August 22, 2023 - Earlier this month, the US Supreme Court (the “Court”) issued an order putting the Purdue Pharma bankruptcy confirmation plan on hold and agreeing to hear an appeal by the United States Bankruptcy Trustee (the “Trustee”) of the decision by the US Court of Appeals for the Second Circuit (the “2nd Circuit”) to confirm the plan. The Court will hear oral argument in December. The specific issue under review is whether non-consensual third-party releases are permissible under the bankruptcy code. A helpful summary of the Court’s actions provided by SCOTUSblog is available here. Importantly, while the Purdue case involves the use of third-party releases in a “mass torts” case, the Court’s ruling will also determine whether they are permitted in typical corporate workouts.
Background. Purdue Pharma is the maker of OxyContin, a painkiller that generated billions of dollars of revenue but was implicated in a serious public health crisis involving the abuse of opioid painkillers. The company was the target of thousands of lawsuits and in 2019 filed for bankruptcy protection to shield against those lawsuits. Members of the Sackler family, the owners of Purdue, agreed to contribute $4.5 billion to fund the bankruptcy plan. In exchange, the Sackler family would be released from all liability in what is known as a third-party release. After a series of negotiations, the plan was approved by the bankruptcy court over the Trustee’s objections. The US District Court overturned confirmation of the plan, ruling that the third-party releases were not authorized by the bankruptcy code. (We covered that decision and its implications here). In May, the 2nd Circuit reversed and approved the plan, leading to the Trustee’s request for a stay and, effectively, a petition for certiorari. The U.S. Solicitor general, representing the Trustee, argued that nothing in the bankruptcy Code gives bankruptcy courts the power to approve such a sweeping third-party release and the case raises “serious constitutional questions by extinguishing private property rights without providing an opportunity for the rights holders to opt in or out of the release.”
What does this mean for third-party releases in corporate bankruptcies and loan workouts? Non-consensual third-party releases are ubiquitous in corporate bankruptcies, particularly in those involving private equity-sponsored companies, so the stakes are high. At bottom, it seems clear that whatever the Court decides in the context of this mass torts case will spill over to typical corporate restructurings. It is hard to imagine the Court ruling that bankruptcy courts don’t have the statutory power to approve non-consensual releases in mass tort cases but do in corporate cases. Similarly, if the Court finds that constitutional roadblocks prevent these releases, it is also unlikely that the Court would distinguish mass tort cases from corporate cases. We have written extensively on the topic of third-party releases, including on the potential impact of the Purdue case. The Creditor Rights Coalition has also published a Special Feature which includes several (conflicting) expert views of the 2nd Circuit’s decision on third-party releases. Some experts argue that third-party releases are not countenanced by the bankruptcy code and violate the Constitution’s takings clause, and others that bankruptcy courts do have the power, that third-party releases have been in use for decades, and that they make great sense from a policy perspective. Indeed, they argue, the Purdue plan, which will make billions of dollars available to plaintiffs, would not have been possible without the release of the Sackler family. Others counter that if the plan is overturned, the parties will go back to the table and renegotiate a deal that will not include non-consensual releases, something that has happened in many previous contentious bankruptcies.
What’s next and the bottom line. The Court will hear oral argument in December 2023 after which it will render an opinion by the end of June 2024. If they affirm the 2nd Circuit’s decision, the Purdue Pharma plan of reorganization will be implemented. The impact of such a decision on future third-party releases would depend on the breadth or narrowness of the Court’s opinion. If the Court reverses, the plan will be struck down and the case remanded back to the bankruptcy court for further proceedings. This result will also likely mean that non-consensual third-party releases will no longer be a tool available in corporate workouts. As we (perhaps presciently) noted after the District Court’s decision striking down the plan or reorganization, “if the 2nd Circuit and/or the Supreme Court affirm the court’s view on the narrowness of courts’ general Section 105(b) equitable or residual authority, the implications on reorganization practice, perhaps even beyond the limited issue of third-party releases, could be profound.
We will continue to follow this case and report as developments require. Please contact Elliot Ganz if you have any questions.