USA Trends and Developments Contributed by: Paul M “Tad” O’Connor III, Joshua D Fulop, Daniel J Koevary and Matthew B Stein, Kasowitz Benson Torres LLP
Bankruptcy Code’s authorisation that a reorgani- sation plan can include “any other appropriate provision” was not sufficiently broad to encom- pass a third-party release, given the other provi- sions of the US Bankruptcy Code. Purdue Pharma LP developed, manufactured, and marketed OxyContin, an opioid that the company promoted as non-addictive. On 15 September 2009, Purdue Pharma LP filed for Chapter 11 bankruptcy in an effort to resolve thousands of lawsuits related to the drug against the company and its equity owners (the Sackler family and related entities). In September 2021, as part of the US Bankruptcy Court’s decision to confirm the debtors’ reorganisation plan, Judge Drain issued a decision extending non-consen- sual third-party releases and injunctions to the Sackler family and related entities. In support of the holding that the third party-release was authorised, the US Bankruptcy Court found that that the Sacklers had agreed to: • pay USD4.325 billion over nine years; • certain restrictions on naming rights; • not engage in business with the reorganised debtors; • exit foreign companies within a prescribed time; • release a public document depository (includ- ing privilege waivers) that future governments and the public could evaluate and benefit from; and • certain “snap back” protections to enhance collectability upon default in settlement pay- ments. Eight objecting states and the US Trustee, among others, appealed. Judge McMahon reversed the US Bankruptcy Court’s decision. The court reviewed the releases de novo, hold- ing that the US Bankruptcy Court did not have
the constitutional authority to enter a final order in the case. In her analysis, Judge McMahon found that nothing in the US Bankruptcy Code author- ises non-consensual third-party releases for non-derivative claims (those claims for which a creditor may be liable independently of the debtor) and non-asbestos claims (which Sec- tion 524(g) of the US Bankruptcy Code express- ly allows). Judge McMahon expressly rejected the argument that any “equitable authority”, or “residual” authority in other provisions of the US Bankruptcy Code, permits third-party releases. At the same time, she acknowledged the well- developed body of case law across the circuit courts (as well as within the Second Circuit) that have permitted such releases, observing ‒ even though “[o]ne would think that this had been set- tled long ago” ‒ that “[i]t has not been”. Subsequently, the debtors and other parties who supported the reorganisation plan appealed. The Second Circuit reversed the district court’s deci- sion and reinstated the US Bankruptcy Court’s order confirming the plan. The Second Circuit based its rationale on the lack of a specific authority in the US Bankruptcy Code preclud- ing third-party releases. In doing so, the court relied on Section 105(a), which grants bank- ruptcy courts broad equitable power to effectu- ate provisions of the US Bankruptcy Code. The court also relied on Section 1123(b)(6), which provides that a reorganisation plan can “include any other appropriate provision not inconsist- ent with the applicable provisions of this title”. These sections ‒ acting in tandem ‒ “grant bank- ruptcy courts a residual authority consistent with the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships”.
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