Purdue Pharma Bankruptcy Case: Supreme Court to Decide on Nondebtor Releases, Shaping Future of Chapter 11 Practice

Indianapolis, Indiana: The US Supreme Court is set to hear arguments in December in a case involving Purdue Pharma, the pharmaceutical company accused of contributing to the opioid epidemic. The central issue at stake is whether the Bankruptcy Code permits a Chapter 11 plan to provide releases to nondebtor third parties without their consent. This case has garnered significant attention from the public and bankruptcy professionals alike, as it has the potential to bring about significant changes in Chapter 11 bankruptcy practice.

Purdue Pharma and its affiliates filed for Chapter 11 bankruptcy in the Bankruptcy Court for the Southern District of New York in September 2019. The company sought protection from the onslaught of lawsuits related to its alleged role in the opioid crisis. While many of these lawsuits named members of the Sackler family, who were associated with the company, none of the Sacklers filed for bankruptcy themselves.

After extensive negotiations, the debtors and creditors’ committee proposed a Chapter 11 plan that included a settlement in which the Sacklers would pay around $4.3 billion in exchange for broad releases. The bankruptcy judge confirmed the plan, overriding objections.

However, the district court judge later vacated the confirmation order, stating that there was no statutory authority for the plan’s releases. The debtor and plan proponents appealed this decision to the Second Circuit, which reversed the district court’s ruling. The Second Circuit held that the Bankruptcy Code provides the necessary authority for such releases.

The US Trustee, a voice of the Justice Department, appealed the Second Circuit’s decision to the Supreme Court. Both parties have submitted their initial briefs, and oral arguments are scheduled for December 4.

It is anticipated that the court may find no statutory authority for the releases. Some members of the court, especially the more conservative ones, may be hesitant to grant bankruptcy courts the power to alter the rights of creditors concerning nondebtor third parties. Additionally, they could argue that granting such sweeping power would be better left to Congress.

Should the Supreme Court decide against these releases, it would reverse the majority of circuits that have allowed them. This ruling may prompt a reevaluation of Chapter 11 plans and possibly lead to congressional efforts to reform the Bankruptcy Code to prevent similar maneuvers in the future.

Regardless of the court’s ruling, the question of third-party releases is likely to persist. While the court is considering the issue of statutory interpretation, constitutional issues may still be raised to challenge these releases or other innovative uses of the Bankruptcy Code.

In conclusion, the Supreme Court’s upcoming hearing in the Purdue Pharma case could reshape Chapter 11 bankruptcy practice and have far-reaching implications. The court’s decision on whether nondebtor releases are authorized under the Bankruptcy Code will impact how future bankruptcy proceedings handle the rights of creditors and nondebtor third parties.