Sackler’s immunity and Texas 2-step could tip bankruptcy scales away from victims

Billionaire owners of OxyContin maker Purdue Pharma LP and timber giant Georgia-Pacific are in high-stakes legal battles to rid themselves of billions of dollars in bankruptcy liabilities – the first concerning their company’s alleged role in the opioid crisis in the United States and the second for 64,000 asbestos-related claims.

If they are successful, it threatens to reduce the bargaining power of alleged victims of corporate abuse for years to come. The result could also benefit Johnson & Johnson, which is leading tens of thousands of health-related lawsuits.

In New York, the American bankruptcy judge, Robert Drain, could rule as soon as Thursday on the advisability of granting the Sackler family a broad immunity against all the current and future lawsuits related to the addictive painkiller. Meanwhile, in North Carolina, Georgia-Pacific is trying to use a strategy dubbed the “Texas Two-Step” to get rid of lawsuits related to asbestos, an industrial product that causes lung cancer, by siphoning them off. to a unit.

The two cases could tip bankruptcy rules in favor of businesses and away from people trying to sue, said Adam J. Levitin, a research professor at Georgetown University Law Center, in an interview.

“They are trying to get the benefits of bankruptcy on the cheap,” he said.

Companies have used bankruptcy courts to consolidate their debts since the 1980s, applying the restructuring process to eliminate tens of thousands of lawsuits for less than the cost of arguing claims individually in court. The recent cases threaten to set a precedent that other business owners could use as a legal hammer against victims in negotiations.

“The company is going to say, ‘This is the offer we’re going to make to you. If you’re not playing well, we’re going to use the bankruptcy process to, at the very least, drag this out for years. Now we all know how it will turn out. It’s going to mean lower recoveries for crime victims, ”Levitin said.

Purdue is asking a federal court to approve a landmark settlement that would turn over all of its assets, plus more than $ 4 billion from the Sacklers, to cities, states and counties battling the opioid crisis in the United States. To involve the family, the court must agree to permanently isolate the owners from the opioid lawsuits.

In a written statement to the court, David Sackler made it clear that his family will not support the plan or pay the settlement amount “unless all civil claims against us for Purdue’s opioid-related activities are fully, definitively and definitively released ”.

Even after Purdue slashed the statutory releases requested by the Sacklers this week, the U.S. Trustee, a federal corporate bankruptcy watchdog, continued to oppose statutory immunity, arguing it is too broad. and vague.

Representatives for members of the Sackler family declined to comment or did not respond to requests for comment. The family has previously denied committing any wrongdoing.

Texas in two steps

In the asbestos business, a strategy emerged a few years ago known as Texas Two-Step. In the first stage, Georgia-Pacific, which is owned by Texas-incorporated Koch Industries Inc., according to court documents. There, a law favorable to companies allows a company to proceed with a so-called separative merger to divide itself into two parts.

In one entity, Georgia-Pacific retained its most valuable assets, including its operating activities. The other side struggled with 64,000 asbestos-related claims and assets worth around $ 177 million and then filed for bankruptcy, court records show.

The restructuring has left the new, smaller company, Bestwall LLC, “a hollow shell, with no employees, no operations, no ongoing business,” creditors who attacked the maneuver in a filing said. The $ 177 million is “almost unimportant asset value compared to what the former GP should.”

Georgia-Pacific took issue with the idea that its strategy would make it harder for asbestos victims to hold companies accountable. The company has agreed to make up any shortfall if Bestwall is unable to pay the alleged asbestos victims, Georgia-Pacific representative Greg Guest said in an email. In addition, Bestwall offered to put $ 1 billion into a trust for victims, he said.

“Bestwall has filed for bankruptcy to fairly and permanently resolve current and future asbestos claims,” ​​said Guest. “Bestwall has worked and will continue to work with current and future claimant representatives – who are appointed by the court – to reach agreement on a comprehensive resolution that will pay legitimate asbestos claims in full.”

The case is months away from resolution, as lawyers for asbestos victims and the company are battling over obscure points of law.

Meanwhile, asbestos victims who blame talc in baby powder made by J&J were so concerned about the Texas Two-Step that they asked a federal judge as a precautionary measure to prevent the commodity giant consumer to do so. J&J potentially faces billions of lawsuits from people claiming to have developed ovarian cancer from baby powder contaminated with asbestos.

J&J should not be prevented from using a legal strategy that he believes will benefit him, firm lawyer Theodore E. Tsekerides said at a court hearing on Tuesday. Victims’ lawyers mistakenly assume that J&J will somehow hurt them with whatever tactics he chooses to employ in the future.

“They are prejudging their fight,” Tsekerides told a judge in Wilmington, Delaware on Tuesday. “They say everything we do is wrong.”

US bankruptcy judge Laurie Selber Silverstein has said she will decide in the coming days to temporarily ban J&J from using the strategy.

“Johnson & Johnson hasn’t really denied that this is a possibility,” Silverstein said in court. “There is no denying that a Texas Two-Step … is within the realm of the possible.”

The company has won more than half a dozen of these cases in a lawsuit outside bankruptcy court in recent years, but it has also lost a few, including a $ 2.1 billion award. in 2018 to 20 women who continued in Saint-Louis.

Restrictive provisions

When David Sackler spoke in Purdue’s bankruptcy lawsuit last week, he said his family could only be free from all of their legal issues related to the maker of OxyContin if they were given full immunity in the process. part of the case.

“I don’t know of any other forum that would allow this kind of comprehensive solution,” he told the court.

Indeed, the keystone in seeking redress from future bankruptcy lawsuits often comes down to so-called third-party discharges, which increases the stakes for landmark cases that risk tilting the bank. balance against the victims.

These releases have the ability to force a settlement on the recalcitrant. Once 75 percent of creditors participating in a vote agree to back a deal, anyone can be dragged out if the judge gives the green light. Outside of bankruptcy, there is no way to force someone to settle a case if they ask to be tried.

“This is the only forum that can compel future claim holders to accept payments,” said former bankruptcy judge Judith K. Fitzgerald, who oversaw the reorganization of specialty chemicals maker WR Grace & Co. ., one of the oldest asbestos-related bankruptcy cases. in history.

Bloomberg News


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