Opioids and Bankruptcy

 Published: March 31, 2021

By: Anthony L. DeWitt, JD, RRT, FAARC



Unless you’ve not been getting good airflow under your surgical mask, you’re well aware of what has been termed the “opioid epidemic.” Most therapists have seen at least one case where a person came in through the ER in respiratory arrest and required Narcan or similar interventions. Indeed, most therapists have probably seen patients for whom Narcan came too late to do any good. Across the country, politicians, health care leaders, and activists have sought to turn back the wave of deaths that accompanied easy access to high-potency pain killers.

One of the leading purveyors of high-potency opioids was Purdue Pharmaceuticals. With a significant portion of its stock held by the Sackler family, the company fought the opioid cases as best it could for several years. But like the body’s defenses to opioids themselves, at some point, the company’s defenses were simply overwhelmed.

Nearly everyone believes that bankruptcy is a bad thing and something to be avoided. In most cases, particularly for individuals, it is. A person who takes bankruptcy can have it hang on their credit report for up to 10 years, making it hard to get a loan, finance a car, and in some cases, get a job. But the result is not always that sad for businesses owing to a type of bankruptcy called Chapter 11. Under Chapter 11, a business gets to reorganize its debts and escape even millions of dollars in lawsuit judgments with a simple filing in federal court. At that point, an estate consisting of all the Debtor’s assets is created. Every penny they have and every penny owed to them is in that estate. For a period of time that is often extended, something called the “automatic stay” prevents anyone from suing them. It prevents anyone with an active case against them from moving forward. Creditors (including people who have lawsuit-based claims) are encouraged to file claims against that estate.

Let’s use an example of two mythical plaintiffs Paul and Sherry. Paul gets an opioid prescription on January 5, and so does Sherry. Paul begins taking more and more of the drug, and on February 1, he overdoses and dies. Sherry has the same problem, but she doesn’t overdose and die until February 3. On February 2, the pharmaceutical maker takes bankruptcy. Paul’s claim will be handled as a claim against the bankruptcy estate. Suppose the Debtor company is declared hopelessly insolvent. In that case, Paul’s family may not see a very good recovery because the bankruptcy made his family’s claim something that can only be resolved in bankruptcy.


Sherry’s family is luckier. Their claim will be against the reorganized entity. But even that might not wind up working out for her family. It may take more than a year to get to court, and even after that, it may wind up having to take a recovery from a fund of money set aside for that purpose.

In recent years bankrupt entities have sought injunctions to stop lawsuits, and that’s exactly what has happened in most opioid cases. Even people with good claims have had to wait while the courts work through the bankruptcy process.

The Debtor company gets a chance to reorganize. It seeks out companies and lenders that will lend it money to “restructure” and sets up a payment schedule to pay back (usually for pennies on the dollar) those who hold claims against them. Lenders sometimes see only 72% of their loans repaid, while “unsecured creditors” (which is what a lawsuit creditor is) often must settle for only 21% of their claim. And because bankruptcy treats secured debt (loans with collateral, for example) to a higher priority, often this debt recovers 100% of its claim, leaving other lower-priority creditors with nothing. The company gets a “discharge” of all the debts not paid in full. If a company owes you $100 as an unsecured creditor and pays you only $21, that may be all you will ever get.

In opioid cases, there is a class of creditors called “future claimants.” These individuals are people who will be injured, or who have suffered injury, but who have not yet sued. Usually, the courts appoint a representative for these folks to set aside some recovery for them.

In the opioid litigation, the defendant Debtors are setting up trusts. These are funds of money set aside to pay the victims based on their claims. In the Purdue case, the funds for opioid lawsuit claimants are valued between $700 million and $750 million. That averages out to about $48,000 per claimant.

Many companies have come through bankruptcy and done well. General Motors took bankruptcy several years ago and emerged as a vibrant force in the auto industry. Apple went through bankruptcy and came back to create the iPhone. Marvel Entertainment, of comic book fame, also reorganized successfully.

Sometimes a company simply can’t get financing, or its debts mount too quickly, and it cannot reorganize. Enron, Texaco, and Lehman Brothers are examples of such companies. When that happens, as it did to those companies, the judge can convert the bankruptcy to a Chapter 7 and liquidate the company by selling off its assets at auction. While the bankruptcy system’s goal is to save the company (and the jobs for its workers), sometimes that does not work out.

Email newsroom@aarc.org with questions or comments, we’d love to hear from you.

Anthony is an attorney and a partner in the firm Bartimus, Frickleton, Robertson, PC, and resides in Opelika, AL. He also published two books and numerous legal journal articles. This article is not a substitute for legal advice.

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