01.17.2024
Author: Elias Marwan Yazbeck

During the 1990s, Purdue Pharma L.P. (“Purdue”) launched OxyContin, a controlled-release semisynthetic opioid analgesic, which it promoted as non-addictive. See In Re Purdue Pharma L.P., 69 F.4th 45, 56 (2d Cir. 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., 144 S. Ct. 44, 216 L. Ed. 2d 1300 (2023). In the years that followed, OxyContin has been blamed for playing a substantial role in one of the most significant public health crises in United States history—the opioid epidemic. Id. As a result, Purdue was the target of a large number of lawsuits accusing it and its ownership of being a catalyst for the opioid epidemic through its alleged deceptive marketing of OxyContin. Id. In part to shield against those lawsuits, Purdue filed for bankruptcy in 2019 in the Southern District of New York. See id. at 60. The Sackler family, who owned and operated Purdue, and who were subject to trillions of dollars in tort claims, did not file for bankruptcy. Id.

The resulting bankruptcy plan included a provision for the release of claims against the Sacklers. Id. In exchange for a multi-billion dollar contribution by the Sacklers to the Debtors’ estate over a decade, the Debtors’ plan of reorganization contained several nonconsensual releases (the “Releases”) that, in effect, permanently enjoined certain third-party claims against the Sacklers. Id. at 60–61. These Releases were limited to only claims that directly affected the Debtors’ estate and for which Purdue’s conduct was a legal cause, or a legally relevant factor. Id. at 64. On subsequent appeal, however, the district court for the Southern District of New York reversed the bankruptcy court and vacated the bankruptcy court’s plan confirmation order, ruling that the Bankruptcy Code did not permit such third-party releases. Id. at 57. Other Circuits, including the Fifth Circuit, have held similarly. See Bank of N.Y. Tr. Co. v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 251–53 (5th Cir. 2009); Resorts Int'l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401–02 (9th Cir. 1995); Landsing Diversified Props.-II v. First Nat'l Bank and Tr. Co. of Tulsa (In re W. Real Estate Fund, Inc.), 922 F.2d 592, 600–02 (10th Cir. 1990). An appeal to the Court of Appeals for the Second Circuit followed and was heard before Circuit Judges Newman, Wesley, and Lee. Purdue Pharma, 69 F.4th at 54.

The Second Circuit’s published opinion, penned by the Honorable Judge Lee, focused on two key questions: first, does the Bankruptcy Code permit nonconsensual third-party releases of direct claims against non-debtors, and, second, if so, were such releases proper in light of all equitable considerations and the facts of this case. Id. at 57. The Court answered both in the affirmative, reversing the district court’s order and remanding the case to the district court for further proceedings. Id.

In re: Purdue Pharma L.P. turns, in part, on the Court’s application of Section 1123(b)(6) of the Bankruptcy Code. The Supreme Court has put the confirmed plan of reorganization on hold while it reviews the Second Circuit’s opinion. Perhaps then, some friendly speculation may also be had herein as to how the Supreme Court may agree, or disagree, with the Second Circuit’s conclusions of law.

Summary of Case

Purdue Pharma is about the bankruptcy court’s power. Specifically, whether there is authority under the Bankruptcy Code for the imposition of nonconsensual releases of direct third-party claims against non-debtors, and if so, does that authority allow for the inclusion of the subject Releases in the confirmed plan.

As the Supreme Court stated in Law v. Seigel, and as the concurrence points out: “equitable powers [that] remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.” Law v. Siegel, 571 U.S. 415, 421 (2014); see Purdue Pharma, 69 F.4th at 86 (J. Wesley, Concurring). And so, in agreement with the bankruptcy court, the Second Circuit grounded its authority for approving the subject Releases in Sections 105(a) and 1123(b)(6). Section 105(a) states that “[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code].” 11 U.S.C. § 105(a). Section 1123(b)(6) states that “a plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.” 11 U.S.C. § 1123(b)(6). Holding that “§ 105(a) alone cannot justify the imposition of third-party releases,” the Second Circuit’s decision hinged on Section 1123(b)(6) to provide the requisite authority. Purdue Pharma, 69 F.4th at 73. At a minimum, a novel plan provision under Section 1123(b)(6) should be (a) “appropriate,” and (b) “not inconsistent” with the applicable provisions of Title 11. See 11 U.S.C. § 1123(b)(6).  However, a look outside or behind the “applicable provisions,” at legislative history or public policy, may be deemed necessary depending on how the words “not inconsistent” are construed. See generally William N. Eskridge, Jr., Phillip P. Frickey & Elizabeth Garrett, Cases & Materials On Legislation: Statutes & The Creation Of Public Policy at 689–798 (4th ed. 2007) (historical survey, with example cases, of theories of interpretation applied by the federal courts and the role of legislative history/public policy in them).

Relying on the Supreme Court’s description of Section 1123(b)(6) in United States v. Energy Resources Co., Inc., the Second Circuit, like the bankruptcy court before it, found that because bankruptcy courts are bestowed with “residual authority” under Section 1123(b)(6), the nonconsensual release of third-party claims was something it had the power to do. Purdue Pharma, 69 F.4th at 73 (citing United States v. Energy Resources Co., Inc., 495 U.S. 545, 549 (1990)).

Having “crossed the bridge,” the Second Circuit then moved on to apply certain equitable factors it believed justified or supported confirmation of a plan with the subject Releases. Purdue Pharma, 69 F.4th at 85 (J. Wesley, concurrence). Namely, that (a) the Releases were important to the plan and (b) the breadth of the Releases was necessary to the plan. Id. at 77. The Second Circuit based its formulation and application of these equitable factors on precedent which did not discuss Section 1123(b)(6). As commented in Judge Wesley’s reluctant concurrence, the Second Circuit’s discussion of precedent for nonconsensual nondebtor releases did not explain how Section “1123(b)(6)’s equitable repository” includes “the power to extinguish an individual’s claim against a nondebtor without their consent, and without providing them any value in return.” Id. at 89. The relied-upon precedent said “nothing about a nondebtor’s obligations under the Bankruptcy Code whatsoever.” Id. “At bottom,” the concurrence concluded, “if Congress intended so extraordinary a grant of authority, it should say so.” Id. at 90.

Another look

The Supreme Court’s forthcoming decision may pivot on an interpretation of Congress’ choice of language within the Bankruptcy Code, specifically the phrase “not inconsistent” in Section 1123(b)(6). Although the equitable factors applied after the Court determined it had authority for the Releases show consistency with case law precedent, they do not necessarily show that the provision is “not inconsistent” with all “applicable provisions” as required by Section 1123(b)(6).  The argument could be made that Congress deliberately inserted this language to set a higher standard than what is merely important or necessary to a proposed plan. In other words, the Supreme Court may contend that the term “not inconsistent” necessitates a more stringent criterion, requiring that any proposed plan provision align not just with specific parts or features of Title 11 but with the entirety of the Bankruptcy Code. This interpretation implies a broader consideration, demanding that any exercise of authority under Section 1123(b)(6) is not only compatible with isolated components of the Code but also in harmony with the “very nature of bankruptcy, including the role it is intended to serve and the parties it is intended to benefit.” Id. at 57. Such a stance would imply that a wider and taller hurdle must be overcome by those seeking to utilize Section 1123(b)(6) in their favor.

Implications

Because Purdue Pharma is about the power of a court of equity and about applying these equitable powers within the confines of the Bankruptcy Code, Section 1123(b)(6) now has joined Section 105 as another gem on the infinity gauntlet, through which the portals of third-party releases have been opened. Purdue Pharma assigns a particular scenario (nonconsensual release of third-party claims against nondebtors without a monetary cap) to specific code sections that are by their nature open to broad interpretation. Without the intervention of the Supreme Court, the opinion may also eventually lead to action by the legislature, as was done in 1994 with third-party asbestos claims,[1] to place enumerated limitations on a court’s grant of authority for third-party releases.  Of course, the opinion also has given rise to new forum shopping concerns. “As it stands, a nondebtor’s ability to be released through bankruptcy turns on where a debtor files.” Id. at 91.

Conclusion

The Second Circuit’s decision, anchored in Section 1123(b)(6) and Section 105(a) of the Bankruptcy Code, blessed the nonconsensual releases and sparked debates over the extent of a court’s authority within the bankruptcy framework. The implications of Purdue Pharma extend beyond the case itself, highlighting the inherent ambiguity in the language of the Bankruptcy Code, particularly in Section 1123(b)(6), leaving room for broad interpretation and potentially necessitating clearer statutory limitations. The impending review by the Supreme Court adds an extra layer of significance, as its decision will shape the future landscape of nonconsensual releases and the parameters of court authority within the realm of bankruptcy.


[1] In 1994, Congress amended the Bankruptcy Code to provide express authorization for nondebtor releases in asbestos-related bankruptcies, subject to a stringent set of requirements. See 11 U.S.C. § 524(g).

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