Immunity With No Side Effects: Sackler Family Granted Releases Of Liability In Purdue Pharma Bankruptcy Case

• Jurisdiction: United States,Federal,New York
• Law Firm: Cullen and Dykman
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Author: Mr Michael Traison
• Published date: 16 June 2023

On May 7, 2021, we issued a client alert regarding Purdue Pharma's bankruptcy case and the Sackler family's attempt to have Purdue's reorganization plan release them of their personal liability for the American opioid epidemic.¹ We updated that alert on December 21, 2021 when a federal judge in the Southern District of New York blocked Purdue Pharma's reorganization plan due to its including the aforementioned releases, otherwise known as "third-party releases."² Less than a month later, we alerted our clients again when that Southern District judge's decision was appealed to the Second Circuit Court of Appeals.³

The issue the Second Circuit was charged with resolving: whether Purdue Pharma's chapter 11 reorganization plan could grant the Sacklers broad releases of personal liability against opioid litigation, even when the Sacklers have not sought bankruptcy themselves and the plaintiffs in those opioid cases do not consent to the Sacklers' release. ⁴

Now, the Second Circuit has determined that not only can bankruptcy judges in courts throughout the Second Circuit grant third-party releases in many cases, but the Sacklers themselves can receive releases through Purdue Pharma's case. ⁵

Notably, the court began by reminding us that bankruptcy is an equitable process and that its judges sit in courts of equity. This concept finds its roots in old England's Chancery Courts which had their origins in Church law. As Court of Appeals Judge Lee stated in the first sentence of her opinion: "Bankruptcy is inherently a creature of competing interests, compromises, and less-than-perfect outcomes."

The court first found third-party releases permissible under Bankruptcy Code sections 105(a) and 1123(b)(6), which state respectively that a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]," and that a bankruptcy plan "may . . . include any . . . appropriate provision not inconsistent with the applicable provisions of [the Bankruptcy Code]."⁶

The court insisted that together, sections 105(a) and 1123(b)(6) grant a "residual authority" consistent with "the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships." ⁷ As such, the court rejected the view of a minority of circuits that section 524(e), which states "discharge of a debt of the debtor does not affect the liability of any other entity on, or...