Third-party versions do not comply with the bankruptcy code

A New York federal district court judge overturned bankruptcy court confirmation of Purdue Pharma, LP’s controversial Chapter 11 plan. The Purdue Pharma reorganization was intended to release all third party claims against the Sackler family based on their $ 4.325 billion contribution to the reorganization plan. Purdue Pharma and the Sackler family had faced a wave of lawsuits alleging they were responsible for the opioid crisis in that country through their aggressive marketing and sale of OxyContin.

By filing for bankruptcy, Purdue Pharma has ended all lawsuits against the company. However, as the Sackler family did not file for bankruptcy, claims against them continued. To defeat their lawsuits, the Sackler family convinced the bankruptcy court to grant them full discharge from all creditors’ claims.

The Federal District Judge has ruled that these third party releases granted to the Sackler family do not comply with the bankruptcy code and that creditors can still retain any direct claims they have against the Sackler family. The claims derived from the Chapter 11 debtor would have been protected. The decision also recognizes that there is a conflict in the circuits. The Sixth and Seventh Circuits recognize that Articles 105 (a) and 1123 (b) (6) give bankruptcy judges “residual authority” to impose discharges. The Fourth and Eleventh Circuits concluded that Section 105 (a) authorizes such releases. While the Fifth, Ninth and Tenth Circuits rejected the idea that a bankruptcy court could authorize discharges by non-debtors outside the asbestos context under section 524 (g).

Although this decision has very little precedent value as a decision of a district court, it is still an important decision to reaffirm the limitation of discharges of non-debtors in bankruptcy court. The case also highlights the dilemma of Chapter 11 mass torts cases where parties use the bankruptcy process to protect non-debtor parties in return for a contribution to pay under a Chapter 11 plan. The use of these non-debtor releases violates the authority of Congress given under the Bankruptcy Code. If Congress wants to codify the use of non-debtor receipts, it could do so as it did with the codification of asbestos cases from In re John-Manville Corp. Bankruptcy courts’ use of vague “equitable powers” is a stretch that gives non-debtor parties the ability to use bankruptcy as a sword to defeat lawsuits against them.

© 2021 Roetzel & AndressRevue nationale de droit, volume XI, number 356

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