On September 1, 2021, Justice Robert Drain issued a much anticipated oral decision approving the Purdue Pharma LP reorganization plan. The plan, which has garnered significant attention from media, lawmakers, academics and practitioners, frees current and future members of the Sackler family and many of their associates and affiliates – none of whom have filed for bankruptcy itself – from any liability for any damage caused by OxyContin and other opioids manufactured and distributed by Purdue Pharma. In return for the liability waivers, the Sacklers will contribute, over a nine-year period, up to $ 4.325 billion to a settlement fund from which payments will be made primarily to compensate victims and fund initiatives to reduce the burden. opioid epidemic.
Despite the Sacklers’ releases, the plan received overwhelming support from Purdue Pharma’s creditors, with more than 95% of votes in favor. Yet the plan has been fiercely opposed by some, including several states and the Office of the United States Trustee, the Justice Department’s arm that serves as a bankruptcy watchdog. The United States Trustee’s Office made several arguments in its objection, and we highlight some of the most notable below.
Objections Raised by the United States Office of the Trustee
First, the US office of the trustee challenged the plan’s third-party releases, calling them “nothing less than an illegal and court-ordered release of a potentially unlimited group of non-debtors.” The United States Office of the Trustee referred to Section 524 (e) of the Bankruptcy Code, which prohibits the discharge of non-debtors. Additionally, the United States Office of the Trustee cited Section 1129 (a) (1), which prohibits confirmation of a plan that does not comply with the applicable provisions of the Bankruptcy Code. The Office of the Trustee argued that the plan did not comply with Article 1141 (d) of the Bankruptcy Code since this article does not include the non-debtor parties as part of the discharge provided for the debtors upon confirmation. (ie it only allows Purdue Pharma and its related bankrupt subsidiaries to obtain releases).
Second, the United States Trustee’s Office argued that the releases contemplated in the plan exceeded the powers of the tribunal conferred by the United States Constitution. However, the United States Office of the Trustee has acknowledged that the United States Court of Appeals for the Second Circuit, which covers the Southern District of New York (where the Purdue case is pending), held that such Releases were permitted in certain circumstances, primarily when the non- debtors who obtain the releases contribute to the debtor’s recovery plan. The United States Office of the Trustee has argued that the releases from the Purdue plan extend to people far beyond those who contribute to the reorganization plan and are therefore ineligible. Further, the US Trustee’s Office argued that any case law to the contrary was wrongly decided.
Third, the US Trustee’s Office argued that Judge Drain should not examine the votes cast, but rather the large number of votes requested but not cast to determine whether the plan was “overwhelmingly” accepted.
The decision of the bankruptcy court
In his ruling, Justice Drain dismissed objections raised by the United States Office of the Trustee and others. Responding specifically to the objections of the United States Office of the Trustee, Justice Drain dissected the language of Section 524 (e) and, in particular, its use of prepositional phrases, and held that any reading of Section 524 (e) as excluding third party disclosures has been “effectively refuted”. Judge Drain held, “[i]It therefore seems clear, by virtue of well-reasoned case law as well as the Code itself, that Article 524 (e) is not a statutory obstacle to the issuance or execution of a liability waiver. under a plan in appropriate circumstances. Therefore, following this reasoning, the plan also satisfied the requirement that the plan complied with the applicable provisions of the Bankruptcy Code.
Judge Drain also responded to the United States Office of the Trustee’s argument that bankruptcy courts do not have the constitutional power to make a final order upholding a plan that contains a third-party claims release by citing Regarding Millennium Lab Holdings II, LLC, 945 F.3d 126 (3d Cir. 2019) and Lynch v. Lapidem Ltd. (In re Kirwan Offices SARL), 592 BR 489 (SDNY 2018). Justice Drain wrote that the court had only to “simply cite” these cases because “their logic cannot be improved upon in establishing that a procedure to determine whether a Chapter 11 plan which contains such a release must be upheld not only is a basic proceeding under 28 USC § 157 (b), but is also a fundamentally central aspect of adjusting a Chapter 11 case to the debtor / creditor relationship and, therefore, “Constitutionally essential” under Stern v. Marshall . . . and his descendants.
As to the United States Office of the Trustee’s argument regarding the vote, Judge Drain rejected this argument out of hand, holding that “this is not the way elections are conducted” and that “he is not there is no conceivable way to determine the preferences of those who did not vote other than that, they did not object to confirmation.
The United States Office of the Trustee, along with the states of Washington and Connecticut, have already filed stay-of-appeal motions. The states of Maryland, Washington and Connecticut, the District of Columbia, the city of Grande Prairie in Alberta, Canada, and the Peter Ballantyne Cree Nation have also appealed to have the confirmation order set aside.
The Split Circuit on third-party versions
Federal appeals courts are divided on whether non-consensual third party releases, such as those granted to the Sackler family and related parties under the Purdue plan, are permitted under the Bankruptcy Code. As indicated above, the analysis largely revolves around Article 524 (e) of the Bankruptcy Code, which provides that “the discharge of a debt of the debtor does not affect the liability of a debtor. other entity on, or the property of any other entity for, such debt. In addition to the second circuit, the fourth, sixth, seventh and eleventh circuits also allow such releases in at least certain circumstances, usually when they are essential to the plan. In contrast, the Fifth, Ninth, and Tenth Circuits generally prohibit such releases, with some exceptions for creditors committees, for actions taken by attorneys and advisers to the estate trustees, or in other limited circumstances, generally for conduct during, but not before, bankruptcy proceedings.
To complicate matters further, the question arises as to whether bankruptcy courts even possess the requisite constitutional jurisdiction to grant such discharges, as discussed in a series of United States Supreme Court decisions beginning with Stern v. Marshall. In 2019, the Third Circuit (which includes Delaware bankruptcy courts) became the first appellate court to deal with this issue, ruling that bankruptcy courts in fact have such constitutional jurisdiction, which we have already discussed. here. As noted, Drain J. concluded that there was no such constitutional obstacle. There is also the question of whether objections on appeal to Purdue’s now confirmed plan can be challenged on the basis of the equity theory doctrine, under which courts can dismiss cases on appeal. without substantive examination despite appropriate jurisdiction because a confirmed reorganization plan would be unraveled as a result. More information on theoretical fairness is available here.
In view of this division between federal courts of appeals and the important public interest in the Purdue plan, it is possible that the United States Supreme Court may have an opportunity to rule on the appeals and resolve the issue of whether non-consensual releases by third parties are permitted. under the Bankruptcy Code, notwithstanding Section 524 (e). While the Purdue plan releases are undoubtedly broad, there is also an argument that they are “important” to the resolution of the Purdue bankruptcy case, which makes it difficult to predict how the courts of appeal intermediaries or the Supreme Court will ultimately rule. It is also possible that Congress will step in and pass a bill prohibiting such releases in the future. We have already discussed the potential of such a bill here.
On September 17, 2021, Justice Drain issued an order confirming the plan, along with a 159-page written decision that amended his original oral decision of September 1. Stay tuned to the Real Bankruptcy Intel blog for further updates.