David (left) and Kathe Sackler, members of the family that owns Purdue Pharma, the maker of Oxycontin, testified via video to a House Oversight Committee hearing on Dec. 17, 2020. Sackler family members have acknowledged that the drug had a role in the opioid crisis, but they have stopped short of apologizing or admitting wrongdoing.

David (left) and Kathe Sackler, members of the family that owns Purdue Pharma, the maker of Oxycontin, testified via video to a House Oversight Committee hearing on Dec. 17, 2020. Sackler family members have acknowledged that the drug had a role in the opioid crisis, but they have stopped short of apologizing or admitting wrongdoing. / House Television via AP

For months, members of the Sackler family that owns Purdue Pharma, the maker of Oxycontin, have portrayed their bid for immunity from future opioid lawsuits as a kind of fait accompli, a take-it-or-leave-it fix to a legal morass.

In exchange for what amounts to a legal firewall for the Sacklers and their remaining empire, members of the family have offered to forfeit control of their bankrupt drug company and pay $4.2 billion from their private fortunes.

Judge Robert Drain, who is presiding over the case in White Plains, N.Y., has suggested that such a deal may be desirable and achievable along these broad lines.

A negotiated settlement could preempt years of costly litigation — the Sacklers deny any wrongdoing — and might accelerate financial aid to communities struggling to recover from an opioid epidemic that has already cost more than 450,000 lives.

But a growing group of public officials and activists is mounting a last-ditch effort to derail the plan, describing it in legal briefs as an unethical, and possibly unlawful, use of the bankruptcy court's power.

Late last week, 24 state attorneys general as well as the attorney general for Washington, D.C., filed a new brief describing the proposed settlement as "unprecedented," "unjust" and "unconfirmable as a matter of law."

"The bankruptcy system should not be allowed to shield non-bankrupt billionaires," said Massachusetts Attorney General Maura Healey in an interview with NPR.

"It would set a terrible precedent. If the Sacklers are allowed to use bankruptcy to escape the consequences of their actions, it would be a roadmap for other powerful bad actors."

State AGs aren't alone in objecting to the deal. In recent weeks, attorneys representing local and state governments, native tribes and opioid activists filed briefs raising legal and ethical concerns about the plan.

A division of the Justice Department that oversees bankruptcy cases also filed a brief questioning whether the bankruptcy court has the "authority and jurisdiction" to approve such a plan.

Seeking bankruptcy-like protection without filing for bankruptcy

The Purdue Pharma case is dauntingly complex, involving what may be the nation's worst man-made public health crisis, but the central legal dispute now hinges on a simple fact: The Sacklers are seeking bankruptcy-like protections from the court without actually filing for bankruptcy.

Here's how this would work.

One piece of the family's private empire, Purdue Pharma, sought Chapter 11 protection in 2019, exposing the firm to a rigorous accounting by creditors.

But the rest of the Sacklers' vast holdings — cash, art, real estate, companies and trusts valued at roughly $11 billion — aren't part of that process.

Yet the Sacklers are negotiating to use a rare and controversial bankruptcy procedure known as "non-consensual third-party releases" that would protect them and their assets from lawsuits linked to the opioid crisis.

"They will be shielded from any further scrutiny because the release and injunction that's being contemplated means they can never be sued," said Jonathan Lipson, a bankruptcy expert at Temple University.

In recent weeks, a growing number of local, state and federal governments have filed briefs raising alarm about this provision of the deal.

"The current plan impermissibly allows the Sacklers to escape scrutiny while availing themselves of the 'fresh start' benefits of bankruptcy by free-riding on the Purdue Pharma bankruptcy," attorneys representing a coalition of school districts suing Purdue Pharma wrote in an April 23 legal filing.

"If the Sacklers wish to obtain the benefits of bankruptcy-like insulation from the consequences of their conduct, then Sackler family members and related entities should be required to file their own individual bankruptcy proceedings," the school districts argued.

Experts say some federal appellate courts have agreed, prohibiting outright the kind of third-party releases the Sacklers are seeking. In other parts of the country such deals have been approved but only with strict limitations.

"There's a split among the U.S. courts of appeal on both whether they're permissible at all and ... how do we decide when it's OK and when it's not?" Lipson said.

Can a federal bankruptcy court halt a state investigation?

In their brief filed Thursday, state attorneys general and the attorney general for the District of Columbia argued that this case doesn't involve the "specific" and "exceptional" circumstances that would allow the Sacklers to benefit from such releases.

They note that the bankruptcy court would not only be halting private lawsuits against the Sacklers, but the deal would also force states to suspend efforts to investigate members of the family and hold them accountable.

"The court should not, through third-party non-consensual releases of non-debtors, strip the public of the protections of state-by-state police and regulatory powers," the AG brief argued.

In an earlier brief, the states noted that the Justice Department has taken a position that "the non-consensual release of government claims against non-debtors such as the Sacklers is never lawful."

Purdue Pharma, which has pleaded guilty twice to criminal conduct for its opioid practices, most recently last year, hasn't responded to these objections and a company spokesman declined comment.

The Sacklers who served on the company's board of directors have denied any wrongdoing and have never faced criminal charges. Spokespeople for branches of the Sackler family didn't respond to a request for interviews or comment.

If the deal proposed by the Sacklers is finalized — the next court hearing was planned for Monday but has been delayed until May 12 — critics say it could set a dangerous new precedent that extends beyond the opioid crisis.

A legal brief filed in April by a group of opioid activists argued that such a settlement would open the floodgates to other wealthy people accused of serious wrongdoing who might use bankruptcy courts to limit their exposure to lawsuits without being required to file for bankruptcy.

"If the American judiciary is available to compel settlements to give billionaires peace because they want it, then billionaires will of course demand it," the brief said.

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Tags: Sackler Family  Purdue Pharma  opioid  Justice Department