Southern District Of New York Holds That Bankruptcy Court Lacks Statutory Authority To Approve Non-Consensual Third-Party Releases

• Published date: 02 February 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy, Shareholders
• Law Firm: Mayer Brown
• Author: Mr Adam C. Paul, Sean T. Scott, Louis S. Chiappetta, Aaron Gavant and Tyler R. Ferguson

In a December 16, 2021, decision,¹ Judge Colleen McMahon of the US District Court for the Southern District of New York reversed the bankruptcy court order confirming the Chapter 11 plan of Purdue Pharma, L.P. and its affiliated debtors, holding that the Bankruptcy Code did not authorize the plan's non-consensual third-party releases. Judge McMahon's decision is now the subject of an expedited appeals process² whose outcome has the potential to substantially affect the ability of shareholders and other third parties to obtain releases in a Chapter 11 case.

BACKGROUND

As the district court explained and has been widely reported, the Purdue Pharma case arose in the context of the opioid epidemic in the United States, which has been traced largely to the over-prescription of addictive medications, including Purdue Pharma's proprietary drug, OxyContin.³ By 2019, Purdue Pharma was facing thousands of lawsuits by people who had become addicted to OxyContin and the estates of people who had died of overdoses. The company also faced numerous claims by federal, state and local governmental entities and in 2020 pled guilty to criminal charges brought by the US Department of Justice.⁴

Faced with thousands of lawsuits in jurisdictions around the country, Purdue Pharma filed a voluntary Chapter 11 bankruptcy petition in September 2019. Shortly after the filing, which automatically stayed litigation against Purdue Pharma itself, the bankruptcy court entered a stay of litigation against various non-debtors affiliated with Purdue Pharma, primarily members of the Sackler family, who for years owned and controlled the company and were defendants in many of the pending lawsuits. Over the following two years, various classes of creditors then negotiated a plan of reorganization with Purdue Pharma and the Sackler family that was ultimately approved by the bankruptcy court and which Judge McMahon subsequently reversed.

THE SHAREHOLDER RELEASES

A central provision of Purdue Pharma's plan of reorganization was a broad release of claims in favor of the "Shareholder Released Parties," i.e., the Sackler family and various related people and entities. The provision included a release of direct claims of the "Releasing Parties"-which included all holders of claims against Purdue Pharma-against the Shareholder Released Parties, relating to, among other things, Purdue Pharma's OxyContin-related activities "as to which any conduct, omission or liability of any Debtor or any Estate is the legal cause or is otherwise a legally relevant factor."⁵ The release provision was non-consensual, meaning that it was binding not only on those who consented to it but on objecting parties, as well.⁶ In exchange, pursuant to settlements that were incorporated into Purdue Pharma's Chapter 11 plan, the Shareholder Released Parties agreed to contribute a total of $4.325 billion to a trust, over the course of nine to ten years, that would be used to resolve public and private opioid-related civil claims and civil and criminal settlements with the federal government.⁷ The plan also provided for the channeling of enjoined claims against the Shareholder Released Parties to nine creditor trusts for treatment according to the trust documents for each trust.⁸

The plan was overwhelmingly accepted by the members of each class of creditors entitled to vote. However, eight states, the District of Columbia and various other parties objected to the releases of the Shareholder Released Parties and argued, among other things, that (1) the releases of their direct claims against the Shareholder Released Parties were not permitted under the Bankruptcy Code; and (2) the bankruptcy court lacked constitutional, statutory and equitable authority to approve the releases.⁹ The bankruptcy court confirmed the plan over these objections.

BANKRUPTCY COURT'S FINDINGS

In confirming the plan, the bankruptcy court made three core findings with respect to the Sackler settlements that incorporated the releases of the Shareholder Released Parties.¹⁰

Necessary to the Plan

First, the bankruptcy court found that the settlements were necessary...