Article courtesy of Maggie Parker-Yavuz (Akin Gump) and Jake Gawlak (Akin Gump)
Purdue Pharma L.P. v. City of Grande Prairie (In re Pharma L.P.), 69 F.4th 45 (2d Cir. 2023)
The U.S. Court of Appeals for the Second Circuit reversed the order of the U.S. District Court for the Southern District of New York and affirmed the bankruptcy court’s confirmation of Purdue Pharma L.P.’s chapter 11 plan, which included non-consensual releases of direct third-party claims against members of the Sackler family, who were not debtors in the bankruptcy case. The Second Circuit held that such releases are statutorily permitted under Sections 105(a) and 1123(b)(6) of the Bankruptcy Code, and articulated seven factors that bankruptcy courts should consider when determining whether such releases should be approved.
Purdue Pharma L.P. (“Purdue”) was owned and operated by the Sackler family (“Sacklers”) for decades, and members of the Sackler family held various director and officer positions. In the 1990s, Purdue introduced and marketed OxyContin, a semisynthetic opioid, as non-addictive. OxyContin was subsequently blamed for significantly contributing to the opioid epidemic.
By 2000, abuse of OxyContin was widespread and lawsuits against Purdue were proliferating. In 2004, Purdue’s board of directors voted to indemnify its directors and officers for claims against them in connection with their service to the company pursuant to an expansive indemnity. Between 2007 and 2016, Purdue distributed approximately $11 billion to Sackler family trusts and holding companies, a significant increase from previous years that reduced Purdue’s total assets by 75%. In September 2019, Purdue and its related entities (“Debtors”) filed for bankruptcy. The bankruptcy court enjoined all litigation, which included criminal and civil claims against the Debtors and Sacklers estimated at more than $40 trillion. The Debtors’ estate was estimated at approximately $1.8 billion. The plan of reorganization contained several non-consensual releases that, in effect, permanently enjoined certain third-party claims against the Sacklers; in exchange, the Sacklers were to contribute at least $4.325 billion to the Debtors’ estate.
The U.S. Bankruptcy Court for the Southern District of New York confirmed the plan of reorganization. The U.S. District Court for the Southern District of New York, however, vacated the bankruptcy court’s decision, reasoning that the Bankruptcy Code does not expressly allow third-party releases and Second Circuit case law does not identify a source in the Bankruptcy Code for authority to grant such releases.
On appeal, the Second Circuit identified the two primary questions posed as (1) whether the bankruptcy court had the authority to approve the non-consensual release of direct third-party claims against the Sacklers, non-debtors, through the plan, and (2) whether the text of the Bankruptcy Code, factual record, and equitable considerations supported the bankruptcy court’s approval of the plan. The Second Circuit first concluded that the bankruptcy court had statutory jurisdiction to impose the releases because of the likelihood that the resolution of the claims would directly impact the bankruptcy estate. With respect to authority under the Bankruptcy Code, the Second Circuit found that Sections 105(a) and 1123(b)(6) of the Bankruptcy Code, taken together, provide the statutory basis for the bankruptcy court’s equitable authority and permit its approval of the plan. The Second Circuit noted that, while Section 105(a) gives “broad equitable power”, it alone cannot justify the imposition of third-party releases. However, when linked with Section 1123(b)(6), which permits the inclusion of “any other appropriate provision” in a plan so long as it is “not inconsistent” with other sections of the Bankruptcy Code, such sections taken together constitute statutory authority for bankruptcy courts’ imposition of third-party releases. The court further found that Second Circuit case law permitted the imposition of third-party releases jointly under Sections 105(a) and 1123(b)(6).
Having concluded that the bankruptcy court had the requisite statutory authority, the Second Circuit next considered the circumstances under which nonconsensual third-party releases may be approved. It articulated seven factors that bankruptcy courts should consider before imposing such releases: (1) whether there is an identity of interests between the debtors and related third parties, including indemnification relationships, such that a lawsuit against the third party is essentially a suit against the debtor or will deplete the assets of the bankruptcy estate; (2) whether claims against the debtor and third party are factually and legally intertwined, including whether the debtors and the third parties share common defenses, insurance coverage or levels of culpability; (3) whether the scope of the releases is appropriate; (4) whether the releases are essential to the reorganization’s success; (5) whether the third party contributed “substantial assets” to the reorganization; (6) whether the impacted class of creditors “overwhelmingly” voted in support of the plan with the releases, with approval by 75% of voting creditors being the bare minimum; and (7) whether the plan provides fair payment of the enjoined claims. Evaluating the bankruptcy court’s findings of fact under each of these factors, the Second Circuit reversed the district court and affirmed the bankruptcy court’s approval of the plan.