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The Sacklers Try to Strong Arm the Non-Consenting States with a Threat of Sanctions

posted by Adam Levitin

Every time I think the Purdue Pharma bankruptcy couldn't get crazier, it does. The latest development is that some of the Sacklers (the Raymond branch) are seeking sanctions against five of the holdout non-consenting states for allegedly false statements in the states' proofs of claim. It's a blatant litigation tactic. The clear motivation for this motion is to bully the non-consenting states into dropping their opposition to the plan (and the release of the Sacklers) in exchange for the Sacklers dropping the sanctions motion. It’s absolutely outrageous.

The sanctions motion hasn't actually been docketed, but it was sent out to a wide distribution list. The motion states that it:

will not be filed with, or presented to, the Court unless, within 21 days after service of the motion, the States fail to withdraw or appropriately correct the unsupported factual contentions identified below.

In other words, the non-consenting states have until four days before the confirmation hearing to make nice with the Raymond Sacklers or face a sanctions motion.

Beyond being a crass and transparent litigation tactic, the motion strikes me as poorly thought through.

First, I think it’s clear that the motion was not brought in good faith. I hope the non-consenting states consider filing a countermotion for sanctions. The best evidence that the motion was not brought in good faith is that the Sacklers are only seeking to sanction the non-consenting states. The same allegedly false allegations appear in the proofs of claim of many of the consenting states, yet not one has been asked to amend its proof of claim as far as I can tell.  The only states the Sacklers are going after are ones that haven’t buckled. That alone shows that this is brought in bad faith.

Second, the alleged misstatements do not appear in any way material to the proofs of claim. For example, the first allegation the Sacklers make is that California has mischaracterized the nature of Marianna Sackler’s involvement in Purdue Pharma. Let’s assume that the Sacklers are correct.  So what?  The precise nature of Marianna Sackler’s involvement with Purdue has absolutely zero relevance to Purdue’s liability to California. It’s immaterial to the proof of claim. It’s relevant to Marianna Sackler’s liability to California, but Marianna Sackler isn’t a debtor. The Sacklers can’t have it both ways—if they’re not going to go through the bankruptcy crucible, they cannot complain about supposed factual inaccuracies about them in proofs of claim against the debtor.

Third, there’s a real risk that the states will call the Sacklers bluff and say “bring it.”  Do the Sacklers really want to have a trial to resolve these motions?  That would mean getting deposed and being forced to testify under oath. I cannot imagine that the Sacklers want to risk that for a second. For example, I would think that my home state attorney general would love to have the chance to try whether:

David, Jonathan or Richard Sackler “participated in,” “directed,” or were in any sense “architects” of Purdue marketing during the Relevant Period.

That just opens the door to trying the role of the Sacklers in managing Purdue. Not the issue the Sacklers want before any court. And if the Sacklers push this, it might result in a delay of the confirmation hearing.  Indeed, this just underscores that the Sacklers aren't serious about this sanctions motion; it's just a tactic to try to coerce a settlement.

Fourth, I am not even sure that the Sacklers have the law on their side. The Sacklers present precious little evidence that misstatements in a proof of claim are grounds for sanctions. The only case they cite from the Southern District of New York was about a mortgage claim in a consumer 13 where there was no chain of title on the mortgage, but the attorney signed the proof of claim indicating that he had reviewed it. In other words, there was a problem that went to the underlying validity of the proof of claim. There’s no such problem here. To wit, imagine that the proof of claim included a statement that it rained last Tuesday, when in fact it was sunny. Even if that statement was knowingly false when made, I have trouble seeing it as grounds for sanctions. There’s a duty of candor to the courts, but I think it has to be tempered with a materiality requirement.

This kind of strong arm crap might work in a squabble between hedge funds, but it’s a different matter when dealing with state attorneys general, and the Sacklers attorneys are not doing them any favors with this latest move.  I’m not sure the Sacklers or their attorneys fully understand the public dimension of this case or the outrage that the Sacklers don’t seem in the least bit contrite for their role in the opioid crisis.

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