Relevant Document:
Questions for Oral Argument
“To me, there are two issues in this case,” U.S. District Judge Colleen McMahon said today at the conclusion of oral arguments in the consolidated
appeals of Purdue Pharma’s
plan. One key question before the court is whether Bankruptcy Judge Robert Drain had statutory authority to approve the
third-party release of claims against Purdue’s owners, the members of the Sackler family, she said. The second is
“an extremely difficult issue about whether there has been abuse of the bankruptcy process.”
Judge McMahon told the parties about her concern that the Sackler family had abused the bankruptcy process to obtain a release of claims against them at the very end of an all-day proceeding. “I can’t believe that with five minutes to go, nobody mentioned to me what has always been the elephant in the room,” she remarked, but “I have to lay my cards on the table, folks.”
Judge McMahon observed that the Sacklers "took
more than $10 billion out of the company" from 2008 to 2018. She said there exists “circumstantial evidence, of which there's quite a bit,” supporting the conclusion that after the resolution of the first round of Purdue opioid-related litigation in 2007, the Sacklers “began to take steps against the possibility that things would go south again.” The Sacklers then “made themselves necessary” to Purdue's exit from bankruptcy via the shareholder settlement, she later suggested.
Maura Monaghan of Debevoise, counsel for the Mortimer Sackler family, or “side A” of the family, began to respond by saying, “There’s not a shred of evidence.” But the judge interjected, “There’s not a shred of evidence? They took more than $10 billion out of the company,” adding that there is evidence in the record “from which very negative conclusions can be drawn.”
Judge McMahon also emphasized, “Judge Drain made no findings on abuse” in his
confirmation bench ruling. Rather, the bankruptcy court “made a finding that it would be very difficult to prove a
fraudulent conveyance claim,” she remarked.
Judge McMahon said that she did not disagree with this conclusion, because “fraudulent conveyance is something very technical. But doing something to the company so that it needs your assistance to come out of bankruptcy is something entirely different.”
Monaghan pointed out that the Sacklers ceased taking distributions from Purdue in 2016, years before the bankruptcy began. Judge Drain also
appointed an examiner in the chapter 11 cases to conduct a limited investigation into the independence of the board’s special committee, with the examiner
concluding that the special committee acted independently, she stressed.
In addition, Monaghan asserted that creditor groups in the chapter 11 cases, including the official committee of unsecured creditors and the multistate governmental entities group, “thoroughly reviewed” the issues the district court is considering now. The concerns were “priced into the settlement” that the bankruptcy court ultimately approved, she stated.
Monaghan also said that Judge Drain was well aware of the history of Purdue’s distributions to the Sackler family when he confirmed the chapter 11 plan.
However, Judge McMahon responded, “They weren’t analyzed the way that I would look at them, that I would want to look at them. I’m not even sure the facts are in the record.” Monaghan questioned why the district court would overturn the confirmation order if “there’s no evidence of abuse of the bankruptcy process,” asking to brief the issue to the court.
On her concern about abuse of the bankruptcy system, Judge McMahon said, “I’m not basing it on speculation. I have record cites.”
Any skilled litigator could use that evidence to argue that there was a “longstanding plan by the Sacklers to get as much money as they could in the years before they withdrew from the lists” and left Purdue to “fend for itself, until such time as they elected to give the money into bankruptcy,” the judge commented.
Gerard Uzzi of Milbank, representing the Raymond Sackler family, or “side B,” said that the resolution of issues relating to potential abuse by the Sacklers was a “fundamental” part of the plan settlements. Moreover, claims to recover the distributions from Purdue to the Sacklers are estate claims, he asserted. However, Judge McMahon answered, “That’s the fraudulent conveyance claim. I’m not interested in the fraudulent conveyance claim. But it’s possible to draw more than one inference from the same set of facts.”
Uzzi pressed on, asking the court to examine the rest of the record. He said that Judge Drain determined that there were substantial defenses to “all the allegations being made here, including the argument that the Sacklers engaged in a conspiracy to strip assets out of the company.” Judge McMahon invited the parties to weigh in on the topic in writing, saying that she raised the issue because she wanted them to know what was on her mind.
As noted above, Judge McMahon said that she saw statutory authorization and potential abuse of the bankruptcy process as the key issues before her. On the parties’ dispute over whether the bankruptcy court had
subject matter jurisdiction to approve the shareholder release, Judge McMahon said that the question is “not so difficult in light of SPV OSUS,” a 2018 decision from the Second Circuit.
“I think [debtor’s counsel Marshall] Huebner has you there,” the judge told the parties, signaling that she is sympathetic to the stance on the issue taken by the debtors. The debtors had argued that the plan injunction “arises in” the chapter 11 cases and that the claims subject to the shareholder release have a “conceivable effect” on the estate, supporting the bankruptcy court’s “related to” jurisdiction.
Judge McMahon concluded, “It may not sound like it, but I have a tremendous appreciation for what this plan is intended to do. But if it’s going to be affirmed, it’s going to be affirmed because we got it right.”
Earlier in the proceedings, the court heard arguments from appellants calling on the court to overturn approval of the plan and the Sackler release: the U.S. Trustee, objecting states and the District of Columbia, certain Canadian creditors and
pro se claimants as well as the United States, which submitted an
amicus brief in the form of a “statement of interest.” The appellees speaking in support of the plan included the UCC, the ad hoc committee of governmental and other litigation claimants, the MSGE group, the ad hoc group of individual victims and the ad hoc committee of NAS children. Counsel for the Sackler parties responded to the court’s questions about potential abuse of the bankruptcy process.
The parties’ remarks aligned with their
briefs, with the court highlighting various topics:
- During a colloquy with Noah Purcell, solicitor general for the state of Washington, Judge McMahon said that she has “a real problem telling who put up the money” in the Sackler settlement. She queried whether all members of the Sackler family were contributing to the settlement.
- Purcell argued that the Sacklers extracted distributions from Purdue, steered the company into bankruptcy and used the bankruptcy to protect themselves. “If that is not abuse of the bankruptcy process, it’s unclear what would be” and the court should reverse the confirmation ruling on that ground alone, he asserted. “And if I reverse on that ground alone, then I wouldn't have to do any more work, right?” the judge joked.
- The court repeatedly asked counsel to address a hypothetical situation she described in last week’s list of questions for oral argument: “Am I correct that the release as it was ultimately approved by Judge Drain does not cover a claim against Susie Sackler (a person I invented to stand for all the Sacklers) if she gave her roommate who had a backache a bottle of Oxycontin from her private store and the roommate became addicted as a result?” Sumi Sakata from the Office of the U.S. Trustee said it depended on whether the claim involved conduct by Purdue that was “legally relevant.” Counsel for the debtors and for side A of the Sackler family said that the roommate’s claim would not be released under the shareholder release.
- Judge McMahon called the Second Circuit’s 2005 Metromedia opinion “a nice law review article” that is “not particularly helpful as precedent.” The opinion warned of third-party releases being subject to “abuse” without defining what would constitute abuse, she noted. The judge said that in her view, “Manville III, IV” - not Metromedia - “is governing law in this circuit.”