The bankruptcy of Purdue Pharma L.P. (Purdue) concerns more than money. It questions whether the bankruptcy process can--or even should--limit the liability of a non-debtor in the mass tort context. Purdue significantly contributed to the opioid crisis due to its development and marketing of Oxycontin, a semisynthetic opioid painkiller. Beginning in 1995, Purdue aggressively advertised Oxycontin as nonaddictive. As widespread abuse of the drug proliferated, so too did lawsuits. Purdue agreed to indemnify its directors and officers against claims relating to their employment. Many of those directors and officers were members of the Sackler family who privately owned and operated Purdue. Fearing the effects of mounting litigation, the Sacklers took $11 billion in distributions from Purdue over a decade, putting it in family trusts and holding companies. The distributions left the company in a weak financial position to defend itself against actions for Oxycontin liability.
Overwhelmed with litigation, Purdue and its related entities declared bankruptcy in 2019 under Chapter 11 of the Bankruptcy Code (the Code). The Sacklers, however, did not. At that time, claims against Purdue and the Sacklers totaled approximately $40 trillion. In contrast, Purdue's bankruptcy estate was valued at merely $1.8 billion. Following extensive mediation, the United States Bankruptcy Court for the Southern District of New York confirmed Purdue's plan of reorganization (the Plan). The Plan had overwhelming support with the approval of ninety-five percent of voting creditors.
The central issue concerned the Plan's inclusion of so-called “nonconsensual third-party releases” or “non-debtor releases.” Under the Plan, the Sacklers would contribute $4.325 billion to the bankruptcy estate. In exchange, the Plan would permanently enjoin third-party causes of action against the Sacklers relating to Purdue (the Sackler Releases). The Plan would effectively free the Sacklers from personal liability related to Purdue even though the Sacklers did not declare bankruptcy themselves. The bankruptcy court nonetheless found that the Sackler Releases were critical to the recovery of creditors.
On appeal, the United States District Court for the Southern District of New York vacated the bankruptcy court's order confirming the Plan. The court held that the Bankruptcy Code does not authorize the imposition of non-debtor releases. Parties in favor of the Plan appealed the district court's order rejecting the Plan. In the meantime, the bankruptcy court approved a revised settlement agreement between Purdue, the Sacklers, and many states that originally opposed the Plan--raising the Sacklers' contribution to $5.5-6 billion. Reversing, the United States Court of Appeals for the Second Circuit held that § 105(a) and § 1123(b)(6) of the Bankruptcy Code jointly provide bankruptcy courts the authority to impose nonconsensual releases of third-party claims against non-debtors.
The Second Circuit's holding is significant because it marks the first time the court rooted the authority to impose non-debtor releases in specific Code provisions even though its prior jurisprudence allowed for such releases without clear statutory justification. This is important because it reinforces the majority view held by circuit courts permitting non-debtor releases. The court properly concluded that nothing in the Bankruptcy Code prohibits a bankruptcy court from exercising its broad, equitable authority to impose non-debtor releases in a reorganization plan. Part II provides an overview of bankruptcy courts' equitable authority, relevant Code provisions, and the circuit courts' competing jurisprudence on non-debtor releases. Part III discusses the Second Circuit's reasoning for holding that the bankruptcy court had the authority to impose the Sackler Releases. Part IV analyzes the reasoning behind the court's statutory findings and discusses the policy implications of its decision. Part V briefly concludes.
About the Author
André Guidry, J.D. Candidate 2025, Tulane University Law School; M.S. 2020, University of North Carolina at Charlotte; B.S. 2018, University of Louisiana at Lafayette.
Citation
98 Tul. L. Rev. 709