On August 10, 2023, the Supreme Court agreed to hear an appeal of the U.S. Second Circuit’s recent decision upholding the grant of non-consensual third party releases to members of the Sackler family as part of the Purdue Pharma L.P. (“Purdue”) Chapter 11 plan of reorganization.
The Supreme Court’s decision will resolve a long-standing split in authority among circuit courts of appeals regarding whether non-consensual third party releases are permitted under the Bankruptcy Code. While no specific provision of the Bankruptcy Code permits non-consensual third party releases (except in the context of asbestos-related claims), no provision specifically prohibits such releases in most contexts. Further, multiple provisions of the Bankruptcy Code vest courts with broad powers to grant relief not specifically enumerated in the statute.
Current Circuit Split in Authority
Non-consensual third party releases are releases of liability that benefit entities or individuals that are not debtor entities, which bind parties that do not affirmatively consent to them (i.e., by voting for the plan that includes such releases). They are permitted in the majority of bankruptcy courts1, including those in the Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits.
A minority view – that such releases are impermissible, except in asbestos cases – has been adopted by the Fifth and Tenth Circuits; the Ninth Circuit’s view is the same, with a narrow exception permitting non-consensual third party releases for conduct occurring within the bankruptcy proceeding. Some lower courts in the Fifth Circuit that have rejected an expansive authorization for non-consensual releases have found a third party release to be “consensual” if creditors are permitted to opt out of such release on the plan ballot2.
Currently, the majority of large-dollar Chapter 11 restructuring cases are filed in the Southern District of New York, the District of Delaware, and the Southern District of Texas (which are in the Second, Third, and Fifth Circuits, respectively). As such, most major restructurings currently take place in jurisdictions in which non-consensual third party releases are permissible, or where releases can be structured to be found “consensual.”
Current Circuit Split in Authority
Non-consensual third party releases are releases of liability that benefit entities or individuals that are not debtor entities, which bind parties that do not affirmatively consent to them (i.e., by voting for the plan that includes such releases). They are permitted in the majority of bankruptcy courts1, including those in the Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits.
A minority view – that such releases are impermissible, except in asbestos cases – has been adopted by the Fifth and Tenth Circuits; the Ninth Circuit’s view is the same, with a narrow exception permitting non-consensual third party releases for conduct occurring within the bankruptcy proceeding. Some lower courts in the Fifth Circuit that have rejected an expansive authorization for non-consensual releases have found a third party release to be “consensual” if creditors are permitted to opt out of such release on the plan ballot2.
Currently, the majority of large-dollar Chapter 11 restructuring cases are filed in the Southern District of New York, the District of Delaware, and the Southern District of Texas (which are in the Second, Third, and Fifth Circuits, respectively). As such, most major restructurings currently take place in jurisdictions in which non-consensual third party releases are permissible, or where releases can be structured to be found “consensual.”
The Purdue Plan Releases
The Purdue releases were an integral part of the Purdue plan of reorganization, which provided for the Sacklers’ payment of up to $6bn over nearly 20 years to the states, local governments, tribes, and individuals harmed by the opioid crisis. In exchange, the Sacklers received broad immunity for opioid-related claims that could otherwise be filed against them in their personal capacities, stemming from their involvement in alleged deceptive and illegal activities undertaken by Purdue in marketing OxyContin and other opioid products.
The Purdue Plan Releases
The Purdue releases were an integral part of the Purdue plan of reorganization, which provided for the Sacklers’ payment of up to $6bn over nearly 20 years to the states, local governments, tribes, and individuals harmed by the opioid crisis. In exchange, the Sacklers received broad immunity for opioid-related claims that could otherwise be filed against them in their personal capacities, stemming from their involvement in alleged deceptive and illegal activities undertaken by Purdue in marketing OxyContin and other opioid products.
The approval of the Purdue debtors’ plan was the culmination of their Chapter 11 proceedings in the U.S. Bankruptcy Court for the Southern District of New York. In approving the plan, Judge Robert D. Drain described the compromise as a “bitter” result that included smaller contributions from the Sacklers than he had expected and hoped for, but stated that the benefits of the proposed settlement outweighed the costs and risks of further delay.
The District Court overturned Judge Drain’s decision, and the case was appealed to the Second Circuit Court of Appeals, which upheld the plan and the releases. The Second Circuit based its decision primarily on two precedential Second Circuit cases – Drexel Burnham Lambert3 and Metromedia4 – both of which permitted non-consensual third party releases under certain circumstances.
In affirming the plan and the releases, the Second Circuit set forth a new test for analyzing whether bankruptcy courts are empowered to grant non-consensual third party releases, considering (among other factors) the extent of any identity of interest between the debtor and the non-debtors to be released, the contributions made by the non-debtors to the financing of the plan, whether the releases were essential to the reorganization, and whether the creditors had voted overwhelmingly to support the plan. The Second Circuit’s decision is now on appeal to the Supreme Court, which will hear oral argument on the appeal in December 2023.
New Implications for Chapter 11
The Supreme Court’s decision in Purdue has the potential to significantly change the dynamics of Chapter 11 plan negotiations. Should the Supreme Court hold that the Bankruptcy Code does not empower courts to grant non-consensual third party releases under any circumstances, it would upend the way many debtors and creditors currently approach plan releases, particularly in cases such as Purdue in which mass tort liability is a primary driver for filing. It could make settlements in which non-debtor stakeholders agree to fund plan payments much less common, because without a release such payments could be used to fund litigation against the non-debtors themselves.
The Supreme Court could uphold the Second Circuit’s decision, affirming the ability of bankruptcy courts to authorize non-consensual third party releases after weighing the Purdue factors. It could also fashion an entirely new standard or test, which could expand or contract the availability of non-consensual third party releases under certain circumstances.
Regardless of the outcome, the Supreme Court’s decision on the Purdue appeal – which is likely to come between January and June 2024 – will be a significant milestone in the Supreme Court’s bankruptcy jurisprudence. It could have the potential to substantially remake one of the most potent tools presently available to debtors in navigating the negotiation of a plan with creditors and other stakeholders.
New Implications for Chapter 11
The Supreme Court’s decision in Purdue has the potential to significantly change the dynamics of Chapter 11 plan negotiations. Should the Supreme Court hold that the Bankruptcy Code does not empower courts to grant non-consensual third party releases under any circumstances, it would upend the way many debtors and creditors currently approach plan releases, particularly in cases such as Purdue in which mass tort liability is a primary driver for filing. It could make settlements in which non-debtor stakeholders agree to fund plan payments much less common, because without a release such payments could be used to fund litigation against the non-debtors themselves.
The Supreme Court could uphold the Second Circuit’s decision, affirming the ability of bankruptcy courts to authorize non-consensual third party releases after weighing the Purdue factors. It could also fashion an entirely new standard or test, which could expand or contract the availability of non-consensual third party releases under certain circumstances.
Regardless of the outcome, the Supreme Court’s decision on the Purdue appeal – which is likely to come between January and June 2024 – will be a significant milestone in the Supreme Court’s bankruptcy jurisprudence. It could have the potential to substantially remake one of the most potent tools presently available to debtors in navigating the negotiation of a plan with creditors and other stakeholders.
Built with Shorthand