The (Third) Party's Over? Recent Decisions Cast Doubt On The Continued Vitality Of Third Party Releases In Chapter 11 Reorganizations

• Published date: 31 March 2022
• Subject Matter: Government, Public Sector, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Constitutional & Administrative Law
• Law Firm: Proskauer Rose LLP
• Author: Julia D. Alonzo and Elliot R. Stevens

Two recent decisions by U.S. District Courts have rejected attempts to include nonconsensual third party releases in chapter 11 reorganization plans. These rulings suggest third party releases may be facing increasing push back from the courts.

Traditionally, bankruptcy only operates to eliminate claims held by creditors against the debtor. Over the last few years, however, corporate debtors have increasingly attempted to include nonconsensual third party releases in chapter 11 plans of reorganization. These third party releases, when approved by the bankruptcy court, operate to preclude creditors of the debtor from pursuing claims they possess against non-debtor third parties. Despite being increasingly found in chapter 11 restructurings, however, third party releases have remained controversial and the subject of heated debates, both inside and outside the courtroom.

These debates culminated in the United States District Court for the Southern District of New York's reversal of the bankruptcy court's order confirming a plan for Purdue Pharma, L.P. ("Purdue"), in which it held that the bankruptcy court did not have statutory authority to approve the plan's third party releases. The court noted that Purdue, a pharmaceutical company with most of its revenue stemming from the sale of the prescription opioid OxyContin, has found itself faced with a "veritable tsunami of litigation" arising from the marketing and sale of OxyContin. As a result, Purdue filed for bankruptcy protection in September 2019. After two years of litigation and extensive negotiation, Purdue obtained confirmation of a reorganization plan which, among other things, contained third party releases eliminating claims held by creditors of Purdue directly against its private owners (the Sackler family) and other non-debtor entities, including claims arising from alleged willful misconduct and fraud. In return, the Sacklers agreed to contribute approximately $4.5 billion to fund charities and certain recoveries under the plan. While the plan was supported by an overwhelming majority of creditors, many states and other creditors objected and appealed the plan following confirmation.

On appeal, the Southern District of New York vacated the confirmation order. In a 142-page decision, the District Court held that nothing either express or implied in the Bankruptcy Code gave a bankruptcy court statutory authority to confirm a plan containing nonconsensual third party releases. Among other things...