Purdue's Poison Pill: The Breakdown of Chapter 11's Checks and Balances
78 Pages Posted: 27 May 2021 Last revised: 7 Aug 2021
Date Written: July 23, 2021
Purdue Pharma, the bankruptcy drug manufacturer at the center of the opioid crisis, entered into a controversial settlement of its civil and criminal liability for opioid harms with the Department of Justice. The settlement contained an unusual feature—a “poison pill,” that effectively prevents creditors from objecting to any Purdue restructuring: if creditors exercise their rights and push for Purdue’s liquidation, they will forfeit all of Purdue’s value to the Department of Justice.
While Purdue’s poison pill was unusual in its details, it is representative of the hardball played in contemporary chapter 11 cases. This Article argues that Purdue illustrates how the procedural checks and balances that make chapter 11 bankruptcy a fair and credible system have broken down. Purdue represents the confluence of three trends in bankruptcy: increasingly aggressive and coercive restructuring techniques that lock in the determination of subsequent decisions in the bankruptcy; the lack of appellate review for many key bankruptcy issues; and the rise of “judge-shopping” facilitated by bankruptcy courts’ local rules that enable debtors to handpick their judge, such that over half of all large, public company bankruptcy filings now end up before just three judges.
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 enables 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
Suggested Citation: Suggested Citation