsatisfying resolution to a long chapter of a painful public-health crisis. For many, alas, the pain continues.