Second Circuit Picks A Side In Non-consensual Third-party Releases In Highly Anticipated Purdue Opinion

• Published date: 13 June 2023
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Shearman & Sterling LLP
• Author: Mr Jacob Mezei

Introduction

Non-consensual third-party releases are provisions in reorganization plans that release non-debtor parties from liability to other non-debtor parties without the consent of all potential claimholders. These releases are frequently included in chapter 11 plans of reorganization. Most circuit courts allow these releases under certain circumstances; however, there is a split among circuit courts as to whether such non-consensual third-party releases are permitted by the Bankruptcy Code.

On May 30, 2023, in a highly anticipated ruling, the United States Court of Appeals for the Second Circuit held that bankruptcy courts have the authority to approve plans with non-consensual releases of direct third-party claims against a non-debtor. The Second Circuit articulated seven factors courts should consider before imposing non-consensual third-party releases and, in overruling the Southern District of New York, found that the bankruptcy court properly imposed non-consensual third-party releases when it confirmed Purdue's chapter 11 plan.

Background

The Sackler family owned and operated Purdue Pharma (Purdue) for decades. In the 1990s, Purdue released the drug OxyContin. Purdue aggressively promoted the opioid, minimizing its addiction concerns. Consequently, OxyContin usage proliferated across the country. OxyContin was one of the major causes of the opioid epidemic. The aftermath of the opioid epidemic resulted in mass civil claims against Purdue and the Sacklers.

In September 2019, Purdue filed for chapter 11 bankruptcy. The Sacklers did not file for bankruptcy. During settlement negotiations, the Sacklers agreed to contribute approximately $4 billion to the debtors' bankruptcy estate in exchange for all civil claims against them being released.

On September 17, 2021, U.S. Bankruptcy Judge Robert D. Drain of the Southern District of New York approved the plan but limited the releases such that they only "apply where . . . a debtor's conduct or the claims asserted against it [are] a legal cause or a legally relevant factor to the cause of action against the shareholder released party, and the released claims directly affect the res."

The U.S. District Court for the Southern District of New York, however, reversed, holding that the Bankruptcy Code does not permit bankruptcy courts broad authority to impose non-consensual third-party releases in reorganization plans. The District Court also disagreed with the bankruptcy court that Second Circuit...