Purdue Plan Rejection Sets Stage for Liability Release Clarity

Purdue Pharma LP’s planned appeal from a decision to overturn the OxyContin manufacturer’s multi-billion dollar settlement provides an opportunity for the Second Circuit to tackle long-standing legal issues surrounding liability releases in bankruptcy.

The plan releases the Sackler family—Purdue Pharma’s owners—from all liability related to their role in the opioid crisis. In exchange, they collectively made a $4.5 billion contribution to fund the bankruptcy plan.

Judge Colleen McMahon’s decision to nix that deal now places the legality of such releases squarely before the U.S. Court of Appeals for the Second Circuit, said Douglas Baird, a professor at the University of Chicago Law School. Purdue already said it plans to appeal.

Conventional wisdom has been that the Second Circuit already gave the green light to non-consensual, third-party releases under the right circumstances, Baird said.

Following the U.S. District Court for the Southern District of New York ruling in the Purdue Pharma case, that’s no longer clear.

“The one thing you can say about this opinion is given the way that it’s written and the unequivocal way it addresses the issue, it really does put this issue in play in a way that it might not have been before,” Baird said.

Releases Under Scrutiny

Legal protections for non-bankrupt third parties are common in Chapter 11 reorganization plans.

Typically, third parties make significant, necessary monetary contributions to the bankruptcy estate in exchange for those protections, which apply to potential litigants regardless of whether they affirmatively approve the release.

Both McMahon and Bankruptcy Judge Robert Drain, who signed off on Purdue Pharma’s plan, “really want the Second Circuit to provide guidance on whether non-debtor releases are permissible,” said Jonathan Lipson, a professor at Temple University’s Beasley School of Law.

The Second Circuit is likely to examine the legality of non-consensual releases, as well as whether they’re final orders that bankruptcy judges have authority to adopt, said Melissa Jacoby, a bankruptcy law professor at the University of North Carolina at Chapel Hill.

The appeals court also could uphold releases generally, but find that the particular releases in Purdue Pharma’s case were abusive or outside the bankruptcy court’s power, Lipson said.

Or the Second Circuit could simply approve the releases in Purdue Pharma’s case, he said.

There’s nothing in the bankruptcy code that authorizes these releases, according to an attorney representing one of the states in Purdue Pharma’s bankruptcy, who asked not to be named.

Under a “strict constructionist” theory, the Second Circuit will probably affirm McMahon because the court will focus on what the law does or doesn’t say, he said.

Reevaluating Precedent

The Purdue Pharma case also provides an opportunity for the Second Circuit to take another look at a 2005 ruling on third-party releases, said Todd Zywicki, a professor at George Mason University’s Antonin Scalia School of Law.

In Deutsche Bank AG v. Metromedia Fiber Network Inc., the Second Circuit suggested that the legal authority for such releases outside of asbestos cases were “at best uncertain,” according to McMahon’s ruling.

The Second Circuit hasn’t yet issued a subsequent decision that has “filled in the blank,” the judge said.

“I think the underlying point is that, really, Metromedia is wrongly decided under the current law,” Zywicki said.

But scholars and practitioners cautioned that invalidating third-party releases entirely will eliminate a tool to simplify and streamline the bankruptcy process.

“So much of what bankruptcy judges do is approve deals negotiated amongst very sophisticated parties,” Lipson said. Third-party releases are a means to get cash to pay creditors, he said.

“The whole purpose of Chapter 11 is to do good for society, keep jobs,” said the attorney representing the state in the Purdue Pharma case.