Article courtesy of Margaret G. Parker-Yavuz (Akin Gump) and Chanwon (Pio) Yoon (Akin Gump)
In re Purdue Pharma, L.P., 2021 Dist. LEXIS 242236 (S.D.N.Y. Dec. 16, 2021)
The U.S. Bankruptcy Court for the Southern District of New York confirmed a chapter 11 plan of Purdue Pharma L.P. and its debtor affiliates which provided, among other things, that members of the Sackler family and individuals and entities related to them would be released from third-party claims, including a release of all civil liability for direct claims filed against them as individuals. On appeal, the District Court for the Southern District of New York vacated the bankruptcy court’s order confirming the plan on the basis that the Bankruptcy Code does not permit the granting of non-consensual releases of direct claims against non-debtors outside of the asbestos context.
In 2007, Purdue Pharma L.P. (“Purdue Pharma”) admitted by way of a plea agreement (the “2007 Plea Agreement”) with the United States that it falsely marketed OxyContin, a controlled-release semisynthetic opioid analgesic manufactured and distributed by Purdue Pharma, as non-addictive and had submitted false claims to the federal government for reimbursement of medically unnecessary opioid prescriptions. OxyContin’s popularity as a pain reliever coincided with the widespread abuse of the drug around the country and contributed to the opioid crisis.
The first round of lawsuits against Purdue Pharma took place from 2001 to 2007 where plaintiffs across the country filed individual and class actions against Purdue Pharma in state and federal courts pleading various theories of liability as a result of Purdue Pharma’s development, testing, manufacturing, distributing and marketing of OxyContin. As part of the 2007 Plea Agreement, Purdue Pharma agreed to pay over $600 million to settle claims which was intended to resolve issues relating to Purdue Pharma’s misrepresentation. After the 2007 Plea Agreement, members of the Sackler family, who owned Purdue Pharma and served as directors to Purdue Pharma until 2019, distributed significant amounts of money from Purdue Pharma to themselves in the years 2008 to 2016. These “aggressive” distributions to shareholders totaled approximately $10.4 billion and substantially reduced Purdue Pharma’s solvency cushion. Members of the Sackler family then withdrew from the board of directors and management.
Starting in about 2014, new lawsuits began to be filed against Purdue Pharma concerning its promotion and marketing of OxyContin and members of the Sackler family were named as defendants. “Engulfed in a veritable tsunami of litigation,” Purdue Pharma filed for chapter 11 bankruptcy in September 2019. During the course of its bankruptcy case, Purdue Pharma engaged in mediation with committees of various classes of creditors and these parties crafted a plan of reorganization for Purdue Pharma (the “Plan”). The Plan provided, among other things, that (1) the Sackler family would contribute $4.325 billion to fund various trusts that would fund opioid abatement efforts and compensate personal injury claimants, (2) Purdue Phama would cease to exist and the current business operating assets would be transferred to and operated by a new entity and (3) the members of the Sackler family and individuals and entities related to them (over 1,000 individuals and entities) would be released from third-party claims, including a release of all civil liability for direct claims filed against them as individuals.
On September 17, 2021, the bankruptcy court confirmed the Plan. The appellants before the Court, among others, the U.S. Trustee, various states, municipalities and tribes (the “Appellants”) objected to the bankruptcy court’s confirmation of the Plan, arguing that the non-consensual releases of direct claims against the Sackler family were unconstitutional, violated the Bankruptcy Code and were inconsistent with Second Circuit law.
The Appellants attacked the legality of the Plan’s non-consensual release of third-party claims against non-debtors on a number of grounds. They argued that the release was both constitutionally defective and not statutorily authorized, that the bankruptcy court lacked constitutional authority and subject matter jurisdiction to approve the release or to carry out certain “gatekeeping” aspects of the Plan that related to it, and that granting a release to the Sackler family (non-debtors) was unwarranted as a matter of fact and constituted an abuse of the bankruptcy process. On appeal, the Court focused on whether a bankruptcy court is statutorily authorized to grant non-consensual releases of direct claims by third-parties against non-debtors in connection with the confirmation of a chapter 11 bankruptcy plan.
The Court first noted that a bankruptcy court has broad “related to” jurisdiction over any civil proceedings that “might have any conceivable effect” on the estate. Because the civil proceedings against the Sackler family (non-debtors) may have a conceivable impact on the estate, the Court held that the bankruptcy court had subject matter jurisdiction to approve the section of the Plan providing for the releases of direct claims against non-debtors.
The Court next addressed whether the Bankruptcy Code authorizes a bankruptcy court to order non-consensual release of third-party claims against non-debtors in connection with the confirmation of a chapter 11 bankruptcy plan.
First, the Court noted that all parties agree that section 524(g) of the Bankruptcy Code is the only section of the Bankruptcy Code that expressly authorizes a bankruptcy court to enjoin third-party claims against non-debtors without the consent of those third-parties. Section 524(g) was passed by Congress in 1994 and provides for injunctions barring third-party claims against non-debtors “solely and exclusively in cases involving injuries arising from the manufacture and sale of asbestos.” The Court further noted that Congress (1) “left to itself, not the courts, the task of determining whether and how to extend a rule permitting nondebtor releases” in insolvency proceedings seeking relief from non-asbestos liabilities and (2) has been “deafeningly silent” on this issue.
Next, the Court considered the Second Circuit decision in In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005) (“Metromedia”). The Court explained that while the Second Circuit in Metromedia said a great deal, the case did not hold much of anything. Although the Second Circuit in Metromedia provided that non-consensual third-party releases against non-debtors could be approved in “unique circumstances,” it did not provide (i) such releases or (ii) a clear standard for determining such unique circumstances. Further, the Court found that the Second Circuit in Metromedia did not conclude that such releases, if approved, were consistent with or authorized by the Bankruptcy Code.
The Court then reviewed the bankruptcy court’s analysis of sections 105(a) and 1123(a)(5) and (b)(6) of the Bankruptcy Code. The Court explained that section 1123(b)(6) of the Bankruptcy Code provides the substantive authority for an injunction or approval of a release under section 105(a) of the Bankruptcy Code and that the two sections are analogous. Specifically, section 1123(b)(6) of the Bankruptcy Code provides that a plan may “include any other appropriate provisions not inconsistent with the applicable provisions of this title.” Section 105(a) of the Bankruptcy Code authorizes “any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” The Court further determined that if section 105(a) of the Bankruptcy Code does not confer any substantive authority on the bankruptcy court, then section 1123(b)(6) of the Bankruptcy Code cannot be read to confer such authority. Section 1123(a)(5) of the Bankruptcy Code provides that a plan of reorganization must “provide adequate means for [its] implementation.” The Court concluded that nothing in section 1123(a)(5) authorizes a bankruptcy court to grant something that the Bankruptcy Code does not otherwise allow simply because doing so would ensure funding for a plan. Finally, the Court reviewed section 1129(a)(1) of the Bankruptcy Code which provides that a bankruptcy court “shall confirm a plan only if . . . the plan complies with the applicable provisions of this title.” Similar to the cited sections of section 1123, the Court noted that section 1129(a)(1) “confers no substantive right that could be used to undergird a section 105(a) injunction.”
The Court also reviewed Purdue Pharma’s argument that the bankruptcy court must be statutorily authorized to approve the releases as such authority can be inferred from Congressional silence. The Court rejected this argument on the grounds that (1) inferring from silence is inconsistent with the notion that the Bankruptcy Code provides a comprehensive federal system that governs the orderly conduct of debtors’ affairs and creditors’ rights; (2) inferring consent from silence in circumstances when one would expect Congress to speak is counterintuitive; (3) Congress has spoken on the subject of non-debtor releases, and what it has said suggests that it intended sections 524(g) and (h) to preempt the field where non-debtor releases were concerned; and (4) debtors seek to apply generalized provisions of the Bankruptcy Code to justify expanding the express authority conferred by Congress. As to the issue of whether a bankruptcy court has “residual authority” to approve reorganization plans that includes necessary and appropriate provisions not inconsistent with title 11, the Court concluded that such authority does not exist in the circumstances of this case because there is nothing in the Bankruptcy Code that expressly authorizes the Plan’s releases and a bankruptcy court may not “insert a right that does not appear in the Bankruptcy Code in order to achieve a bankruptcy objective.”
The Court concluded that, contrary to the bankruptcy court’s decision, sections 105(a) and 1123(a)(5) and (b)(6) of the Bankruptcy Code, whether read individually or together, do not provide a bankruptcy court with statutory authority to order the non-consensual release of third-party claims against non-debtors, and bankruptcy courts do not have “equitable authority” or “residual authority” outside of specific, substantive grants of authority in the Bankruptcy Code. The Court concluded that the Bankruptcy Code does not authorize such non-consensual non-debtor releases — not in its express text, not in its silence and not in any section or sections of the Bankruptcy Code that, “read singly or together, purported to confer generalized or residual authority.” Therefore, the Court vacated the bankruptcy court’s confirmation order of the Plan.