The recent decision by the United States District Court for the Southern District of New York in In re Purdue Pharma LP, 635 B.R. 26 (S.D.N.Y. 2021) highlighted a significant unsettled issue in bankruptcy law that will receive much more attention in the coming months and years. Purdue Pharma highlighted the question of whether a confirmed bankruptcy plan can release non-debtor third parties from liability related to the subject of the bankruptcy case. Ultimate resolution of this issue will have far-reaching consequences for creditors and for parties related to bankruptcy debtors, such as corporate officers or owners.
In Purdue Pharma, the debtor pursued bankruptcy due to substantial litigation regarding its product, OxyContin. Purdue Pharma proposed a bankruptcy plan that included a release from liability in existing and future opioid lawsuits for members of the Sackler family, who founded and managed the debtor. The proposed release would have been binding against future opioid lawsuit plaintiffs who were not involved in the bankruptcy, and against state attorneys general who opposed confirmation of the Purdue Pharma plan. The court concluded that the bankruptcy code did not authorize courts to confirm bankruptcy plans that include nonconsensual releases of third-parties. The court found that Congress expressly granted bankruptcy courts the authority to approve plans with nonconsensual third-party releases only in asbestos cases.
The third-party release issue highlighted in Purdue Pharma poses a significant challenge for large bankruptcy cases, typically under Chapter 11. Chapter 11 plans are custom-tailored to specific cases and are intended to allow the debtor to reorganize and emerge from bankruptcy and continue operating. Chapter 11 plans often include creative provisions, including contributions by non-debtor third parties in exchange for release and indemnification of these third parties.
Currently, federal courts across the country have split on whether the type of release at issue in Purdue Pharma is permitted by federal law. The issue is expected to eventually be addressed by the United States Supreme Court.
Because bankruptcy law regarding nonconsensual third-party releases is rapidly evolving, the rights of creditors and parties closely related to debtors may change significantly in the coming months and years.If you have questions regarding how a bankruptcy has affected your rights, Erickson|Sederstrom recommends consulting with counsel.Erickson|Sederstrom’s experienced litigation and bankruptcy attorneys can help work through these and other bankruptcy-related issues, including pursuit of creditor claims and defense of preference actions.