A HARD PILL TO SWALLOW: PURDUE PHARMA AND THE FUTURE OF THIRD-PARTY RELEASES IN BANKRUPTCY COURT

By: Marine Loison, Volume 106 Staff Member

I. INTRODUCTION

The Sackler name has been synonymous with the opioid crisis in the United States. Now, it has also become a household name in Bankruptcy Court.[1] On December 16th, 2021, Judge McMahon answered the “great unsettled question” of Bankruptcy Court’s statutory authorization by granting non-consensual release of third-party claims against non-debtors.[2] Before this case, it had been assumed that the Second Circuit had permitted these releases, but through an analysis of the case law, Judge McMahon concluded differently.[3] In the Purdue case, these releases would extinguish all claims against the Sackler family, and thousands of other individuals and entities,[4] related in any way to Purdue Pharma,[5] which would not be possible if they were themselves debtors in the case.[6] This proposed settlement means that the Sackler family, who has had significant and extended control of Purdue Pharma and has directly profited billions of dollars from OxyContin, would be “off the hook” as all ongoing claims and future claims against them related to Purdue Pharma would be extinguished and barred.[7]

This ability to extinguish claims for individuals through a company’s bankruptcy has dire consequences. Through her lengthy opinion, Judge McMahon has thrown the Second Circuit’s hat into the ring of the circuit split, arguing that Bankruptcy Courts have no authority to approve these kinds of releases.[8] The circuit courts are now split with four circuits rejecting the Bankruptcy Court’s ability to allow such releases and four circuits allowing Bankruptcy Courts to exercise this authority in specific and limited circumstances.[9]

Congress also has a stake in the game with its proposed Sackler Act as well as the Nondebtor Release Prohibition Act of 2021 which would prohibit bankruptcy courts from releasing third-party claims against non-debtors.[10] These bills should go through Congress, and if they do not succeed, the Supreme Court should resolve the circuit split in favor of Judge McMahon’s opinion.

II. BACKGROUND

The events leading to this bankruptcy case have been in motion for a considerable amount of time. Purdue Pharma is a pharmaceutical company primarily known for OxyContin.[11] The Sackler family has had both a financial and leadership role in the company since the Sackler brothers bought the company in 1952.[12] With the release of OxyContin in 1995, Purdue Pharma aggressively targeted it as a miracle drug and greatly undermined the potential for serious addiction.[13] However, the rise of OxyContin aggressively fueled the opioid crisis, and with it, came thousands of lawsuits against Purdue Pharma and the Sackler family.[14]

During this time, the Sackler family began to insulate itself from potential future creditors and lawsuits.[15]Inevitably, Purdue entities filed for bankruptcy on September 15, 2019, but, importantly, members of the Sackler family did not file for bankruptcy while still being named in opioid-related lawsuits alongside Purdue.[16] After months of mediation and negotiation in bankruptcy court, the third-party release at issue here was one aspect of the bankruptcy plan approved by bankruptcy Judge Drain.[17] The Sacklers agreed to give $4.275 billion toward the Purdue estate to fight the opioid crisis in exchange for third-party releases.[18] However, the U.S. Trustee states, the “City of Seattle, four Canadian municipalities, two Canadian First Nations and three pro se plaintiffs” objected to this provision and brought the case in front of Judge McMahon.[19] The most contentious issue was whether the Bankruptcy Court had the statutory authority to approve this part of the Plan.[20]

III. THE CIRCUIT SPLIT

The notion of third-party release authorization came about in the asbestos context.[21] Since then, the Fifth,[22] Ninth,[23] and Tenth[24] Circuits have taken the position adopted by Judge McMahon and do not allow bankruptcy courts to authorize non-debtor releases outside the asbestos context. Specifically, they argue that 11 U.S.C. § 524(e)[25] and the language in § 524(g)[26] create an exception for asbestos outside of the general bankruptcy rules.[27]

On the other hand, the Fourth, Eleventh, Sixth and Seventh Circuits have taken a different approach to non-debtor releases. The Sixth[28] and Seventh[29] circuit read Bankruptcy Code §§ 105(a) and 1123(b)(6) as creating a “residual authority” which enables bankruptcy courts to approve non-consensual third-party releases against non-debtors.[30] The Fourth[31] and Eleventh[32] circuits have singularly relied on § 105(a) to conclude that bankruptcy courts have this authority.[33]

Judge McMahon’s decision brings the Second Circuit in line with the Fifth, Ninth, and Tenth circuits. In her opinion, she addresses the text, the lack of statutory prohibition, and residual authority, concluding that bankruptcy courts have no statutory authority to allow for such releases. Judge McMahon analyzes the sections of the Bankruptcy Code that Judge Drain used to establish his authority to approve the release, namely, Sections 105(a), 1123(a)(5), (b)(6) and 1129.[34] Through an analysis of each provision, she concludes that they do not create a substantive right. Next, she turns to the argument that the debtors put forward that statutory authority can “be inferred from Congressional silence.”[35] She finds this unpersuasive as Congress explicitly declined to allow for such a substantive form of relief in the Bankruptcy Code.[36] Finally, regarding residual statutory authority, Judge McMahon argues that debtors’ reliance of the Supreme Court decision In re Energy Resources Co. to support residual authority is inconsistent with Chapter 11 as in that case, all “substantive guarantees that the Bankruptcy Code afforded to the IRS were baked into the court’s approval of the plan,” which is not the case here.[37] There are also potential constitutional impediments to allowing bankruptcy courts to exert such authority, although Judge McMahon focused on statutory provisions.[38]

IV. RESOLVING THE ISSUE

This circuit split must be resolved. Judge McMahon’s decision unraveled years of arduous negotiations between the parties in one fell swoop. As three circuits remain undecided and the other eight disagree on the appropriate course of actions, parties embroiled in bankruptcy court find themselves on unstable ground. Proponents in favor of bankruptcy courts allowing these third-party releases argue that bankruptcy courts must continue to consider third-party releases in reorganization plans as they encourage settlement of the bankruptcy disputes[39] and foster equitable settlements in complex class action lawsuits.[40] Also, proponents claim that the releases ensure creditor equality as the absence of releases allow for more recovery from non-debtors—not directly at issue in the bankruptcy cases—which would be unfair.[41] Finally, proponents assert that such releases allow for a “fresh start” and assist in restructuring plans.[42] In this case, the Sacklers argued that donating $4.275 billion should insulate them from future claims and lawsuits. Furthermore, the debtors argued that the inclusion of this agreement enabled for a resolution in negotiations.

On the other hand, critics of third-party releases argue that there is a consent issue at stake and that no substantive public policy supports the expansion of a bankruptcy court’s authority outside of the text provided in the Bankruptcy Code.[43] Some families involved in the Purdue case also felt that such a settlement focused more on the non-debtors trying to escape liability rather than allowing them to have their voices heard in court.[44] Also, as Judge McMahon discusses in her opinion, Congress had the opportunity to address these non-debtor releases and was silent on the issue.[45] There is also a potential Article III constitutional bar to these types of releases.[46] Finally, it is arguable that the Sackler family purposefully embarked on a deliberate attempt to shield their assets from potential debtors, and the inclusion of the non-debtor release was part of this crusade.[47]

Now that the issue continues to divide courts, parties will have the additional tactical move of deciding which court to file bankruptcy in. Furthermore parties may waste years negotiating a complex settlement that will be rejected in court. Therefore, the issue at hand must be resolved. A possible resolution could be the current bills debated in Congress, H.R. 2096 and H.R. 4777. These bills would prohibit bankruptcy courts from allowing such non-debtor releases in Chapter 11 bankruptcy cases.[48] However, if these bills do not pass, the Supreme Court should resolve this issue quickly in favor of Justice McMahon’s opinion. The Bankruptcy Court should not be allowed to unnecessarily and singlehandedly extend its authority outside of the Bankruptcy Code without good reason. If this issue is not resolved, non-debtors released by these claims who have caused significant societal harm may be able to avoid consequences and paying their fair share to harmed parties, as evident in the Purdue case and the Sackler family’s near escape from liability.

 

[1] Jan Hoffman, Judge Overturns Purdue Pharma’s Opioid Settlement, N.Y. Times (Dec. 16, 2021), https://www.nytimes.com/2021/12/16/health/purdue-pharma-opioid-settlement.html [https://perma.cc/VE9W-RD22].

[2] In re Purdue Pharma, L.P., 2021 WL 5979108, at *3 (S.D.N.Y. Dec. 16, 2021). See also Steven Abramowitz, David Meyer, Kristie Torkildsen Duchesne, William Wallander, Steven Zundell, In re Purdue Pharma L/P.: S.D.N.Y. Holds Bankruptcy Court Lacks Statutory Authority to Approve Sackler Family Releases, JD Supra (Dec. 28, 2021), https://www.jdsupra.com/legalnews/in-re-purdue-pharma-l-p-s-d-n-y-holds-2631948 [https://perma.cc/UJX2-Z67E]. The non-consensual third-party non-debtor releases will be referred to as third-party releases for brevity.

[3] Abramowitz, supra note 2.

[4] In re Purdue Pharma, 2021 WL 5979108, at *29.

[5] Id. at *29 (“The release of claims against the Shareholder Released Parties permanently enjoins third parties from pursuing their current claims against the Shareholder Released Parties and precludes the commencement of future litigation against any of the Sacklers and their related entities, as long as (i) those claims are “based on or related to the Debtors, their estates, or the chapter 11 cases,” and (ii) the “conduct, omission or liability of any Debtor or any Estate is the legal cause or is otherwise a legally relevant factor.”).

[6] Id. at *3–4.

[7] LastWeekTonight, Opioids III: The Sacklers: Last Week Tonight with John Oliver (HBO), Youtube at 14:40-15:11 (Aug. 9, 2021), https://www.youtube.com/watch?v=uaCaIhfETsM&t=265s [https://perma.cc/V88B-BTBH].

[8] Abramowitz, supra note 2.

[9] Id.

[10] H.R. 2096, 117th Cong. (2021-2022); H.R. 4777, 117th Cong. (2021-2022).

[11]  In re Purdue Pharma, L.P., 2021 WL 5979108, at *5 (S.D.N.Y. Dec. 16, 2021).

[12] Id. at *5.

[13] Id. at *7-8.

[14] Id. at *8–9. These lawsuits came from individuals, states, governments, and even foreign nations. Id. at *9–18.

[15] Id. at *18–22.

[16] Id. at *22.

[17] Id. at *27–28.

[18] Id. at *29.

[19] Id. at *30.

[20]  Id. at *38.

[21] 11 U.S.C. § 524(g) (2018).

[22] In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009).

[23] Resorts Int’l v. Lowenschuss, 67 F.3d 1394 (9th Cir. 1995), cert. denied, 517 U.S. 1243 (1996).

[24] In re W. Real Estate Fund, 922 F.2d 592, 601–02 (10th Cir. 1990).

[25] 11 U.S.C. §524(e) (2018) (“Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”).

[26] 11 U.S.C. § 524(g) (2018) (“Notwithstanding the provisions of section 524(e).”).

[27] Resorts Int’l, 67 F.3d at 1401–02.

[28] In re Dow Corning Corp., 280 F.3d 648, 656 (6th Cir. 2002).

[29] In re Airadigm Communs., Inc., 519 F.3d 640, 657 (7th Cir. 2008).

[30] In re Purdue Pharma, L.P., 2021 WL 5979108, at *61 (S.D.N.Y. Dec. 16, 2021).

[31] Nat’l Heritage Found., Inc. v. Highbourne Found., Inc., 760 F.3d 344, 350 (4th Cir. 2014).

[32] In re Seaside Eng’g & Surveying, Inc., 780 F.3d 1070, 1076–79 (11th Cir. 2015).

[33] In re Purdue Pharma, 2021 WL 5979108, at *61.

[34] Id. at *61–65.

[35] Id. at *65-67.

[36] Id.

[37] Id. at *68.

[38] Id. at *4. See also William Hallam, Is the End Near for Third Party Releases in Chapter 11 Plans?, JD Supra (Jan. 21, 2022), https://www.jdsupra.com/legalnews/is-the-end-near-for-third-party-6944004 [https://perma.cc/LTX8-BQDT].

[39] Ralph Brubaker, Bankruptcy Injunctions and Complex Litigation: A Critical Reappraisal of Non-Debtor Releases in Chapter 11 Reorganizations, U. Ill. L. Rev. 959, 973 (1997).

[40] Id. at 976.

[41] Id. at 981.

[42] Id. at 1001–02.

[43] Dorothy Coco, Note, Third-Party Bankruptcy Releases; An Analysis of Consent Through the Lenses of Due Process and Contract Law, 88 Fordham L. Rev. 231, 253–54 (2019).

[44] LastWeekTonight, supra note 7, at 18:23-19:00.

[45] In re Purdue Pharma, 2021 WL 5979108, at *65-67.

[46] Hallam, supra note 38.

[47] Id. at *18–22.

[48] H.R. 2096, 117th Cong. (2021–2022); H.R. 4777, 117th Cong. (2021–2022).