SDNY Bankruptcy Court OKs Purdue Pharma’s Plan of Reorganization Featuring Third-Party Releases for Sacklers in Exchange for Contributing $4.325 Billion to Opioid Victim Settlement Fund

On September 1, 2021, Judge Robert Drain issued a much-anticipated oral ruling approving Purdue Pharma L.P.’s plan of reorganization. The plan, which has garnered significant attention from the media, legislators, academics, and practitioners, releases current and future members of the Sackler family and many of their associates and affiliated companies – none of whom filed for bankruptcy themselves – from liability in connection with any possible harm caused by OxyContin and other opioids that Purdue Pharma manufactured and distributed. In return for the liability releases, the Sacklers will, over a nine-year period, contribute up to $4.325 billion to a settlement fund from which payments will be made primarily to compensate victims and to fund initiatives to abate the opioid epidemic.

Despite the releases for the Sacklers, the plan received overwhelming support from the Purdue Pharma creditors, with over 95% voting in favor of it. Still, the plan was staunchly opposed by some, including several states and the Office of the United States Trustee, the arm of the Department of Justice that serves as a bankruptcy watchdog. The United States Trustee’s Office raised several arguments in its objection, and we highlight a few of the noteworthy ones below.

Objections Raised by the United States Trustee’s Office

First, the United States Trustee’s Office took issue with the plan’s third-party releases, calling them “nothing less than an illegal, court-ordered discharge of a potentially limitless group of non-debtors.” The United States Trustee’s Office pointed to Section 524(e) of the Bankruptcy Code, which proscribes the discharge of non-debtors.  Additionally, the United States Trustee’s Office cited Section 1129(a)(1), which prohibits the confirmation of a plan that does not comply with the applicable provisions of the Bankruptcy Code.  The Trustee’s Office argued that the plan did not comply with Section 1141(d) of the Bankruptcy Code since that section does not include non-debtor parties within the scope of the discharge provided for debtors at confirmation (i.e., it only permits Purdue Pharma and its related bankrupt affiliates to obtain releases).

Second, the United States Trustee’s Office argued that the releases contemplated in the plan exceed the court’s powers conferred by the United States Constitution. However, the United States Trustee’s Office acknowledged that the U.S. Court of Appeals for the Second Circuit, which covers the Southern District of New York (where the Purdue case is pending), has found such releases permissible under certain circumstances, primarily when the non-debtor parties obtaining the releases make contributions to the debtor’s reorganization plan.[1]  The United States Trustee’s Office argued that the releases in the Purdue plan extend to persons far beyond those making contributions to the reorganization plan and thus were impermissible. Furthermore, the United States Trustee’s Office argued that any contrary case law was wrongly decided.

Third, the United States Trustee’s Office argued that Judge Drain should not look at the votes cast, but instead at the sizeable number of votes that were solicited but not cast in determining whether the plan was “overwhelmingly” accepted.

The Bankruptcy Court’s Ruling

In his ruling, Judge Drain overruled the objections raised by the United States Trustee’s Office and others. In addressing the United States Trustee’s Office’s objections specifically, Judge Drain dissected Section 524(e)’s language and, in particular, its use of prepositional phrases and held that any reading of Section 524(e) as being preclusive of third-party releases has been “effectively refuted.” Judge Drain held, “[i]t appears clear, therefore, under well-reasoned caselaw as well as the Code itself that section 524(e) is not a statutory impediment to the issuance or enforcement of a third-party claim release under a plan in appropriate circumstances.” Therefore, following that reasoning, the plan also satisfied the requirement that the plan comply with the applicable provisions of the Bankruptcy Code.

Judge Drain also addressed the United States Trustee’s Office’s argument that bankruptcy courts lack the constitutional power to issue a final order confirming a plan that contains a third-party claims release by citing In re Millennium Lab Holdings II, LLC, 945 F.3d 126 (3d Cir. 2019) and Lynch v. Lapidem Ltd. (In re Kirwan Offices S.A.R.L.), 592 B.R. 489 (S.D.N.Y. 2018). Judge Drain wrote that the court needed only “simply cite” those cases because “their logic cannot be improved upon to establish that a proceeding to determine whether a Chapter 11 plan that contains such a release should be confirmed not only is a core proceeding under 28 U.S.C. § 157(b), but also is a fundamentally central aspect of a Chapter 11 case’s adjustment of the debtor/creditor relationship and, therefore, ‘constitutionally core’ under Stern v. Marshall . . . and its progeny.”

As for the United States Trustee’s Office’s point about voting, Judge Drain dismissed that argument out of hand, holding “that is not how elections are conducted” and that “there is no conceivable way to determine the preferences of those who didn’t vote other than that they didn’t object to confirmation.”

The United States Trustee’s Office, as well as the states of Washington and Connecticut, have already filed motions for a stay pending appeal. The states of Maryland, Washington, and Connecticut, the District of Columbia, the City of Grande Prairie in Alberta, Canada, and the Peter Ballantyne Cree Nation also have lodged appeals seeking to overturn the confirmation order.

The Circuit Split on Third-Party Releases

The federal appeals courts are split as to whether nonconsensual third party releases, such as the ones granted to the Sackler family and related parties under Purdue’s plan, are permissible under the Bankruptcy Code. As indicated above, the analysis centers largely around Section 524(e) of the Bankruptcy Code, which provides that the “discharge of a debt of the debtor does not affect the liability of another entity on, or the property of any other entity for, such debt.”[2] In addition to the Second Circuit, the Fourth, Sixth, Seventh and Eleventh Circuits also allow such releases in at least some circumstances, usually when they are critical to the plan.[3] By contrast, the Fifth, Ninth, and Tenth Circuits generally bar such releases, with only narrow exceptions for creditors’ committees, for actions taken by attorneys and advisors to estate fiduciaries, or in other limited circumstances, typically for conduct during, but not before, the bankruptcy proceedings.[4]

Complicating matters further, there is a question as to whether bankruptcy courts even possess the requisite constitutional jurisdiction to grant such releases, as discussed in a line of United States Supreme Court decisions beginning with Stern v. Marshall.[5] In 2019, the Third Circuit (which encompasses the Delaware bankruptcy courts) became the first appeals court to address that issue, ruling that bankruptcy courts do in fact possess such constitutional jurisdiction, which we previously wrote about here.  As indicated, Judge Drain concluded that there was no such constitutional impediment. There is also a question of whether any appellate objections to Purdue’s now-confirmed plan may face challenges based on the equitable mootness doctrine, under which courts may dismiss matters on appeal without review of the merits notwithstanding proper jurisdiction because a confirmed plan of reorganization would be unraveled as a result. More on equitable mootness is available here.

Analysis

Given this split among the federal appeals courts along with the significant public interest in the Purdue plan, it is possible that the United States Supreme Court will have the opportunity to weigh in on the appeals and resolve the question of whether nonconsensual third party releases are permissible under the Bankruptcy Code, notwithstanding Section 524(e). While the Purdue plan releases are undoubtedly broad, there is also an argument that they are “important” to the resolution of the Purdue bankruptcy case, making it difficult to predict how intermediate appeals courts or the Supreme Court eventually will rule.  There is also the continued possibility that Congress may step in and pass a bill prohibiting such releases going forward.  We previously discussed the potential for such a bill here.

On September 17, 2021, Judge Drain entered an order confirming the plan, along with a 159-page written ruling that modified his initial oral ruling from September 1. Stay tuned to the Real Bankruptcy Intel blog for further updates.

[1] Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142 (2d Cir. 2005) (permitting release if it is “important” to reorganization).

[2] 11 U.S.C. § 524(e).

[3]  Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203, 212-13 (3d Cir. 2000) (approving non-debtor releases in “extraordinary cases”); Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694, 702 (4th Cir. 1989); Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002); Airadigm Commc’ns, Inc. v. FCC (In re Airadigm Commc’ns, Inc.), 519 F.3d 640 (7th Cir. 2008); SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying (In re Seaside Eng’g & Surveying), 780 F.3d 1070 (11th Cir. 2015).

[4] Bank of New York Trust Co., NA v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009) (Section 524(e) prohibits non-consensual third party releases and injunctions with exception for creditors’ committee); Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020) (same with a narrow exception for settling parties during post-petition proceedings); In re Western Real Estate Fund, Inc., 922 F.2d 592, 600 (10th Cir. 1990) (“Congress did not intend to extend such benefits to third-party bystanders.”).

[5] 564 U.S. 462 (2011).