(This December 18 story removes extraneous word from the first paragraph)
By Tom Hals
(Reuters) - OxyContin-maker Purdue Pharma could be years away from paying billions of dollars to address the U.S. opioid crisis after a judge blew up a deal that gave legal immunity to the Sackler family that owned the company, people close to the negotiations said.
In a surprise ruling on Thursday, U.S. District Judge Colleen McMahon in Manhattan found that a bankruptcy judge overstepped his authority by approving the plan that gave the Sacklers immunity in return for $4.5 billion for those harmed by Purdue.
The deal had been hammered out over two years by U.S. states, local governments and others who had filed thousands of lawsuits accusing Purdue and the Sacklers of aggressively marketing OxyContin while downplaying its addiction and overdose risks.
The company and family members have denied the allegations.
Purdue said it will appeal McMahon's ruling, which it said would not impact its operations but will delay or even end the ability of states and others to receive billions of dollars.
Representatives for the Sackler family did not immediately respond to a request for comment.
Eight hold-out states and the U.S. Department of Justice's bankruptcy watchdog had challenged the plan in part because of the legal protections it granted the Sacklers. The appeal process won't end with McMahon, who encouraged the 2nd U.S. Circuit Court of Appeals to review her decision.
The family has come under scrutiny for withdrawing $10 billion from Purdue between 2008 and 2017.
The Sacklers have said almost half the money went to paying taxes, but opponents of the plan allege the withdrawals strengthened the family's hand in bankruptcy negotiations and gave them leverage to demand legal immunity.
Purdue has been estimated to be worth around $2 billion without the Sackler contribution, making their participation critical.
Those involved in the case doubt a new deal could be agreed before the appeals court weighs in, a process that could take up to 18 months given the importance of the issue of so-called nondebtor releases in corporate bankruptcy cases.
Ryan Hampton, who served through most of the bankruptcy as the co-chair of the unsecured creditors committee, a key player in the deal negotiations, said there were talks earlier this year on a plan that excluded a Sackler contribution.
"It was almost dead on arrival," he said. "It will very hard to negotiate something before the 2nd Circuit decides because I've seen it live and in-person trying to negotiate a deal without a Sackler contribution," he said.
If the plan had gone into effect, it would have started providing funds to state and local governments and others to address the damage caused to communities reeling from the opioid epidemic, which has claimed 500,000 lives since 1999.
The appeals might not end at the 2nd Circuit, as Washington's attorney general has vowed to take the issue to the U.S. Supreme Court, a process that could add another year.
Even then, resolving the question of Sackler immunity might require sending the entire deal negotiation back to the bankruptcy court to start over.
There is also the possibility the Sacklers kick in more money, something the family did during the bankruptcy process to win over about a dozen states.
"Maybe the Sacklers put up more money and maybe the objecting parties drop the objections and we reach unanimity," said Scott Bickford, who represented a committee of children born dependent on opioids, a plan supporter.
The bankruptcy court judge, Robert Drain, said he approved the plan including immunity for the family in part because it was unclear whether the Sacklers could be held liable and uncertain if judgments against them could be collected.
The family has used trusts organized in the Bailiwick of Jersey, in the Channel Islands between England and France, among other jurisdictions, to hold their wealth, according to McMahon's opinion.
Bickford said any plan without Sackler funds leaves Purdue with less money and victims with difficult legal claims.
"Essentially everyone takes a haircut and then we pursue the Sacklers for 100 years," he said.
(Reporting by Tom Hals in Wilmington, Delaware; Editing by Alexia Garamfalvi and Daniel Wallis)