Purdue’s Bankruptcy Deal Has Holes the Size of 24 States

If Purdue Pharma LP wants its bankruptcy plan to work, it’ll have to find a way to halt the kind of government lawsuits that normally can’t be stopped by a Chapter 11 case.

Purdue said the point of its court filing late Sunday night was to get protection from thousands of lawsuits tied to its aggressive sales of addictive opioids. To make that stick, it has to persuade Judge Robert Drain to delay as many as two dozen states from pursuing their cases until a solution is worked out, even though federal law says such investigations normally can’t be interrupted.

Purdue acknowledged the stakes in its court papers.

“Absent that protection, this case will fail because the fundamental goal of this and any bankruptcy will have been thwarted,” the company said. Its lawyers get their first chance to ask Drain directly at a hearing Tuesday in White Plains, New York.

Purdue has a deal with the attorneys general from at least 24 states, five U.S. territories and law firms representing more than 1,000 counties, cities and Native American tribes. Those government agencies represent more than half the U.S. population, according to Purdue.

That still leaves plenty of opposition. When it filed bankruptcy, the Stamford, Connecticut-based company said it was facing lawsuits from about 2,250 government agencies of various types. And about 24 states have not signed onto the deal; the biggest are California, New York and Massachusetts.

Purdue said its officials “anticipate that many or all of the governmental plaintiffs who have not agreed to support the settlement structure will claim that their actions are exempt” from bankruptcy’s customary ban on taking legal action in other arenas.

The company will also seek to halt lawsuits aimed at officers and owners, potentially shielding the Sackler family that controls Purdue from legal claims during the bankruptcy case.

Persuading Drain to block governments from using their regulatory powers against Purdue will be difficult, bankruptcy lawyers say.

Broad Powers

“It would be challenging to say the least,” said bankruptcy lawyer Sander Esserman, who has been involved in similar court battles. Esserman represents California municipalities that cut a deal with the bankrupt utility PG&E Corp., which faces legal action from governments and residents who blame the company for wildfires that destroyed thousands of homes.

A key factor in the fight will be the goal of the government lawsuits, perhaps monetary damages or some kind of regulatory action, said Bruce Markell, a bankruptcy professor at Northwestern Pritzker School of Law.

“I don’t think it’s a slam dunk either way,” Markell, a former bankruptcy judge, said in an interview. “The powers of state attorneys general at this level are very broad and not that well-understood.”

Read More: Purdue Is Bleeding $2 Million a Week on Opioid Legal Bills

Purdue has already won a delay of one of the biggest cases it was involved with, when a federal judge removed the company from a trial set to start Oct. 21 against Purdue and other opioid makers. The case was brought by a number of local governments and is the first federal trial over the opioid epidemic.

Maura Healey, the attorney general of Massachusetts who sued Purdue and its board last year, and Letitia James, her counterpart in New York, each said they’ll continue to pursue the company and the Sackler family.

“If they think they can use bankruptcy to escape accountability, after creating the worst public health crisis of our time, they are mistaken,” Healey said in an emailed statement. “We will keep fighting to get all the facts out, make sure this company is shut down forever, and force the Sacklers to pay back the billions they pocketed breaking the law.”

Insys Case

The situation echoes the bankruptcy of opioid producer Insys Therapeutics Inc., which filed for Chapter 11 protection this year to deal with suits targeting its Subsys painkiller. States including Maryland and Minnesota fought Insys’ request to halt all litigation against it.

Before a judge could decide, the company and the states agreed to put the suits on hold while the bankruptcy went forward. Under the agreement, if any states oppose Insys’ bankruptcy payout plan, they could attempt to restart their cases.

Purdue is proposing to set up a trust that would own all of the company’s assets and use them to repay those who claim to have been harmed by its opioid products. The Sackler family has also agreed to contribute $3 billion over seven years and to sell other pharmaceutical assets.

In exchange, all of the lawsuits against the company would be resolved.

The case is Purdue Pharma LP 19-23649, U.S. Bankruptcy Court for the Southern District of New York (White Plains).

–With assistance from Erik Larson and Jef Feeley.