Typically, the bankruptcy code primarily extends its protections solely to the debtor who files for bankruptcy. But what happens when the debtor is a corporation? Can the corporate insiders, who did not themselves file for bankruptcy, also benefit from the protections of the bankruptcy code?
On September 15, 2019, Purdue Pharma (“Purdue”) and its affiliates filed Chapter 11 bankruptcy following a surge in lawsuits relating to OxyContin liability.[i] OxyContin is an opioid painkiller that was released by Purdue in 1995 and has been a pivotal contributor to the opioid epidemic. Between 1996 and 2001, Purdue aggressively promoted OxyContin, leading to increased legal and illegal drug use, even as addiction concerns grew. By 2000, state governments were reporting widespread OxyContin abuse to Purdue. In 2001, the Food and Drug Administration forced Purdue to remove the low addiction risk claim from the drug’s label, triggering more than 3,000 lawsuits against Purdue, involving individuals, state governments, and federal agencies.[ii]
During its bankruptcy case, Purdue sought confirmation of a reorganization plan that included extensive releases of civil claims against non-debtor family members (the Sacklers), who also served as directors and officers of the debtor entities. Specifically, the Sacklers agreed to contribute up to $6 billion to fund Purdue’s reorganization plan, but only on the condition that the Sacklers and other individuals and entities (who did not themselves file for bankruptcy) receive a release from liability.[iii]
Despite objections, the United States Bankruptcy Court for the Southern District of New York confirmed the plan, notwithstanding modifications limiting shareholder releases against family members.[iv] Subsequently, the District Court vacated the order, ruling that the Bankruptcy Code does not allow non-consensual releases of third-party claims against non-debtors.[v] This decision was primarily based on Section 524(e) of the bankruptcy code which says that “discharge of a debt of a debtor does not affect the liability of any other entity on, or the property of any other entity. . . .”[vi] Purdue then appealed, and the Second Circuit Court of Appeals affirmed the Bankruptcy Court’s ruling, allowing the Sacklers to be released from liability.[vii]
After this decision, the Second Circuit joined the Fourth, Sixth, and Seventh circuits in permitting non-consensual third-party releases of non-debtors from creditor’s claims.[viii] These circuits contend that Section 524(e) does not prohibit third-party releases in bankruptcy plans.[ix] They argue that Section 524(e) lacks explicit language limiting the bankruptcy court’s authority to release non-debtors from creditors’ claims, suggesting that Congress would have used stronger language if it intended such a restriction. Moreover, they point out that when Congress intends to restrict the bankruptcy court’s powers, it does so explicitly in other sections of the Bankruptcy Code.[x] Consequently, they find no textual reason to preclude the inclusion of third-party releases in reorganization plans. Other circuits, however, argue that bankruptcy courts cannot impose non-consensual third-party releases, emphasizing that the bankruptcy process’s protections are designed solely for the debtor, not third parties.[xi]
To resolve this circuit split, the United States Supreme Court put the reorganization plan of Purdue Pharma on hold. The Supreme Court will address “whether 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 non-debtors against non-debtor third parties, without the claimants’ consent.” [xii]
The forthcoming decision by the Supreme Court carries profound implications for the bankruptcy landscape and corporate practices. If the U.S. Supreme Court permits third-party releases, it may inadvertently allow corporations to exploit bankruptcy as a shield against mass tort liability. This could undermine accountability for their actions, leaving claimants without recourse. Conversely, if the Court decides against allowing these releases, it may discourage corporate insiders from contributing funds to the bankruptcy estate or entering into settlement agreements with various claimants. In this scenario, corporate stakeholders might be hesitant to negotiate resolutions, fearing ongoing liability even after bankruptcy proceedings. This, in turn, could complicate the process of reaching settlements and escalate time and costs.
In essence, the Supreme Court’s decision will impact pharmaceutical companies and various industries, shaping the dynamics of corporate behavior, accountability, and bankruptcy proceedings.
[i] See Bunch & Brock, What is the Difference Between Chapter 7, 11, and 13?, Bunch & Brock Attorneys At L. (Apr. 21, 2021) https://www.bunchandbrocklaw.com/difference-between-chapter-7-11-13-bankruptcy/ (explaining how unlike a Chapter 7 business bankruptcy, which involves the liquidation of a business, a Chapter 11 bankruptcy allows the debtor-business to propose a plan of reorganization to keep its business alive and pay creditors over time).
[ii] See In Re Purdue Pharma L.P., 69 F.4th 45, 58–60 (2d Cir. 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., No. (23A87), 2023 WL 5116031 (U.S. Aug. 10, 2023).
[iii] See id. at 60.
[iv] See id. at 57.
[v] See In re Purdue Pharma, L.P. (“Purdue II”), 635 B.R. 26 (S.D.N.Y. 2021) (Colleen McMahon, J.).
[vi] See 11 U.S.C. § 524(e).
[vii] See In Re Purdue Pharma L.P., 69 F.4th 45, 58–60 (2d Cir. 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., No. (23A87), 2023 WL 5116031 (U.S. Aug. 10, 2023).
[viii] See Airadigm Commc’ns, Inc. v. FEC (In re Airadigm Commc’ns, Inc.), 519 F.3d 640, 657 (7th Cir. 2008) (holding that “bankruptcy courts’ equitable powers under § 1123(b)(6) include the power to ‘release third parties from liability’”); see also Class Five Nev. Claimants (00-2516) v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 656–58 (6th Cir. 2002) (concluding that third-party releases can be appropriate, but that the factual findings presented did not support them).
[ix] See 11 U.S.C. § 524(e).
[x] See 11 U.S.C. § 105(b) (“a court may not appoint a receiver in a case under this title”); see also 11 U.S.C. § 1129(a) (“The court shall confirm a plan only if the following requirements are met”).
[xi] See In re W. Real Est. Fund, Inc., 922 F.2d 592, 600–02 (10th Cir. 1990) (quoting 11 U.S.C. § 524(e)); see also In re Pac. Lumber Co., 584 F.3d, 229, 252 (5th Cir. 2009) (“In a variety of contexts, this court has held that Section 524(e) only releases the debtor, not co-liable third parties. These cases seem broadly to foreclose non-consensual non-debtor releases and permanent injunctions.”); In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995) (“This court has repeatedly held, without exception, that § 524(e) precludes bankruptcy courts from discharging the liabilities of non-debtors.”).
[xii] See Harrington v. Purdue Pharma L.P., No. (23A87), 2023 WL 5116031, at *1 (U.S. Aug. 10, 2023).
