69 F.4th 45
2d Cir.2023Background
- Purdue Pharma and related entities filed Chapter 11 after massive opioid litigation; the Sackler family (non-debtors who formerly controlled Purdue) agreed to contribute billions in exchange for releases of many claims against them.
- Bankruptcy court confirmed a plan that (as modified) enjoined third-party direct and derivative claims against certain Sacklers when the Debtors’ conduct was a legal cause or legally relevant factor and those claims affected the res; Sackler contributions eventually rose to about $5.5–6.0 billion.
- The bankruptcy court found extensive factual overlap between claims against Purdue and claims against the Sacklers, indemnity relationships, widespread creditor support (overwhelming creditor votes), and that releases were essential to any viable collective recovery.
- The district court vacated confirmation, holding the Bankruptcy Code did not permit nonconsensual releases of direct third-party claims against non-debtors.
- The Second Circuit reversed the district court, holding §§ 105(a) and 1123(b)(6) authorize such releases in appropriate circumstances, affirmed confirmation, articulated a seven-factor test to evaluate nonconsensual third-party releases, and affirmed rejection of Canadian creditors’ cross-appeal on classification and sovereign-immunity grounds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether bankruptcy courts may approve nonconsensual third-party releases of direct claims against non-debtors | §§ 105(a) and 1123(b)(6) together (and circuit precedent) authorize releases as part of a plan | No statutory authorization; §524(e) and Code structure bar non-debtor releases | Yes. Court holds §§ 105(a) and 1123(b)(6) permit such releases in specific, well-supported circumstances and under Second Circuit precedent |
| Whether the particular releases here were appropriate on the facts and equitable grounds | Releases were essential to the Plan, backed by large Sackler contributions, extensive creditor support, factual overlap, indemnity risk, and would fairly allocate limited funds | Releases are too broad, nonconsensual, and unfair—Sacklers should not receive release for less than full accountability | Yes. Bankruptcy court made detailed factual findings; the plan met the articulated factors and was affirmed |
| Due process: did claimants receive adequate notice and opportunity to be heard | Notice was extensive and the confirmation proceeding was lengthy; claimants had meaningful process | Nonconsensual, no opt-out destroys claimants’ day in court and violates due process | No due process violation: notice and meaningful hearing satisfied procedural requirements |
| Canadian creditors: sovereign immunity and improper classification | Canadian creditors argued sovereign-immunity implications and that separate classification denied equitable treatment | Plan differentiated classes for legitimate reasons (different regulatory regimes, mediation participation); sovereign immunity not implicated | Held for debtors: no sovereign-immunity bar; separate classification permissible on the record |
Key Cases Cited
- Drexel Burnham Lambert Grp., Inc. v. Commodity Exch., Inc., 960 F.2d 285 (2d Cir. 1992) (recognized that a bankruptcy court may enjoin third-party suits when the injunction is important to reorganization)
- MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988) (held third-party injunctions can channel claims to settlement proceeds and are not necessarily discharges)
- In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005) (third-party releases may be permissible in rare cases; requires releases be important and necessary to the plan)
- United States v. Energy Resources Co., Inc., 495 U.S. 545 (1990) (§1123(b)(6) supports residual equitable authority for plan provisions not inconsistent with the Code)
- Class Five Nev. Claimants v. Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (approves use of §§105 and 1123(b)(6) for third-party releases but emphasizes stringent factual support)
- Law v. Siegel, 571 U.S. 415 (2014) (bankruptcy courts lack power to issue orders that exceed specific Code provisions)
- Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017) (limits on bankruptcy equitable power when Code prescribes specific procedures)
- Taggart v. Lorenzen, 139 S. Ct. 1795 (2019) (bankruptcy equitable enforcement must be consistent with traditional equitable standards)
- Marshall v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 740 F.3d 81 (2d Cir. 2014) (distinguishes direct and derivative claims in bankruptcy context)
- Johns-Manville Corp. v. Chubb Indemnity Ins. Co. (In re Johns-Manville Corp.), 517 F.3d 52 (2d Cir. 2008) (jurisdictional limits on enjoining certain third-party direct claims)