Relevant Document:
Decision and Order
U.S. District Judge Colleen McMahon on Thursday evening, Dec. 16, issued a decision in the
appeals of the Purdue Pharma
plan confirmation
order, concluding that
the third-party releases of the Sackler family in the plan lack any statutory authority and thus the confirmation order and the "advance order" authorizing certain plan implementation steps must be vacated. Among a number of notable discussions in the opinion, Judge McMahon reviewed the releases
de novo in light of a conclusion that third-party releases in a plan are not sufficiently “core” matters to be finally adjudicated by bankruptcy courts.
With respect to the third-party releases, the court states:
"...the Bankruptcy Code does not authorize such nonconsensual non-debtor releases: not in its express text (which is conceded); not in its silence (which is disputed); and not in any section or sections of the Bankruptcy Code that, read singly or together, purport to confer generalized or 'residual' powers on a court sitting in bankruptcy."
and
“As no party has pointed to any other section of the Bankruptcy Code that confers such authority, I am constrained to conclude that such approval is not authorized by statute.”
The judge begins her discussion of statutory authority with a “caveat:” “The topic under discussion is a bankruptcy court’s power to release, on a non-consensual basis, direct/particularized claims asserted by third parties against non-debtors pursuant to the Section 10.7 Shareholder Release.
This speaks to a very narrow range of claims that might be asserted against the Sacklers,” which are “claims that are not derivative, but as to which Purdue’s conduct is a legally relevant factor” (emphasis added).
Judge McMahon heard
oral arguments on Nov. 30, saying she was considering a “very difficult statutory issue” regarding the validity of the Sackler release as well as “an extremely difficult issue about whether there has been abuse of the bankruptcy process.”
The opinion acknowledges that the invalidation of the shareholder release “will almost certainly lead to the undoing of a carefully crafted plan that would bring about many wonderful things, including especially the funding of desperately needed programs to counter opioid addiction.”
“But just as ‘A court’s ability to provide finality to a third-party is defined by its jurisdiction, not its good intentions’... so too its power to grant relief to a non-debtor from nonderivative third party claims ‘can only be exercised within the confines of the Bankruptcy Code.’ … Because the Bankruptcy Code confers no such authority, the order confirming the Plan must be vacated,” the opinion says.
Judge McMahon rejects what many had viewed as relatively settled law in the Second Circuit - that such releases could be approved in exceptional circumstances. Instead, the judge explains the Second Circuit has only “identified the question as open back in 2005,” but “has not yet had occasion to analyze the issue.” According to the judge, the only guidance to lower courts thus far is that “because statutory authority is questionable and such releases can be abused, they should be granted sparingly and only in ‘unique’ cases.”
However, “this will no longer do,” the judge writes (emphasis added).
Purdue has already
vowed to appeal.
Opinion
After an extensive review of the facts of the case - in particular the Sackler family’s role in the development of Oxycontin and the family’s subsequent “milking” of Purdue funds into its private coffers - Judge McMahon summarizes at great length what she says is a “judicial
tour de force” confirmation opinion by the “learned bankruptcy judge” Robert Drain. Judge McMahon flags Judge Drain’s “obvious reluctance” to approve the amount of the Sackler’s contribution given that he “expected a higher settlement.” Judge McMahon also discusses at length Judge Drain’s concerns regarding collectability against the Sacklers given that much of their money is in offshore spendthrift trusts.
However, Judge McMahon does not address directly Judge Drain’s conclusion that the settlement was ultimately more than could be collected on fraudulent conveyance and other “estate” claims against the Sacklers. Indeed, as noted above, the opinion rejects the statutory basis for nonconsensual releases of third party “direct” claims such as non-settling states wishing to bring consumer protection or unfair trade practices suits against the Sacklers for the Sacklers’ own actions.
Judge McMahon stresses that the parties and Judge Drain all admit that the Purdue plan release would cover these “direct” third party claims against the Sacklers. The scope of the release would permanently enjoin third parties from pursuing their current claims and future litigation against the Sacklers and their related entities, as long as (i) those claims are “based on or related to the Debtors, their estates, or the chapter 11 cases,” and (ii) the “conduct, omission or liability of any Debtor or any Estate is the legal cause or is otherwise a legally relevant factor.” The third-party releases are non-consensual and would cover objecting parties alongside those who approved the plan. “All present and potential claims connected with OxyContin and other opioids” would be barred by the release, the judge notes.
Judge McMahon frames her central findings on appeal as follows, stating that all other disputes in the case either were not raised on appeal or are unnecessary to address in light of other findings:
- The bankruptcy court does have subject matter jurisdiction to impose a release of nondebtor claims because, citing SPV OSUS Ltd. v. UBS, the bankruptcy court has broad “related to” jurisdiction over any civil proceedings that “might have any conceivable effect” on the estate and “civil proceedings asserted against the non-debtor Sackler family members might have a conceivable impact on the estate.”
- The bankruptcy court does not have statutory authority to approve the non-debtor releases because the confirmation order “fails to identify any provision of the Bankruptcy Code that provides such authority.” Specifically, “Sections 105(a) and 1123(a)(5) & (b)(6), whether read individually or together, do not provide a bankruptcy court with such authority; and there is no such thing as ‘equitable authority’ or ‘residual authority’ in a bankruptcy court untethered to some specific, substantive grant of authority in the Bankruptcy Code. Second Circuit law is not to the contrary; indeed, the Second Circuit has not yet taken a position on this question” (emphasis added).
- The plan provides equal treatment between the “Canadian Appellants” and their “domestic unsecured creditor counterparts” because the Canadian appellants “belong to a different class” and “legitimate reasons are proffered for that differentiation.”
Subject Matter Jurisdiction / Stern v. Marshall
Judge McMahon finds that Judge Drain “misreads”
Stern v. Marshall to give him power to finally adjudicate the propriety of the third-party release, meaning that the confirmation order on these points is subject to a different standard of review than if Judge Drain had final authority under
Stern.
Specifically, Judge McMahon rejects the idea that the bankruptcy court has final adjudicative authority for the release “because the issue arose in the context of confirming a plan of reorganization,” a clearly “core” bankruptcy proceeding. According to Judge McMahon:
“But nothing in Stern or any other case suggests that a party otherwise entitled to have a matter adjudicated by an Article III court forfeits that constitutional right if the matter is disposed of as part of a plan of reorganization in bankruptcy. Were it otherwise, then parties could manufacture a bankruptcy court’s Stern authority simply by inserting the resolution of some otherwise non-core matter into a plan.”
Further:
“The correct constitutional question, and the question on which the Bankruptcy Court should have focused in this case, is whether the third party claims released and enjoined by the Bankruptcy Court either stem from the bankruptcy itself or would necessarily be resolved in the claims allowance process – not whether the release and injunction are ‘integral to the restructuring of the debtor-creditor relationship.’” (Quoting but rejecting as inapposite the Third Circuit’s decision in
Millenium Lab Holdings II)
As to whether a release might not implicate
Stern because a release does not “adjudicate” claims, the opinion says this is a “flawed” proposition because “[t]here really can be no dispute that the release of a claim ‘finally determines’ that claim.”
As a result, Judge McMahon determines that bankruptcy courts do not have authority to adjudicate to finality the third-party releases in question. However, “the practical impact of this holding is non-existent, as no one has challenged any of Judge Drain’s findings of fact – only the conclusions he drew from them – and the court has always had the obligation to review those conclusions de novo.”
As to the separate question of subject matter jurisdiction, the judge follows a more traditional path:
“The release of most third-party claims against a non-debtor touches the outer limit of the Bankruptcy Court’s jurisdiction. [citing
In re Johns-Manville Corp] But the Second Circuit defines that limit quite broadly. See
SPV OSUS Ltd., 882 F.3d at 339-340. The standard is not that an action’s outcome will certainly have, or even that it is likely to have, an effect on the
res of the estate, as is the case in some other Circuits. It is, rather, whether it
might have any conceivable impact on the estate. Id.
Bound to adhere to this broad standard, which has been consistently followed in this Circuit for almost three decades and was applied most recently in SPV Osus, I agree with the Debtors that the Bankruptcy Court had subject matter jurisdiction over the direct (non-derivative) third party claims against the Sacklers, under the ‘related to’ prong of bankruptcy jurisdiction.”
Statutory Authority for Third Party Release
As to the “meat” of the appeal - the statutory authority (or lack thereof) for “the Bankruptcy Court’s approval of the broad releases that the Plan affords to all members of the Sackler family and to their related entities, including businesses and trusts” - Judge McMahon rejects Judge Drain’s determination that statutory authority arises via the “necessary or appropriate” power in section 105(a) of the Bankruptcy Code coupled with Section 1123(b)(6)’s grant of power to “include any other appropriate provision not inconsistent with the applicable provisions of this title,” “buttressed by” sections 1123(a)(5) and 1129, along with “residual authority.”
“One would think that this had been long ago settled” the judge writes, but answers “It has not been.” Framing a “long-standing conflict among the Circuits,” Judge McMahon takes the view that the Second Circuit has not yet been asked squarely the question of whether there is statutory authority for third party releases of non-debtors, saying that the Second Circuit’s 2005
Metromedia opinion “identified as questionable a court’s statutory authority to do this outside of asbestos case.”
Specifically, according to Judge McMahon,
Metromedia outlined circumstances where releases had been approved in the past but “did not rule on whether any or all of the factors it had identified were satisfied in the particular case before it” but merely “vacated approval of the plan and declined to remand for further consideration because the matter had become equitably moot – thereby guaranteeing that those open questions – including the question about whether there was statutory authority for such releases – would not be answered.” “
In other words, while Metromedia said a great deal, the case did not hold much of anything” (emphasis added).
As a “caveat,”
Judge McMahon stresses that the power of the bankruptcy courts to release “derivative” claims is not questioned. By derivative claims, the court means “claims that would render the Sacklers liable because of Purdue’s actions (which conduct may or may not have been committed because of the Sacklers),” that is claims that seek to recover from the estate indirectly on the basis of the debtor’s conduct, as opposed to the non-debtor’s own conduct.
Instead, the opinion rejects any statutory authority for release of third party “direct claims” against non-debtors, meaning “claims that are not derivative of Purdue’s liability, but are based on the Sacklers’ own, individual liability, predicated on their own alleged misconduct and the breach of duties owed to claimants other than Purdue,” for example claims that are based upon a “particularized” injury to a third party that can be directly traced to a non-debtor’s conduct. In this case the judge notes in particular unfair trade practices and consumer protection claims potentially brought by appealing states.
Judge McMahon says that it is undisputed that “one and only one section of the Bankruptcy Code expressly authorizes a bankruptcy court to enjoin third party claims against non-debtors without the consent of those third parties” - section 524(g), pertaining to asbestos claims. Surveying the text and legislative history, the opinion concludes that Congress “left to itself, not the courts, the task of determining whether and how to extend a rule permitting nondebtor releases ‘notwithstanding the provisions of section 524(e)’ into other areas [beyond asbestos].” Congress has been “deafeningly silent on this subject” since then.
Reviewing seemingly every Second Circuit case on the matter, the opinion summarizes as follows:
“The only fair characterization of the law on the subject of statutory authority to release and enjoin the prosecution of third-party claims against nondebtors in a bankruptcy case is: unsettled, except in asbestos cases, where statutory authority is clear. Because the Court of Appeals has decided every other case on non-statutory grounds, its only clear statement is that Section 105(a), standing alone, does not confer such authority on the bankruptcy court outside the asbestos context.”
As for other circuits:
“A majority of the Circuits that have spoken to the statutory authority question either dismiss the idea that such authority exists or, as with the Second Circuit, (i) reject the notion that such authority can be found by looking solely to Section 105(a) and then (ii) fail to answer the question of where such authority can be found. Two Circuits rely solely on Section 105(a), and so have law that conflicts with the Second Circuit’s pronouncement. Only two Circuits [the Sixth and Seventh Circuits] support the position taken by the learned Bankruptcy Judge.”
As to Judge Drain’s reliance on Sections 105(a), 1123(a)(5) and (b)(6), and 1129: according to Judge McMahon, none of those provisions “confers some substantive right such that a release to enforce that right could be entered … Rather, each of the cited sections … confers on the Bankruptcy Court only the power to enter orders that carry out other, substantive provisions of the Bankruptcy Code. None of them creates any substantive right; neither do they create some sort of ‘residual authority’ that authorizes the action taken by the Bankruptcy Court.”
In an extremely dense section of the opinion, Judge McMahon also rejects the debtors’ position that (in her words) “the Bankruptcy Court must be statutorily authorized to approve these releases because no provision of the Bankruptcy Code – including but not limited to § 524(e) – expressly prohibits them.” Citing a number of recent Supreme Court cases that have limited bankruptcy court power to the express text of the Bankruptcy Code, Judge McMahon finds a clear presumption in the case law that the Bankruptcy Code is “comprehensive” and that it would be inconsistent to infer meaning from Congressional silence on a matter related to bankruptcy.
“Granting releases to non-debtors for claims that could not be released in favor of the debtors themselves is so far outside the scope of the Bankruptcy Code and the purposes of bankruptcy that the ‘silence does not necessarily mean consent’ principle applies with equal force,” according to the opinion. The conclusion is even more true, Judge McMahon writes, where Congress would be “expected” to act and has acted in other contexts, referring to section 524(g) and asbestos claims.
Analogizing to
RadLAX, the judge writes: “Where, as here, Congress has deliberately limited a specific targeted solution (the release of third-party claims against non-debtors) to a specific identified problem (asbestos bankruptcies) – and has even denominated that solution as an exception to the usual rule – RadLAX strongly suggests that the general/specific canon should apply with particular force.”
Relatedly, Judge McMahon reviews and rejects the contention that a bankruptcy court has “residual authority” to approve reorganization plans that includes all “necessary and appropriate” provisions, as long as those provisions are not otherwise inconsistent with the Bankruptcy Code. While cited for this proposition by the debtors, the judge concludes that
In re Energy Resources Co. does not provide such authority.
Reviewing her decision, Judge McMahon writes: “It is indeed unfortunate” that her decision “comes very late in a process that, from its earliest days in 2019, has proceeded on the assumption that releases of the sort contemplated in Section 10.7 of the Debtors’ Plan would be authorized – this despite the language of the Bankruptcy Code and the lack of any clear ruling to that effect. I am sure that the last few years would have proceeded in a very different way if the parties had thought otherwise. But that is why the time to resolve this question for once and for all is now – for this bankruptcy, and for the sake of future bankruptcies. It should not be left to debtors and their creditors to guess whether such releases are statutorily authorized; and it most certainly should not be the case that their availability, or lack of same, should be a function of where a bankruptcy filing is made.”
Conclusion
After addressing and finding adequate the separate classification of Canadian appellants under the plan, Judge McMahon concludes:
“This decision leaves on the table a number of critically important issues that were briefed and argued on appeal principal among them, whether the Section 10.7 Shareholder Release can or should be approved on the peculiar facts of this case, assuming all the other legal challenges to their validity were resolved in Debtor's favor. But sufficient unto the day. This and the other issues raised by the parties can be addressed if they need to be addressed - which is to say, if this ruling is reversed.”