In setting aside Purdue Pharma’s confirmation order, district court determines that non-consensual releases by third parties from the plan are not permitted by law
We wrote a lot here, here, and here on the issue of third-party releases in Chapter 11 plans. Widespread interest in third-party versions appeared to peak in 2021 with the high-profile nature and general impact of several recent Chapter 11 cases of companies billions of dollars, including those fighting the opioid fallout like Purdue Pharma.
New York’s Southern District Judge Colleen McMahon, who overturned Purdue’s much-publicized confirmation order on appeal, is the 142-page ruling and order recently released on third-party publications. non-consensual. The district court ruled that the Bankruptcy Code did not give the bankruptcy court statutory authority to grant non-consensual discharges in Purdue’s Chapter 11 plan of direct claims against non-debtor Sackler family members (the former owners of Purdue) and other non-debtor affiliates of Purdue. . In doing so, the district court considered the inconsistent approaches to the issue of non-consensual third party releases adopted by federal circuit courts and concluded that existing Second Circuit jurisprudence1, which has been widely interpreted as having left open the bankruptcy way for the approval of such releases in “rare” or “unique” circumstances, has in fact failed to address the fundamental question of whether there is a legal authority to approve such releases. The district court ruling, which tackles the issue head-on, appears to bar any avenue for approval of non-consensual third-party releases of direct claims against non-debtors in the Purdue bankruptcy case and upsets the understanding treaty of the applicable law in the second circuit. . Purdue said he plans to appeal the decision to the Second Circuit.
Bankruptcy court approves plan and publication over objections
Seeking a stay of thousands of lawsuits brought against him over his opioid pain reliever OxyContin, Purdue filed a Chapter 11 case in September 2019. After two years of extensive negotiations, multiple settlements and hotly contested litigation, Purdue ultimately upheld a reorganization plan with the consensus of over 95% of its voting creditors that included a discharge from certain direct third party claims against non-debtor Sackler family members and other non-debtor affiliates. These included complaints of willful misconduct, corporate fraud and misrepresentation, as well as complaints filed against directors and officers by some states for violating unfair business practices and consumer protection laws governing the sale of goods. ‘OxyContin. In return for those releases, the Sacklers agreed to pay about $ 4.5 billion to fund charities and opioid trusts as part of the plan. Eight states and the District of Columbia, among others, voted against the plan and opposed the releases. After several days of hotly contested hearings and scoping reviews of the discharges, the bankruptcy court approved the plan and the discharges, overturning the remaining objections. Some opponents subsequently appealed against the confirmation order.
District court overturns confirmation order
Before delving into the reasoning of the district court, it should be noted that the decision focuses on direct claims against non-debtors, which are claims based on “special” damage caused to a third party that can be directly attributed. to the conduct of a non-debtor. , rather than derivative claims, which are claims relating to harm caused to the company itself. Further, although the district court ruled that the bankruptcy court had jurisdiction to issue third party discharges, the heart of the decision rested on whether the bankruptcy code provided for the legal power to grant non-consensual releases by third parties for direct claims. The district court concluded that it did not – “not in its express text (which [was] conceded); not in his silence (who [was] contested); and not in any section or sections of the Bankruptcy Code which, read individually or together, purport to confer generalized or “residual” powers on a court sitting in bankruptcy. Notably, although the district court ruled that the bankruptcy court did not have the constitutional power to make a final order approving the discharges, the district court did not consider the other discharge arguments presented, including various constitutional challenges to non-consensual third party releases and whether they should be approved on the basis of the facts of the particular case, concluding that there is no legal authority to approve the release arrangement.
The bankruptcy court provided six different bases to support its decision to approve the discharges: Sections 105 (a), 1123 (a) (5) and (b) (6) and 1129 (a) (1) of the Bankruptcy Code, the absence of any contrary provision in the Bankruptcy Code and the “residual power” of the Bankruptcy Court to issue this type of discharge. The district court turned to each in turn, dismissed them, and ultimately found no authority for the type of third party releases provided for in the plan.
Section 105 (a) grants the bankruptcy court the power to “make any order, process or judgment that is necessary or appropriate to carry out the provisions of this Title”. Purdue argued that the Sacklers’ money was needed to carry out the plan and that in the absence of a release, the Sacklers would not have contributed to the estate. However, the district court determined that any exercise of Article 105 (a), at least within the second circuit, must be linked to another specific provision of the Bankruptcy Code and cannot be a source of independent authority. .
Article 1123 (a) (5) provides that a plan must “provide adequate means for its implementation”. However, none of the options presented by Article 1123 (a) (5), which involves the of the debtor patrimonial, confers any right to discharge a non-debtor from specific claims of third parties in return for their contribution to the mass. Therefore, the district court ruled that this section does not grant authority per se, or in combination with section 105 (a), for third party release.
Article 1123 (b) (6) provides that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this Title”. The district court considered this article to be analogous to article 105 (a). So, if Section 105 (a) cannot provide an independent authority to grant the third party releases sought in the Purdue Plan, then Section 1123 (b) (6) cannot either. The district court further determined that granting a discharge of fraud claims and civil penalties payable to and for the benefit of government units against a third party, where such claims could not be discharged against a debtor, was inconsistent with the Bankruptcy Code.
Section 1129 (a) (1) deals with one of the requirements for confirmation of a plan and provides that a plan should only be confirmed if it “complies with the applicable provisions of that title”. The district court held that Article 1129 (a) (1) does not confer any substantive rights of its own. Therefore, Section 1129 (a) (1), alone or in combination with Section 105 (a), could not be invoked to authorize the third party releases requested by the Sacklers and Purdue.
The district court then addressed the argument that the Bankruptcy Code’s silence on the issue of non-consensual third party releases is in fact a source of authority supporting the releases. The District Court presented four reasons why this argument is insufficient. First, the district court ruled that the silence is incompatible with the long-held notion that the Bankruptcy Code is exhaustive. “Complete”, explained the district court, means “complete”. Therefore, reading the extraordinary powers in the Bankruptcy Code where it is silent cannot rhyme with understanding that the Bankruptcy Code is complete. Second, the district court determined that Congress intended to help debtors, while not extending the benefits of the Bankruptcy Code to anyone else, and that it would therefore have been unnecessary to prohibit an action. that benefits third parties. Third, the district court found that Congress do talk about this when he passed sections 524 (g) and (h) – the sections of the Bankruptcy Code that provide the exact type of release Purdue is looking for, but only in asbestos cases. The district court ruled that by allowing releases under section 524 (g), Congress created an exception to the default structure of the Bankruptcy Code. Fourth, the district court ruled that the canon of statutory interpretation that “specific governs general” means that because Congress addressed the exact issue of third party releases in section 524 and chose to limit recourse exclusively to asbestos cases, a broader reading is not available.
Finding no authority in the Bankruptcy Code to support Sackler’s third-party releases, and finding that Congress’ silence in this matter was not a source of authority, the district court questioned whether it existed a “residual authority” to authorize such releases. He noted that the Sixth and Seventh Circuits concluded that Articles 105 (a) and 1123 (b) (6), read together, give the bankruptcy court a “residual power” which allows it to impose the type of non-consensual releases sought. in the Purdue plan. The district court, however, rejected this reasoning, finding that the non-debtor releases in the plan are in fact inconsistent with Articles 524 (g) and (h), 523 and 1141 (d) and possibly even with l Article 524 (e) of the Bankruptcy Code, and therefore no residual authority can authorize them.
Take away food
The district court’s opinion was an open invitation to the Second Circuit to issue further guidance on whether non-consensual third party releases of direct claims against non-debtors can be permitted in a plan. While it’s clear Purdue intends to appeal the district court’s opinion, it’s unclear when and how the Second Circuit will respond to the district court’s invitation. Until then, the ruling is a reminder that the extent of a court’s power to approve non-consensual third party releases of direct claims against non-debtors in a plan is an open question, and the parties must keep a watchful eye to see if the District Court’s decision has broader implications for other pending and future cases. Stay tuned for further updates as developments unfold.