COURT: Purdue amends plan and disclosure statement, provides support for USD 4.275bn Sackler settlement - Debtwire

COURT: Purdue amends plan and disclosure statement, provides support for USD 4.275bn Sackler settlement

24 May 2021 - 12:00 am

Purdue Pharma filed amended versions of its plan and disclosure statement today, adding for the first time a detailed evaluation of its USD 4.275bn settlement with the Sackler family that owns the company.


Purdue is scheduled to seek approval of its disclosure statement on Wednesday, after several short delays in which it has attempted to resolve objections to the document. Purdue would not rule out a further delay during a court hearing last week, saying that it may need more time and mediation to close the gap with certain creditor groups who remain opposed to its restructuring proposal, including opioid victims and a group of 25 state attorneys general.


The newly amended plan and disclosure statement refines the projected recovery for certain classes of claims.


Opioid claims 


The amended plan splits the USD 700m set aside for opioid personal injury claims into two pots, with USD 45m for children born with opioid addiction symptoms, or neonatal abstinence syndrome (NAS). Attorneys representing NAS children had previously objected to Purdue’s proposed calculation of personal injury claims, saying that it undervalued the injury claims of children and infants relative to adults.


The disclosure statement also significantly rewrites communications to opioid victims about how their specific claims will be valued and paid, a response to objections that argued that individual victims could not rely on aggregated information opioid payments when deciding whether or not to vote for the plan.


Government claims 


The amended plan also offers more clarity on the payout for federal government unsecured claims, which were left uncertain after Purdue pled guilty to fraud and settled criminal charges brought by the US Department of Justice.  Purdue settled the federal government’s claims for USD 8.3bn, and that settlement required Purdue to make an upfront payment of USD 225m on the criminal forfeiture portion of the settlement, while treating the remaining USD 1.775bn civil forfeiture claim as a superpriority administrative expense claim.


The USD 3.5bn criminal fine and USD 2.8bn civil claim had been treated as unsecured claims under that settlement, leading to questions about how the claim would interact with other government claims and Purdue’s distribution of opioid abatement funds.  The amended disclosure statement makes clear that the federal government will receive an initial USD 50m recovery on account of those claims, divided between a USD 25m cash payment on the effective date and a USD 25m claim that will be paid through the master distribution trust established by the plan.


The amended plan also adds new trust funds intended to pay the attorneys’ fees of state, local and tribal governments that have participated in the case. State governments will receive USD 225m in attorney fee reimbursement, and local and tribal governments will receive USD 275m according to the amended plan.


The amended plan also portions off USD 26m from the master distribution trust to pay claims by federal government entities with healthcare-related claims, including the US Department of Health and Human Services, Centers for Medicare & Medicaid Services, the Indian Health Services, the TRICARE military health insurance program, and the US Department of Veterans Affairs.


Sackler settlement 


The amended disclosure statement adds, for the first time, a detailed description of the Sackler settlement and Purdue’s evaluation of its fairness. The judge overseeing the case, Judge Robert Drain of the US Bankruptcy Court for the Southern District of New York, had directed Purdue to include that evaluation to address a “drumbeat of opposition” in the disclosure statement objections, but the last few versions of Purdue’s disclosure statement had described that settlement evaluation as “to come.”  Purdue attorney Marshall Huebner of Davis Polk said last week that the evaluation was not included for the simple reason that the settlement was still being finalized.


The plan and disclosure statement include more detail on the releases included in the plan, including releases granted by the Sackler shareholders for potential claims against Purdue and its estates. The release provisions include a mechanism allowing the parties to return to bankruptcy court for an expedited determination if a released party believes that the releases or channeling injunction have been violated, and the revised disclosure statement clarifies that the releases do not apply to criminal or tax  cases brought by any government entity against the Sacklers or other Purdue shareholders.


Purdue made the case that the settlement is a good value for the estate, and justifies the release of claims against the Sacklers. The disclosure statement lists potential causes of actions that the Purdue estate could bring against the Sacklers, including fraudulent transfer claims related to USD 10.4bn in value that the family extracted from Purdue between 2008 through 2019, but it emphasized the uncertainty of recovery and the risks of expensive, prolonged litigation.


Purdue’s disclosure statement noted that it still may pursue the claims described in the settlement evaluation, if it is unable to confirm a Chapter 11 plan. The evaluation thus attempted to describe its potential claims and the Sacklers’ defenses without tipping its hand about possible litigation strategy.


“The Debtors are aware that the claims against the Sackler Families and Sackler Entities discussed herein may be litigated in the future, either because the settlement is not finally approved or because of a future default event,” Purdue wrote in the disclosure statement. “The analysis balances the need for disclosure regarding the Debtors’ support for the Plan with the need to avoid any potential prejudice in future litigation.”


Purdue pointed out that the difficulties of collecting more than USD 4.275bn from the Sacklers on account of its fraudulent transfer claims, starting with the difficulties of proving that Purdue was insolvent during the time the transfers were made, or rendered insolvent by them.


Purdue would also have to fend off “thousands of other creditors,” including governments, in order to lay its claim to the funds in litigation. Even if litigation was successful, the Sacklers themselves could declare bankruptcy, and it would be difficult to prosecute claims against a fragmented network of Sackler businesses and family members, many of whom were based overseas and had assets that would be difficult to recover.


“Not all of their very considerable assets may be readily accessible by Purdue Pharma or other claimants seeking to hold the Sackler Families personally liable for the costs of the opioid epidemic,” Purdue wrote. “These considerations as to the uncertain costs of defense and uncertain prospects for enforcing potential U.S. court judgments against members of the Sackler Families and Sackler Entities make it difficult to conclude that continuing litigation outweighs the certain merits of the proposed settlement.”


Purdue noted that the current settlement amount of USD 4.275bn is a significant improvement from the initial USD 3bn commitment it had in hand at the start of its Chapter 11 case.


Several objections took issue with the fact that the Sacklers will only make that full payment after nine years, creating risks that they may become unable to make payments or may renege on the deal, in addition to decreasing the present-day value of the settlement. Purdue countered that it had weighed the risks and found that the overall value of the longer-term deal outweighs any depreciation in present-day dollars. Purdue said that it had evaluated discount rates for the deferred payments, applying a discount rate of 2.5% at the low end and 8-10% at the high end.


Amended UCC statement 


While a previous version of the disclosure statement indicated that the unsecured creditors’ committee (UCC) in the case opposed the plan on several fronts, the new disclosure statement is more circumspect, saying that the UCC is continuing to negotiate.


“In light of these continuing negotiations and discussions, as of the time of the filing of this Disclosure Statement [for Third Amended Plan], the Creditors’ Committee has not yet made a determination as to whether it supports the Plan or the proposed settlement with the shareholders,” the UCC said in a statement included in the document.


Purdue previously amended its disclosure statement to address some of the concerns raised by the objections, adding additional detail about the opioid trusts, the proposed treatment of opioid claims, and the allocation of funds between states and territories. A separate amendment added information including a liquidation analysis and company valuation. The plan would set up several opioid trusts designed to provide abatement funds to different classes of stakeholders in Purdue’s bankruptcy, with approximately USD 5bn in value assigned to opioid abatement.


by Dietrich Knauth