Is Chapter 11 Bankruptcy a Way Out for Lawsuit-Ridden Corporations?


On September 15, Purdue Pharma filed for chapter 11 bankruptcy, a move many see as an effort to shield itself and the billionaire Sackler family from liability for more than 2,600 federal and state lawsuits filed over the opioid crisis.

The chapter 11 filing is part of a tentative agreement that could be worth as much as $12 billion over time between Purdue and 24 states and five U.S. territories, but not everyone considers it a good deal. States like Massachusetts and New York have expressed opposition, believing the agreement will allow the Sacklers to continue to participate in the drug manufacturing business until the company is sold.

Under the terms of the proposed settlement, the Sacklers, one of the wealthiest families in the U.S., will give up ownership of Purdue and pay $3 billion to the plaintiffs over seven years. The Sacklers would also be required to sell Mundipharma, their U.K.-based drug company. According to Purdue, the proceeds could add “substantial further monetary contributions” to the settlement. Purdue would then be reorganized into a public benefit trust, and proceeds from the manufacture of OxyContin and other medications would compensate the plaintiffs and be used to fund research and development of medications to treat addiction and overdoses. The new company would be obliged to follow restrictions on the marketing and sale of opioids.

Chapter 11 is increasingly being used by beleaguered companies that still have a realistic chance to survive to discharge their debt, as opposed to chapter 7, in which a company’s assets are liquidated and operations cease. However, chapter 11 offers no guarantees: according to the Notre Dame Law Review, just 10% to 27% of all companies that file for chapter 11 relief successfully reorganize. The majority ultimately fail and resort to liquidation, which can have devastating economic effects.

Purdue’s bankruptcy filing came just 48 hours after the New York attorney general’s announcement late Friday afternoon of nearly $1 billion in previously unidentified wire transfers from the company to personal accounts held by one of the Sacklers. The company’s choice to go the chapter 11 route to resolve mass-tort litigation is certainly nothing new:

  • The 1988 Manville Personal Injury Settlement Trust, arising from the 1982 bankruptcy restructuring of asbestos manufacturer Johns Manville, settled hundreds of thousands of mesothelioma claims.
  • Silicone-breast-implant maker Dow Corning filed for chapter 11 protection in 1995 to address thousands of lawsuits, agreeing in 1998 to pay $3.2 billion to settle the claims of about 170,000 women, who received anywhere from $12,000 to $60,00 each.
  • To get out from under a class-action lawsuit arising from the Camp Fire in Butte County, California, Pacific Gas & Electric Company (PG&E) opted to restructure in January 2019. Although it owes some $30 billion in costs for the wildfires, a bankruptcy court will decide how much money victims will receive.
  • Remington Outdoor Company, the manufacturer the Bushmaster rifle used in the 2012 Sandy Hook school shootings, emerged from chapter 11 bankruptcy last year. In exchange for relinquishing control of the company to its creditors, the company was able to continue to operate, convert more than $775 million of its debt into equity, and potentially limit the plaintiffs’ recovery in a 2015 wrongful death lawsuit related to the shooting.

One positive that has emerged from these and other mass tort cases is the development of a procedure used in conjunction with chapter 11 bankruptcy to fairly and efficiently resolve claims. One of the most significant features of chapter 11 bankruptcy is its ability to shield the debtor from collateral litigation. Chapter 11 provides that all such litigation is “automatically stayed” upon the filing of the bankruptcy petition. Although Purdue’s chapter 11 petition prompts an automatic stay of the current civil litigation the company faces, whether or not individual members of the Sackler family would be similarly protected remains to be seen.

The tentative settlement with Purdue might go a long way toward helping to address the opioid epidemic, which has taken the lives of 400,000 people over the last 20 years. However, it won’t force either Purdue or the Sacklers to admit any wrongdoing, and it won’t dip into the Sacklers’ personal fortunes. That will be left to the attorneys general of some 20 states and the District of Columbia who oppose the deal and favor suing the Sacklers individually for the public health catastrophe many say they created.

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