Dunaway v. Purdue Pharm. L.P. (In re Purdue Pharm. L.P.)

619 B.R. 38

IN RE: PURDUE PHARMACEUTICALS L.P., et al., Debtors.

Bryan C. Dunaway., et al., Appellants,

v.Purdue Pharmaceuticals L.P., et al., Appellees.

No. 19-23649-RDD (Jointly Administered)

Bankruptcy Appeals No. 19 Civ. 10941 (CM)

No. 20 Civ. 03048 (CM) (Jointly Administered)

Adv. Proc. No. 19-08289 (RDD)

United States District Court, S.D. New York.

Signed August 11, 2020

Katherine Stadler, Godfrey & Kahn, S.C., Madison, WI, for Appellants.

Benjamin S. Kaminetzky, Gerard Xavier McCarthy, James Irving McClammy, Marc Joseph Tobak, Marshall Scott Huebner, Davis Polk & Wardwell LLP, Ira S. Dizengoff, Mitchell Patrick Hurley, Sara Lynne Brauner, Erik Preis, Akin Gump Strauss Hauer & Feld LLP, New York, NY, James Edward Tysse, Rachel Bayefsky, Z.W. Julius Chen, Akin Gump Strauss Hauer & Feld LLP, Washington, DC, for Appellees.

DECISION AND ORDER AFFIRMING THE BANKRUPTCY COURT'S PRELIMINARTY INJUNCTIONS

McMahon, C.J.

Purdue Pharmaceutical, L.P. and certain of its affiliated entities and debtors (together, the "Debtors") filed for bankruptcy in this district on September 15, 2019. In re Purdue Pharmaceuticals L.P., et al. , No. 19-23649 (Bankr. S.D.N.Y.). At the time, the Debtors were facing over 2,600 governmental enforcement actions and private lawsuits in state and federal courts (the "Pending Actions"), each of which alleged that Purdue's manufacture, promotion, and sale of prescription painkillers contributed to the ongoing opioid crisis that has killed hundreds of thousands and left millions more struggling with addiction.

The federal actions against the Debtors are consolidated into a single multi-district litigation, see In re Nat'l Prescription Opiate Litig. , 332 F.R.D. 532 (N.D. Ohio 2019), while the state actions remain scattered across the country. There are also ongoing investigations by both law enforcement and regulatory agencies that have yet to culminate into either civil or criminal actions, but may in the near future. The bankruptcy was designed to consolidate all of these proceedings against the Debtors, as well as the claims against certain non-debtors, including Purdue's former or current owners, directors, officers, and other associated entities (each a "Related Party"; together, the "Related Parties"), so that the parties could work towards a global settlement in a single forum.

The instant appeal arises from the adversary proceeding Purdue Pharma, L.P., et al. v. Commonwealth of Massachusetts, et al. , Adv. Pro. No. 19-08289 (the "Adversary Proceeding"), which the Debtors filed in the Bankruptcy Court in order to temporarily halt the Pending Actions against them and the Related Parties. The Debtors argued that the injunction was necessary to allow Purdue's management and other stakeholders to focus on developing a confirmable plan of reorganization that would include a reasonable settlement for all of the parties to the Pending Actions. On November 6, 2019, the Bankruptcy Court, the Hon. Robert Drain, U.S.B.J., granted the Debtors' motion for an order enjoining all of governmental and private plaintiffs from continuing or commencing any judicial, administrative, or investigative actions, as well as any other enforcement proceeding, against the Debtors or the non-debtor Related Parties. (A341-347; the "Preliminary Injunction".)¹

Appellants are five district attorneys from the state of Tennessee, and Baby Doe, an infant born dependent on opioids, each of whom is a plaintiff in the lawsuit Dunaway, et al. v. Purdue Pharma L.P. , No. CC1-2018-cv-6347 (the "Dunaway Action"), which is currently stayed in the Circuit Court of Cumberland County, Tennessee, as a result of the Preliminary Injunction. The Dunaway Action seeks damages under the Tennessee Drug Dealer Liability Act, Tenn. Code Ann. § 29-38-101, et seq. (the "TDDLA") from, inter alia , Purdue and Purdue's former president and co-chairman, non-debtor Dr. Richard Sackler, whose family has controlled a majority of the company's stock for generations.

Appellants ask this Court to vacate the injunction as to their claims solely against Dr. Sackler in the Dunaway Action, on the grounds that (1) the Bankruptcy Court lacks subject matter jurisdiction over a government enforcement action between state officials and a third party non-debtor, and, (2) even if the court did enjoy such authority, the record evidence before Judge Drain was insufficient to warrant granting Debtors' motion for a preliminary injunction. As a matter of equity, the Appellants implore this Court to reverse the unprecedented protections that have been afforded to the Related Parties in the form of injunctive relief, claiming that the bankruptcy court has effectively extended immunity to individuals responsible for a nationwide crisis of addiction and death.

For the reasons that follow, the Bankruptcy Court's order is AFFIRMED.

BACKGROUND

A. The TDDLA and the Dunaway Action

The TDDLA provides a right of action for damages against "[any] person who knowingly participates in the illegal drug market within [the] state [of Tennessee]." Tenn. Code Ann. § 29-38-105(a). Persons or entities found liable under the TDDLA may bring a claim for contribution "against another person subject to liability under this chapter." Tenn. Code Ann. § 29-38-112. However, the statute forbids third parties from paying damages awarded under the TDDLA "on behalf of an insured under a contract of insurance or indemnification." Tenn. Code Ann. § 29-38-108. The goal of the statute is "to shift, to the extent possible, the cost of the damage caused by the existence of the illegal drug market in a community to those who illegally profit from that market." Tenn. Code Ann. § 29-38-102. The complaint in the Dunaway Action alleges that Purdue and Dr. Sackler were two such profiteers.

Appellants added Dr. Sackler as a defendant in the Dunaway Action on April 1, 2019 (see Adv. Dkt. 43 Ex. 3, Second Amended Complaint) and moved for summary judgment on the question of his liability on August 6, 2019, (see A734). In their memorandum of law in support of the summary judgment motion, Appellants argue that, by failing to respond to written requests for admission, Dr. Sackler is deemed to have admitted that he "directed Purdue to distribute opioids unlawfully in Tennessee," that "he personally participated in the illegal drug market in Tennessee from 2010 to the present," and that he did so knowingly. (A748); see also Tenn. Dep't of Human Servs. v. Barbee , 714 S.W.2d 263, 266 (Tenn. 1986) (citing Tenn. R. Civ. P. 36.01 ).

The Dunaway Plaintiffs did not seek summary judgment on the question of damages owed by Dr. Sackler, nor did they move for summary judgment against any other Debtor or non-debtor connected to Purdue.

B. The Debtors initiate the adversary proceeding and seek injunctive relief based on their progress towards a global settlement.

The Debtors declared bankruptcy on September 15, 2019, almost six months after Sackler was sued in the Tennessee state court. Three days later, they filed the Adversary Proceeding, naming all of the governmental actors and private plaintiffs that were then seeking redress against any of the Debtors or Related Parties as defendants in the Pending Actions. (A161.) The Debtors argued that continued prosecution, and Purdue's continued defense, of the Pending Actions "[would] eviscerate the fundamental goals of these bankruptcy cases" and would lead to "the value of the [Debtors'] estates ... be[ing] rapidly eroded by the staggering direct and indirect costs of litigation." (A187.)

The Debtors sought a 270-day injunction of the Pending Actions, arguing that the Bankruptcy Court had the authority under 11 U.S.C. § 105(a) to "enjoin suits that might impede the reorganization process." (A198.) According to the Debtors, that meant the Bankruptcy Court had the authority to, and should, enjoin the claims against the Debtors as well as the Related Parties, because claims against those non-debtors "are based on conduct substantially identical to, and inextricably intertwined with, that alleged to have been engaged in by the Debtors." (A203.) This overlap justified injunctive relief to encourage the settlement negotiations, so that the Debtors might avoid the "material risk" presented by the Related Party Actions "that there would be findings of law or fact with respect to the Related Party Claims that would, at a minimum, create an adverse record against the Debtors." (Id. )

As evidence of their progress in negotiations prior to their Motion, the Debtors provided the Bankruptcy Court with a term sheet outlining a proposed settlement between themselves, the Plaintiffs' Executive Committee appointed in the multidistrict litigation, the state attorneys general, and other territorial law enforcement officials. (A188; see also SA003-014; Bkr. Dkt. 257, hereinafter, the "Settlement Structure".) The Settlement Structure was, and is, an unexecuted term sheet, which proposes, inter alia , that "100% of the assets or equity of Purdue – which together with its subsidiaries constitutes 100% of Purdue's U.S. pharmaceutical business – will be placed under a trust ... for the benefit of the claimants and the U.S. public." (SA006.) Under the Settlement Structure, in exchange for a full release for Debtors and Related parties alike, the Shareholder Parties (a group comprising the Debtors and the Official Committee of Unsecured Creditors, but not Dr. Sackler) would make a contribution of $3 billion to a settlement fund over seven years. (SA011.) To finance their contribution, the Shareholder Parties would promise to sell certain divisions of Purdue that operate abroad, which are owned, directly or indirectly, by members of the Sackler Family. (SA014; the "IACs.") For that reason, the Settlement Structure, if executed, would prohibit certain members of the Sackler Family, including Dr. Sackler, from "tak[ing] any action with respect to any material amount of his [or] her ... property ... with the intent or material effect...