On May 30, 2023, the U.S. Court of Appeals for the Second Circuit delivered an opinion holding that Bankruptcy Code §§ 105(a) and 1123(b)(6) enable Purdue Pharma L.P. and associated entities to include in their Chapter 11 plan, non-consensual third-party releases of direct claims against non-debtors. The circuit court reversed the district court’s contrary decision and upheld the bankruptcy court’s order confirming the plan.
The U.S. District Court for the Southern District of New York had overturned the bankruptcy court’s order approving the Purdue plan. The district court found that the bankruptcy court lacked express or implied statutory authority under the Bankruptcy Code to approve non-consensual releases of direct third-party claims against non-debtors. Furthermore, the district court determined that the bankruptcy court lacked residual equitable authority to approve these releases, and that the necessary authority for such approval was not obtained merely because the plan required the releases for confirmation.
As is now familiar, Purdue and members of the Sackler family were caught up in mass tort litigation related to the effects of OxyContin. In order to settle these civil claims, a deal was made whereby Purdue would file for bankruptcy, and in return, the Sacklers would personally contribute billions of dollars to the bankruptcy if all civil claims against them were released. As such, Purdue and related entities filed Chapter 11 bankruptcy petitions in the U.S. Bankruptcy Court for the Southern District of New York, while the Sackler family did not. After extensive action in the bankruptcy court, the court approved Purdue’s proposed plan of reorganization. This plan included a non-consensual third-party release of claims against the Sacklers, which directly affected Purdue’s estate. In exchange, the Sacklers agreed to contribute between $5.5 and $6 billion to the bankruptcy.
Multiple parties, including the Office of the United States Trustee, appealed the confirmation ruling to the district court. As mentioned, the district court reversed but was then itself reversed by the Second Circuit.