Sackler Ruling Threatens Cash-for-Immunity Deals in Bankruptcy
Sackler Ruling Threatens Cash-for-Immunity Deals in Bankruptcy
(Bloomberg) -- A judge’s decision to deny the billionaire owners of Purdue Pharma protection from lawsuits is the latest threat to one of the most cherished deal-making tools in corporate bankruptcies: trading legal immunity for cash.
The ruling Thursday by U.S. District Judge Colleen McMahon, which overturned a multi-billion dollar settlement to end the bankruptcy of Purdue Pharma, has implications well beyond that case because her New York federal court district is one of three that oversee the vast majority of the nation’s biggest bankruptcies. McMahon ruled that members of the Sackler family who own Purdue can’t use the drugmaker’s Chapter 11 filing to end all current and future lawsuits over their role in the opioid-addiction epidemic.
Purdue has vowed to appeal. But if the ruling stands, it would threaten to upend long-practiced maneuvers allowing companies to shield executives and owners -- and their cash -- as they slash debts in bankruptcy court. The ruling comes at the end of a year in which lawmakers and state attorneys general have grown increasingly uneasy with such tactics, which they see as rampant abuse of the nation’s bankruptcy laws.
“This decision certainly is ground breaking,” retired bankruptcy Judge Steven Rhodes said. “I would call it courageous because it bucked a fairly deeply entrenched trend in chapter 11 plans of reorganization.”
Proposed Reform
Purdue is one in a string of high-profile bankruptcies, including cases filed by the National Rifle Association and a unit of Johnson & Johnson, that caused an uproar among elected officials this year.
The NRA filed for bankruptcy in Texas in an effort to move the gun-rights group to the Lone Star state and escape the jurisdiction of New York Attorney General Letitia James, who is seeking to dissolve the organization for the alleged misuse by senior executives of tens of millions of dollars that belonged to the nonprofit. The case was later thrown out of court.
J&J, meanwhile, is trying to shed tens of thousands of lawsuits over its iconic baby powder, without putting the consumer health giant itself into bankruptcy. Using an obscure Texas law, J&J shunted billions of dollars in potential legal claims into an isolated subsidiary, which was then put into bankruptcy.
In response, some members of Congress have proposed legislation to curb such practices. A bill backed by Dick Durbin, the second-ranking Democrat in the U.S. Senate, would prevent owners of a failed company from using bankruptcy to shield themselves from lawsuits.
“Purdue Pharma can go into bankruptcy and somehow we’re protecting the Sackler family’s personal assets from lawsuits? I just think it’s fundamentally unfair,” Durbin said in a telephone interview. “To think that they were not party to the bankruptcy and they’re receiving this favored treatment is fundamentally wrong.”
A representative for the Mortimer Sackler wing of the family declined to comment. Representatives for the Raymond Sackler wing of the family didn’t immediately respond to a request for comment Friday.
The third-party releases granted to the Sacklers are a common piece of bankruptcy exit strategies. They give people facing years of litigation an incentive to fork over cash to creditors in exchange for peace of mind.
In the case of Purdue, the releases became even more controversial because they were being forced on many parties in the case and because they would benefit people who aren’t themselves bankrupt.
Another proposed bill would ban the legal maneuver used by J&J -- known as the Texas Two Step.
Insolvency advisers worry that lawmakers will inadvertently hurt the people they’re trying to protect. Without strong incentives to settle, corporate wrongdoers may instead spend millions fighting lawsuits in state and federal court rather than offering cash to victims, restructuring expert William A. Brandt, Jr. said.
“Some of the stuff floating around would have huge unintended consequences and make the system harder,” Brandt said. He helped write several amendments to the bankruptcy code and was tapped by the governor of Illinois to head the Illinois Finance Authority, which helps public agencies borrow money for economic development.
Brandt said he has gotten several calls from members of Congress in reaction to the Purdue Pharma case.
“They said ‘We gotta outlaw this,’” Brandt said. “I said ‘What you want to do is put a bill on the floor to say you voted against the Sacklers. You want to oppose the people who sacked Rome. But there are other ways to do that that won’t also destroy the bankruptcy code.’”
Other longstanding practices by bankrupt companies have also come under scrutiny by lawmakers for favoring corporations and their executives at the expense of creditors and workers.
Venue Shopping
Legislation introduced this year would curb a practice known as judge shopping. It’s normal -- even expected -- that troubled corporations file for bankruptcy in regions that have judges and past legal rulings that may give them an advantage. This means a company can wind up in a courthouse far from its headquarters and its workers, who may want to participate in a case.
The proposal -- with sponsors from both Republicans and Democrats -- would force large companies to file for bankruptcy wherever their most significant assets reside. The bill was referred to the Senate Committee on the Judiciary -- which Durbin chairs -- in September. The House bill is at the same stage.
Legislation introduced in October by Illinois Democrat Cheri Bustos is also targeting companies that dole out bonuses to executives just before or during a bankruptcy.
A Government Accountability Office report in September recommended that Congress tighten bonus rules, finding that more than 40 troubled companies in 2020 awarded about $165 million in retention pay shortly before seeking court protection.
Bustos’ bill, co-sponsored by four other Democrats and one Republican, would stop bankrupt companies from paying bonuses to employees making $250,000 or more. Bustos introduced similar legislation in 2019 to no avail. The No Bonuses in Bankruptcy Act of 2021 was referred to the House Judiciary Committee on Oct. 12 and no further action has been taken.
©2021 Bloomberg L.P.