Second Circuit, Reversing Judge McMahon’s Order, Affirms Purdue Pharma Bankruptcy

Yesterday, the Second Circuit overturned Judge McMahon’s December 2021 decision rejecting the Purdue Pharma bankruptcy on the grounds that the Bankruptcy Code did not permit releases of third-party direct claims against non-debtors. As we previously covered, Judge McMahon’s opinion found that the bankruptcy court lacked authority to issue releases in favor of the Sackler family. 

While acknowledging that both sides put forth arguments “about fairness and accountability, particularly as it relates to the Sacklers, in releasing parties from liability for actions that cause great societal harm” the Second Circuit concluded that the only questions it needed to resolve were (1) whether the Bankruptcy Code permits nonconsensual third-party releases of direct claims against non-debtors, and (2) if so, were such releases proper here in light of all equitable considerations and the facts of this case. The Court answered both questions in the affirmative:

We conclude that two sections of the Bankruptcy Code, 11 U.S.C. §§ 105(a), 1123(b)(6), jointly provide the statutory basis for the bankruptcy court’s authority to approve a plan that includes nonconsensual releases of third-party claims against non-debtors. In addition, this Court has recognized that in specific circumstances—such as those presented by this appeal—bankruptcy courts are permitted to approve of restructuring plans that include such releases. We accordingly hold that the bankruptcy court’s approval of the releases here is permissible both statutorily and under this Court’s case law. We further hold that the bankruptcy court’s inclusion of the releases is equitable and appropriate under the specific factual circumstances of this case.

The Court also articulated seven factors to guide bankruptcy courts’ analysis of when to permit nonconsensual third party releases in future bankruptcy reorganization plans, including:

1. Whether there is an identity of interests between the debtors and released third parties;
2. Whether claims against the debtor and non-debtor are factually and legally intertwined;
3. Whether the scope of the releases is appropriate;
4. Whether the releases are essential to reorganization, in that the debtor needs the claims to be settled in order for the res to be allocated
5. Whether the non-debtor contributed substantial assets to the reorganization;
6. Whether the impacted class of creditors “overwhelmingly” voted in support of the plan with the releases; and
7. Whether the plan provides for the fair payment of enjoined claims.

The Second Circuit found that the bankruptcy court’s detailed findings supported approval of the Plan under each of the seven factors.