The Purdue bankruptcy plan was approved. Will it get derailed by appeals?

Although a bankruptcy court has approved a settlement to funnel billions of dollars to pay for the harm caused by Purdue Pharma’s OxyContin painkiller, a key question remains: Will the plan actually be implemented?

After an extraordinary six-hour monologue on Wednesday in which U.S. Bankruptcy Judge Robert Drain took pains to explain his reasons for endorsing the deal, it quickly became apparent that his ruling would be appealed by the U.S. Department of Justice’s trustee and several state attorneys general over a contentious issue that plagued the case for months.

Broadly speaking, the deal calls for some members of the Sackler family, which controlled Purdue, to contribute more than $4.3 billion over nearly a decade to compensate individuals, state and local governments, and tribal communities for the cost of the opioid crisis. And Purdue will be transformed into a new entity that will capture sales of OxyContin and other medicines, but without the involvement of any Sacklers.

But a crucial element of the settlement continues to spark controversy.

The plan grants Sackler family members and hundreds of their associates immunity from future lawsuits, even though — unlike Purdue — they did not file for bankruptcy protection. This has sparked complaints that the immunity is too broad. Some of the Sacklers, for their part, insisted that a deal would not be possible unless they were released from all future liability related to the harm caused by the addictive prescription painkiller.

“The breadth of the release for the family is the sticking point,” said Erik Gordon, a business and law professor at the University of Michigan. “Here’s how bankruptcy works. If you want to be released from liability, you file for bankruptcy and then a court decides how your assets should be fairly distributed among people who filed claims against you. But the Sacklers haven’t filed bankruptcy.”

So now, appeals are planned — yet it remains unclear whether they will succeed.

For one thing, there are important procedural matters.

Bankruptcy appeals do not usually go directly to a federal appeals court, but instead are filed with a U.S. District Court, which may or may not make the case a priority, according to Melissa Jacoby, a professor at the University of North Carolina who specializes in bankruptcy law. How a district court will decide the case is unclear, but she noted a separate procedure must be followed to leapfrog a district court and go before an appeals court.

Even if the case does reach an appeals court, timing becomes critical. How so? Well, by the time an appeal is heard, the bankruptcy settlement may have gone into effect — payments may have started and other arrangements may be underway. At that point, an appeals court might be reluctant to issue a ruling to overturn a settlement, because such an effort could be moot.

“If that happens, the appeals courts are known to say that there might have been a problem with the bankruptcy plan, but they’re not going to unscramble the eggs,” explained Jonathan Lipson, a professor at the Beasley School of Law at Temple University, who specializes in bankruptcy matters.

However, Lipson also noted that the Purdue case dragged on for two years, a long time for a bankruptcy decision. Meanwhile, the Sackler family members have nine years to pay out $4.3 billion. To an extent, this suggests there could be time to review an appeal. “While the need is urgent, they don’t seem to act that way,” he said.

If an appeal does get that far, the next issue is whether the appeals court — which, in this instance, would be the U.S. Court of Appeals for the Second Circuit — will bless the approval or decide that Drain overstepped his bounds by endorsing the far-reaching immunity.

“Generally speaking, a bankruptcy court has extremely broad authority and the scope of what it can do is much more wide-sweeping than many people imagine,” said Lindsey Simon, an assistant professor at the University of Georgia School of Law, who specializes in bankruptcy. “I think Drain has looked very carefully at the circumstances of this case and I’d be surprised if a higher court says his ruling is outside of what has been accepted in the Second Circuit.”

Lipson added, though, that the jurisdictional issues are complicated and uncertain. “These are hard arguments,” he said. “I can see a skeptical appellate court saying a bankruptcy court doesn’t have that much power.”

There is also debate about the extent of the immunity itself, given that the Sackler family members did not file for bankruptcy protection. Simon, for instance, believes it is likely that the confirmed Purdue plan will be upheld on appeal.

Jacoby, however, suggested that if the appeals court “were to hear the case on its merits, it is possible they would have concerns about the third-party releases (providing immunity), although that is not guaranteed. The Second Circuit has not been as enthusiastic about third-party releases as the pleadings in (the) Purdue Pharma (case) sometimes suggest.”

The issue has drawn the attention of some lawmakers, meanwhile. Earlier this year, two House Democrats introduced a bill that would prevent people who have not filed for bankruptcy from being released from lawsuits brought by local communities or the U.S. government. The lawmakers complained the Sacklers are being allowed to use a “loophole” in bankruptcy law.

“In some important ways, this is a very unusual case,” said Gordon. “I don’t think we’re done.”