Wither Non-Debtor Releases? Purdue Pharma and the Proposed SACKLER Act

On Friday, March 19, 2021, Congressional lawmakers introduced a bill that would amend the U.S. Bankruptcy Code to prohibit bankruptcy judges from permanently enjoining or releasing legal claims of states, tribes, municipalities or the U.S. government against non-debtors.

According to media reports, the bill, which is named the “SACKLER Act,” (i.e., the “Stop Shielding Assets from Corporate Known Liability by Eliminating Non-Debtor Releases Act”) is specifically designed to prevent members of the Sackler family, who own OxyContin-maker Purdue Pharma LP, from using the bankruptcy process to obtain legal releases from government lawsuits.  Purdue Pharma LP filed for bankruptcy in September 2019, but none of the members of the Sackler family have filed for bankruptcy as individuals.  Nevertheless, the Sacklers have offered to contribute roughly $4.28 billion as part of a proposed bankruptcy plan to fund payouts to victims who suffered injuries linked to Purdue Pharma’s opioids over the next decade in exchange for legal releases that would enjoin claims against the Sackler family.  If approved, those legal releases would shield the Sackler family from further liability related to the opioid crisis, something that many state attorneys general have ardently opposed. 

But if passed in its current form, the SACKLER Act would have significant implications that extend beyond the Purdue Pharma bankruptcy case itself.  Specifically, the bill would amend Section 105(b) of the Bankruptcy Code by adding the following:

“A court may not — . . . except as provided by section 524(g) of this title, enjoin or release a claim against a non-debtor by a State, municipality, federally recognized tribe, or the United States.”

In other words,  all Chapter 11 plan releases of governmental claims against non-debtors would be barred except for those permitted under Section 524(g) (which relate to channeling injunctions in asbestos-related cases).

Currently, federal appeals courts are split as to whether the Bankruptcy Code allows chapter 11 plans to include legal releases for non-debtor parties.  Under governing Second Circuit law, applicable in the Southern District of New York Bankruptcy Court where Purdue Pharma’s case is pending, bankruptcy courts have both the equitable and statutory authority to enjoin lawsuits against non-debtor parties in connection with a debtor’s chapter 11 plan.  See MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988).  In other circuits, however, including both the Ninth and Tenth Circuits, such releases are not allowed. See In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995) (holding the Bankruptcy Code precludes bankruptcy courts from discharging the liabilities of non-debtors); In re Western Real Estate Fund Inc., 922 F.2d 592 (10th Cir. 1990) (same).

Were it to become law, the SACKLER Act would effectively codify the Ninth and Tenth Circuit view (at least for governmental claims) and would roll back potential liability protections for non-debtor stakeholders of bankrupt companies in jurisdictions like the Second Circuit and also in the Fourth and Sixth Circuits, which allow releases for non-debtors who contribute to reorganization plans.  See e.g. In re A.H. Robins, 972 F.2d 77 (4th Cir. 1992); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002).
On Tuesday, March 23, the Sackler family relayed to the Purdue Pharma bankruptcy court that it would revoke its proposal to contribute $4.28 billion to Purdue Pharma’s bankruptcy plan if the injunction put in place at the beginning of the Purdue Pharma case (which prevented lawsuits against the Sackler family) was lifted.  In response, and to allow negotiations to continue, the bankruptcy court agreed to extend the injunction, which was originally set to expire in April.  The SACKLER Act would also limit any such injunctions, going forward, to 90 days.

The SACKLER Act is still in its early stages, and it is not clear that it will have sufficient support from either or both parties to proceed.  That said, both the act, and the Purdue Pharma case more generally, have led to increased sensitivities around non-debtor releases in bankruptcy cases and are thus likely to impact release negotiations going forward.