Does Purdue Have a 203 N. LaSalle Problem?


I was really struck by a line in the Purdue Pharma plan objection of the Distributors, Manufacturers and Pharmacies (DMP). They called the Sacklers mere "out-of-the-money shareholders."  That's 100% accurate. And it has important implications, one of which is in their objection, and one of which is not.  The point the DMP were making is that the release of the Sacklers has no reorganizational benefit to Purdue—it does nothing for Purdue's business.  This isn't like a release of litigation against folks who will remain officers and directors of a reorganized company and will be distracted by on-going litigation.  It's a good point.  But I think there's actually a stronger one. 

If one thinks of the Sacklers as out-of-the-money shareholders, then their release creates a 203 N. LaSalle Street P'Ship problem. 

The Sacklers are arguably getting their release on account of being shareholders. Heck, it's called the "shareholder" release!  If there is a cramdown confirmation, then the absolute priority rule applies. And that means that unless all creditors are paid in full, shareholders cannot get even a cent of value. The releases of the Sacklers certainly have a lot of value—the best evidence is that the Sacklers are willing to pay $4.5 billion for them. 

Under 203 N. LaSalle, if a plan proposes to have a contribution of "new value" from shareholders in exchange for any property, not just in exchange for the stock of the reorganized debtor, there must be a market test.  The shareholders cannot have an exclusive right to pay new value.  That is exactly the problem here.  The Sacklers are contributing new value—$4.5 billion—in exchange for property—litigation claims. The Sacklers are basically buying back the litigation claims Purdue has against them. That requires some sort of a market test of value if there is a cramdown confirmation.  Indeed, I think this requirement applies to all shareholder releases in cramdown plans under 203 N. LaSalle.

What would a market test look like?  How about this:  take Purdue's claims against the Sacklers (basically a bunch of fraudulent transfer claims), put them in a litigation trust, and auction off the beneficial interests (and governance rights) of that trust.  I've got no doubts that in our world of litigation finance and distressed debt investing that there would be plenty of appetite.  Of course, the Sacklers could themselves bid, which is exactly the point. If they prevailed, they'd have paid market value for their release, rather than what Purdue (facing a lapse of plan exclusivity) and the UCC deemed an acceptable value.

Now, 203 N. LaSalle only applies if there is a cramdown confirmation. No impaired class voted to reject the plan, so it would seem that there's no cramdown. But there's a catch. The US government, which is in a class by itself, failed to vote its claim. Purdue's disclosure statement says that in such circumstances, Purdue will argue that it is deemed to accept. That's the position the 10th Circuit took in Ruti-Sweetwater, and another bankruptcy judge in the Southern District of New York followed that ruling in Adelphia.

There's a problematic fact, however, for following Ruti-Sweetwater and Adelphia (besides the fact that they're wrongly decided--it's ridiculous to infer acceptance from inaction). The US government filed a "statement" that took issue with the legality of the releases in the plan.  It wasn't styled an objection, but I don't know if one can fairly say that a sophisticated creditor like the US government that makes a court filing claiming that a plan contains an illegal element is deemed to accept a plan by inaction. If the US gov't's claim isn't deemed to have accepted the plan, then it is a cramdown confirmation, and I sure as heck hope some creditor raises the 203 N. LaSalle problem.