Purdue's Poison Pill: The Breakdown of Chapter 11's Checks and Balances

Abstract

Purdue Pharma, the bankrupt drug manufacturer at the center of the opioid crisis, settled its civil and criminal liability for opioid harms with the Department of Justice in a deal that contained a “poison pill” that prevented creditors from objecting to any subsequent plan of reor-ganization for Purdue: if creditors exercised their rights and pushed for Purdue’s liquidation, they would forfeit all of Purdue’s value to the De-partment of Justice.

This Article argues that Purdue illustrates how the procedural checks and balances that make Chapter 11 bankruptcy a fair and credi-ble system have broken down. Purdue represents the confluence of three trends in bankruptcy: (1) increasingly aggressive and coercive restruc-turing techniques like the poison pill that lock in the determination of subsequent decisions in the bankruptcy; (2) the lack of appellate review for many key bankruptcy issues; and (3) the rise of “judge-shopping,” facilitated by bankruptcy courts’ local rules that enable debtors to handpick their judge.

While each of these trends is problematic in its own right, standing alone they do not undermine the fundamental fairness of the bankruptcy system. Their convergence, however, results in a broken legal system in which a single non-Article III judge of the debtor’s choosing is the only real check on what the debtor can do in Chapter 11. This situation ena-bles debtors to push through overreaching restructuring transactions that benefit favored creditors and allies at the expense of disfavored creditors, like the opioid victims in Purdue.

Keywords: bankruptcy, forum shopping, judge shopping, opioids, non-debtor releases, third-party releases, channeling injunction, restructuring support agreement, RSA, DIP financing, prepackaged plan, asset sales, stalking horse, equitable mootness, final order

JEL Classification: G33, K22