Two Christmases ago, we posted about Judge Colleen McMahon‘s (SDNY) 142-page opinion reversing the plan confirmation order in the Purdue Pharma Chapter 11 bankruptcy appeal on the basis that its non-consensual third-party releases were improper under the Bankruptcy Code. Today however, the Second Circuit entered a 97-page opinion (including a concurrence) reversing the District Court’s opinion and affirming the Bankruptcy Court’s approval of the Purdue Pharma plan (and its releases of the Sacklers).

I’ll summarize the high points in this post, with an option of coming back to it.

Disclaimer/Admission: Third-party releases should be in this confirmation-focused blog’s sweet spot and we’ve addressed them before. However, I’ll be honest: SO MUCH has been said about third-party releases over the years and at almost every single ABI seminar I’ve ever attended that I’ve sort of stepped away from even trying to be on the cutting edge about the topic. It’s just too fluid for something that’s usually not relevant for my Chapter 11 plans.

Thus, I’ll defer the “deep think” about the front page mass tort release cases to folks like Prof. Melissa Jacoby at UNC and Prof. Lindsey Simon (now at Emory) who have been following this and other tort cases closely and lighting up Twitter today with excellent, thoughtful coverage.

As I did with the District Court opinion in December 2021, I asked Prof. Jacoby this afternoon for her quick take. I’m honored to share her thoughts, as follows:

The Second Circuit decision upholding the Purdue Pharma plan says the Bankruptcy Code authorizes non-consensual non-debtor releases, but the way the opinion lays it out makes it hard to take seriously, especially given the Supreme Court’s ruling in Jevic. Indeed, one need not even leave the opinion for a roadmap to the interpretive problems; the concurrence provides it. Perhaps this ruling is another example of tolerating big departures from rule of law in the hopes that the ends will justify the means. The effort may be very well meaning, but it also is dangerous.

My humble contribution is an obligatory “Breaking News” summary before your inbox gets flooded on Wednesday with more context and deeper (and better) coverage:

Holding: Non-consensual third-party releases of direct claims can, in specific circumstances, be, and those in the Purdue Pharma Plan are, statutorily permitted under §§ 105(a) and 1123(b)(6) of the Bankruptcy Code and are supported by Second Circuit case law, etc.

The Second Circuit’s “Proof

  1. The Bankruptcy Court had subject matter jurisdiction over the released claims because it was not only conceivable, but also likely, that the released claims would directly impact Purdue Pharma’s bankruptcy estate.
  2. Code Sections 105(a) and 1123(b)(6) (which provides that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of” the Code) provide the statutory authority for non-consensual third party releases.
  3. The 6th and 7th Circuits are right about that support, while the 5th, 9th, and 10th Circuits are wrong in viewing § 524(e) as barring such releases.
  4. Second Circuit precedent also provides similar support (including Manville I and Metromedia), even if the appellees argue otherwise.
  5. While the support is there, a court still must inquire into and make specific and detailed findings, usually only after extensive factual discovery, about 7 factors, provided that even if the 7 factors all favor non-consensual releases, a court can still refuse to approve them. As applied:
    • Factor 1: There was a sufficient identity of interests between the debtors and the released parties.
    • Factor 2: As narrowed, the claims against the debtors and the third-parties were sufficiently intertwined, both factually and legally.
    • Factors 3 and 4: The releases were essential to the reorganization and proper in scope (particularly after being narrowed).
    • Factor 5: A $5.5 billion contribution from the Sacklers, purportedly the largest contribution in history for such releases, was “substantial.”
    • Factor 6: The Plan had overwhelming support (including 95% of the personal injury voting classes) and many of the objecting parties stood down, leaving the United States Trustee (a governmental entity with no financial stake) as the primary remaining challenger on appeal.
    • Factor 7: The payment proposal (on potentially $40 trillion in claims!), while not in full, was “fair.”
  6. Equitable considerations prompted by other plan/deal features (e.g., the governance requirements, abatement trusts, public document archive, and Sacklers being out of the global opioid business) further supported approving the third-party releases.
  7. There were no due process problems because the claimants had adequate notice and a meaningful opportunity to be heard on the releases (which everyone agreed were constitutionally-protected interests).

Concurring Opinion: Circuit Judge Wesley reluctantly agreed with majority in so far as prior Second Circuit precedent (including Drexel) supported it and the majority filled the statutory gap in that precedent with §§ 105(a) and 1123(b)(6). Nevertheless, he expresses quite some concern about the opinion and states that, without clarity from Congress or the Supreme Court, the answer to the release issue is a “question of geography.”

Folks who are far smarter than I am will flesh all of this out over the next weeks and months until such time as the Supreme Court (likely?) takes it up.

If you’d like to stay on top of this and other important bankruptcy issues, then you can subscribe to Plan Proponent via email here.