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

• Published date: 28 September 2021
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Mayer Brown
• Author: Samuel R. Rabuck, Sean T. Scott, Thomas S Kiriakos and Aaron Gavant

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...