In December 2021, a Judge for a New York district court (NYDC) issued a decision in bankruptcy involving Purdue Pharma. The judge overturned a bankruptcy court’s confirmation of Purdue’s Chapter 11 reorganization plan.
The judge for the NYDC subsequently held that in most situations, no aspect of the bankruptcy code requires authorizing non-consensual releases for non-debtors who are also third parties. As a result of this decision, the judge drew questions about the method utilized to provide funding for Chapter 11 reorganization plans in bankruptcy cases involving mass torts.
Chapter 11 reorganization plans routinely offer the voluntary release of debts during which creditors are provided a chance to either consent or decline to join these agreements. When third-party releases (TPRs) lacking consent are pursued to bolster a potential plan, debtor companies frequently request that a bankruptcy court require TPRs by all claimants despite whether a group of holdout creditors wants to maintain claims against non-debtors.
The Details Behind the Case
In 2019, the Purdue Pharma company as well as its associated debtors pursued Chapter 11 bankruptcy with the intent to settle large existing claims as well as claims that might accrue in the future against debtors arising from the production and associated marketing of OxyContin.
Purdue Pharma pursued using injunctions as well as release provisions found in bankruptcy law established for tackling mass tort bankruptcy cases against debtor companies. Following negotiations involving various entities in Purdue’s case, the court later approved Purdue’s reorganization plan which utilized sweeping and non-consensual release of both directives as well as derivative opioid-connected claims against the Sacklers, the family responsible for OxyContin’s creation. This reorganization plan receives funding from a settlement that encompasses Purdue’s assets and over $4 billion funds given to obtain TPRs.
Countless lawyers in addition to the U.S. Trustee disagreed with the plan’s confirmation. These opponents argued the court hearing the bankruptcy case did not have the power to authorize the Sackler’s TPRs. The court then ruled that the authorization of third-party release by the Sackler family was authorized following bankruptcy law and concurred with the plan. An appeal was then made to NYDC.
In the court’s opinion, the judge analyzed the issue that has divided circuit courts of whether a court in a bankruptcy case can authorize releases of claims made against non-debtors regardless of consent.
The NYDC began by considering Section 524(g), which authorizes injunctions prohibiting third-party claims against non-debtors only in cases concerning damages connected to the manufacture as well as asbestos sales.
The NYDC then considered the Deutsche Bank case, in which a court found that TPRs of claims lacking consent and brought against non-debtors can be authorized in only narrow circumstances. In considering decisions made by federal courts, the NYDC held that most courts and judges who questioned the issue of statutory authority either dismiss the argument that authority is present or decline to respond to questions of where such authority can be found.
The NYDC then performed a detailed interpretation of bankruptcy provisions the court utilized to grant TPRs. These statutes include the following:
- Section 1123(b)(6) states that reorganization plans can encompass any other necessary provisions not consistent with the corresponding provisions of the title.
- Section 1123(a)(5) states that a reorganization plan must provide sufficient means for its implementation.
- Section 1129(a)(1) states that courts hearing bankruptcy cases can confirm a reorganization plan only if the plan complies with the title’s applicable provisions.
The NYDC disagreed with the court’s dependence on the In re Energy Resources case and held that a bankruptcy court can authorize reorganization plans with all essential provisions provided these provisions do not conflict with other elements of bankruptcy law.
The Future of the Case
The NYDC’s decision will likely be appealed by Purdue to an appellate court and then likely the United States Supreme Court. Many bankruptcy scholars anticipate that the United States Supreme Court will accept this appeal due to the wide scope of opioid claims as well as the division among countless circuit courts on the issue of the power of bankruptcy courts to approve plans with TPRs of claims against non-debtors without claimant consent.
If the appeal is subsequently upheld, the decision could greatly impact Purdue’s ability to provide compensation to those individuals harmed by the opioid crisis as well as other creditors. The decision could also negatively impact Purdue’s ability to restructure following the bankruptcy.
How the Case Could Impact Future Bankruptcy Litigation
If appealed and affirmed, the NYDC’s rejection of TPRs lacking consent in bankruptcy plans would leave the situation more challenging for other entities to restructure in Chapter 11 proceedings that occur in the future. It would be difficult for companies to restructure because this decision would limit the power of companies to fund future restructuring. Debtor companies often do not possess the assets to compensate creditors. For several decades, non-consensual TPRs have played a critical role in incentivizing investors and targeting entities to contribute towards the debtor company’s reorganization.
These contributions permit faster and often higher creditor recovery by avoiding delay as well as costs tied into lawsuits against non-debtors outside bankruptcy. Without this financial assistance, companies facing significant massive tort liability are more likely to liquidate rather than restructure in bankruptcy leading to less financial recovery for creditors.
Prohibiting debtors from receiving non-consensual TPRs would also prevent bad actors and other disreputable parties from utilizing the Bankruptcy Code to protect themselves from legal entanglements apart from bankruptcy while avoiding seeking bankruptcy protection.
Blocking TPRs without consent by claimants in bankruptcy protects the due process rights of creditors with claims against entities who have not initiated bankruptcy proceedings. This helps to retain the ability of impacted claimants to pursue their own court cases against non-debtor parties in an attempt to receive greater compensation than they might have gained under reorganization plans funded by same party contributions.
If the Supreme Court later rules in favor of the Court’s decision overturning Purdue’s plan, legislatures in Congress could reinvigorate the role of TPRs lacking consent by revising Chapter 11.
Speak With an Experienced Bankruptcy Lawyer
Bankruptcy is a complex process and it can be difficult to navigate for those unfamiliar with the process. One of the best ways to make sure that you proceed properly through bankruptcy is to obtain the assistance of an experienced bankruptcy attorney. Do not hesitate to schedule a free case evaluation with attorney Melanie Tavare today.