[Purdue Pharma Bankruptcy Series] Second Circuit Affirms Permissibility of Nonconsensual Third Party Releases in Purdue Pharma Case

Editor’s Note: On August 10, 2023, the Supreme Court of the United States agreed to hear the appeal of the bankruptcy of Purdue Pharma. In its grant of certiorari, the Supreme Court asked the parties to brief and argue “[w]hether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.”

This week’s post features an article about how the Second Circuit reaffirmed the permissibility of nonconsensual third-party releases in the Purdue Pharma Bankruptcy. This will be the last post for now in our mini-series on Purdue Pharma’s bankruptcy. All briefs in the case are due on October 20, 2023; shortly thereafter, we hope to feature one pro-release amicus brief and one anti-release amicus brief. Beginning next week, we will return to regularly-scheduled posts.

For some prior coverage on the BRT regarding Purdue Pharma’s bankruptcy, please see articles here (by Jonathan C. Lipson and Melissa B. Jacoby), here (by Lauren Pansegrau and Jessie Lin), here (by Martin J. Bienenstock & Daniel S. Desatnik and Jared Mayer), here (by Jonathan Lipson, Adam Levitin, and Stephen Lubben), here (by William Organek), here (by Marshall Huebner and Marc Tobak), and here (by Jonathan Lipson).

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By George E. Zobitz, Paul H. Zumbro, and Lauren A. Moskowitz (Cravath, Swaine & Moore LLP)

In a long-awaited decision, on May 30, 2023, the U.S. Court of Appeals for the Second Circuit rendered its opinion in the Purdue Pharma bankruptcy case and affirmed the permissibility of nonconsensual third-party releases in bankruptcy plans under appropriate circumstances. In doing so, the Second Circuit reversed Judge Colleen McMahon of the U.S. District Court for the Southern District of New York, who vacated the bankruptcy court’s earlier order approving nonconsensual third-party releases in Purdue Pharma’s bankruptcy plan. 

The Second Circuit’s decision came on the heels of a ruling by District Judge Richard J. Andrews of the U.S. District Court for the District of Delaware, who affirmed the power of bankruptcy courts to approve nonconsensual third-party releases under appropriate circumstances in the Boy Scouts of America bankruptcy case.

On August 10, 2023, the Supreme Court granted certiori to review the Second Circuit’s decision and will decide whether the Bankruptcy Code authorizes bankruptcy courts to approve nonconsensual third-party releases as part of a plan of reorganization.  We believe that the Second Circuit reached the correct answer in determining that such releases are permitted by the Bankruptcy Code in appropriate cases and that the Second Circuit adopted an appropriate standard to ensure that such releases are only granted where it is appropriate to do so. 

Nonconsensual third-party releases can be controversial for a host of reasons and under certain circumstances may create the potential for abuse, but we believe that bankruptcy judges can and do exercise their discretion to approve such releases, in appropriate cases, in a manner that benefits the body of claimants as a whole.  Indeed, under certain circumstances, nonconsensual third-party releases may be the only way claimants can obtain a recovery against a limited pool of resources that would otherwise be dissipated through piecemeal litigation.  

Concerns about third-party releases can be addressed by ensuring that a rigorous standard is in place so that nonconsensual third-party releases are granted only in those cases where they are truly necessary to implement a reorganization that benefits creditors.  The Second Circuit did this by articulating a seven factor test, largely following the standard we proposed in the amicus brief we filed on behalf of our client, The Association of the Bar of the City of New York (Committee on Bankruptcy and Corporate Reorganization).  This standard requires consideration of the following factors:

1. Whether there is an identity of interest between the debtor and the released parties;
2. Whether there is factual and legal overlap between claims against the debtor and the settled third-party claims;
3. Whether the releases are essential to the reorganization;
4. Whether the releases are proper in scope;
5. Whether the released party made a substantial contribution to the reorganization;
6. Whether the plan containing the releases was overwhelmingly approved by creditors; and
7. Whether the payment in respect of enjoined claims is fair.

Along with the rest of the restructuring community, we are anxious to receive the Supreme Court’s direction in this important area of law.

Click here to read the full article.