In re: Purdue Pharma L.P.
Nos. 22-110-bk (L), 22-113-bk, 22-115-bk, 22-116-bk, 22-117-bk, 22-119-bk, 22-121-bk, 22-299-bk, 22-203-bk
United States Court of Appeals For the Second Circuit
DECIDED: MAY 30, 2023
AUGUST TERM 2021; ARGUED: APRIL 29, 2022
Debtors.
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PURDUE PHARMA, L. P., PURDUE PHARMA INC, PURDUE TRANSDERMAL TECHNOLOGIES L.P., PURDUE PHARMA MANUFACTURING L.P., PURDUE PHARMACEUTICALS L.P., IMBRIUM THERAPEUTICS L.P., ADLON THERAPEUTICS L.P., GREENFIELD BIOVENTURES L.P., SEVEN SEAS HILL CORP., OPHIR GREEN CORP., PURDUE PHARMA OF PUERTO RICO, AVRIO HEALTH L.P., PURDUE PHARMACEUTICAL PRODUCTS L.P., PURDUE NEUROSCIENCE COMPANY, NAYATT COVE LIFESCIENCE
Debtors-Appellants-Cross-Appellees,
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF PURDUE PHARMA L.P., ET AL., AD HOC COMMITTEE OF GOVERNMENTAL AND OTHER CONTINGENT LITIGATION CLAIMANTS, THE RAYMOND SACKLER FAMILY, AD HOC GROUP OF INDIVIDUAL VICTIMS OF PURDUE PHARMA, L.P., MULTI-STATE GOVERNMENTAL ENTITIES GROUP, MORTIMER-SIDE INITIAL COVERED SACKLER PERSONS,
Appellants-Cross-Appellees,
— v. —
THE CITY OF GRANDE PRAIRIE, AS REPRESENTATIVE PLAINTIFF FOR A CLASS CONSISTING OF ALL CANADIAN MUNICIPALITIES, THE CITIES OF BRANTFORD, GRAND PRAIRIE, LETHBRIDGE, AND WETASKIWIN, THE PETER BALLANTYNE CREE NATION, ON BEHALF OF ALL CANADIAN FIRST NATIONS AND METIS PEOPLE, THE PETER BALLANTYNE CREE NATION ON BEHALF ITSELF, AND THE LAC LA RONGE INDIAN BAND,
Appellees-Cross Appellants,
THE STATE OF WASHINGTON, STATE OF MARYLAND, DISTRICT OF COLUMBIA, U.S. TRUSTEE WILLIAM K. HARRINGTON, STATE OF CONNECTICUT, RONALD BASS, STATE OF CALIFORNIA, PEOPLE OF THE STATE OF CALIFORNIA, BY AND THROUGH ATTORNEY GENERAL ROB BONTA, STATE OF OREGON, STATE OF DELAWARE, BY AND THROUGH ATTORNEY GENERAL JENNINGS, STATE OF RHODE ISLAND, STATE OF VERMONT, ELLEN ISAACS, ON BEHALF OF PATRICK RYAN WROBLEWSKI, MARIA ECKE, ANDREW ECKE, RICHARD ECKE,
Appellees.
Appellants appeal from an order of the United States District Court for the Southern District of New York (Colleen McMahon, J.) reversing an order of the United States Bankruptcy Court for the Southern District of New York (Robert D. Drain, Bankr. J.) confirming a Chapter 11 plan that included nonconsensual third-party releases of direct claims against non-debtors. We hold that nonconsensual third-party releases of such direct claims are statutorily permitted under
Judge Wesley concurs in the judgment in a separate opinion.
MARSHALL S. HUEBNER, (Benjamin S. Kaminetzky, Eli J. Vonnegut, James I. McClammy, Marc J. Tobak, Christopher S. Robertson, Gerard X. McCarthy, and Garrett L. Cardillo, on the brief), Davis Polk & Wardwell LLP, New York, New York; Gregory G. Garre, Charles S. Dameron, Eric J. Konopka, and Joshua J. Craddock, Latham & Watkins LLP, Washington, D.C. (on the brief), for Debtors-Appellants-Cross-Appellees Purdue Pharma L.P., Purdue Pharma Inc.,
MITCHELL P. HURLEY (Erik Y. Preis and Sara L. Brauner, on the brief), Akin Gump Strauss Hauer & Feld LLP, New York, New York; Z.W. Julius Chen, Akin Gump Strauss Hauer & Feld LLP, Washington, D.C. (on the brief), for Appellant-Cross-Appellee The Official Committee of Unsecured Creditors of Purdue Pharma L.P., et al.
ROY T. ENGLERT, JR., (Lawrence S. Robbins, on the brief), Robbins, Russell, Englert, Orseck & Untereiner LLP, Washington, D.C.; Kenneth H. Eckstein, Rachael Ringer, and David E. Blabey Jr., Kramer Levin Naftalis & Frankel LLP, New York, New York (on the brief); David J. Molton, Brown Rudnick LLP, New York, New York (on the brief); Richard J. Leveridge,
J. CHRISTOPHER SHORE (Michele J. Meises and Alice Tsier, on the brief), White & Case LLP, New York, New York; Edward E. Neiger, ASK LLP, New York, New York (on the brief), for Appellant-Cross-Appellee Ad Hoc Group of Individual Victims of Purdue Pharma, L.P.
JEFFREY A. LIESEMER (Kevin C. Maclay, Todd E. Phillips, and Lucas H. Self, on the brief), Caplin & Drysdale, Chartered, Washington, D.C., for Appellant-Cross-Appellee Multi-State Governmental Entities Group.
MAURA KATHLEEN MONAGHAN (Jasmine Ball, on the brief), Debevoise & Plimpton LLP, New York, New York, for Appellant-Cross-Appellee Mortimer-Side Initial Covered Sackler Persons.
Gregory P. Joseph, Mara Leventhal, Joseph Hage Aaronson LLC, New York, New York; Gerard Uzzi,
J. CARL CECERE, Cecere PC, Dallas, Texas; Allen J. Underwood, II, Lite Depalma Greenberg & Afanador, LLC, Newark, New Jersey (on the brief), for Appellees-Cross-Appellants The City of Grand Prairie, as Representative Plaintiff for a Class Consisting of All Canadian Municipalities, The Cities of Brantford, Grand Prairie, Lethbridge, and Wetaskiwin, The Peter Ballantyne Cree Nation, on behalf of All Canadian First Nations and Metis People, the Peter Ballantyne Cree Nation, on behalf of itself, and the Lac La Ronge Indian Band.
MICHAEL SHIH, Attorney, Appellate Staff Civil Division, (Michael S. Raab and Sean R. Janda, Attorneys, Appellate Staff Civil Division, on the brief), for Sarah E. Harrington, Deputy Assistant Attorney General, (Beth A. Levene and Sumi K. Sakata, Trial Attorneys, for P. Matthew Sutko, Associate General Counsel, for Ramona D. Elliot, Deputy Director/General Counsel, Executive Office for United States Trustees, on the brief), United States Department of Justice, Washington, D.C.; Lawrence H. Fogelman, Peter Aronoff, Danielle J. Levine, Assistant United States
Ronald Bass, pro se, North Plainfield, New Jersey.
Ellen Isaacs, pro se, on behalf of Patrick Ryan Wroblewski, and all similarly situated persons, Floyd, Virginia.
Maria Ecke, Andrew Ecke, Richard Ecke, pro se, West Simsbury, Connecticut.
Gregg M. Galardi, Ropes & Gray LLP, New York, New York; Douglas Hallward-Driemeier, Ropes & Gray LLP, Washington, D.C.; Andrew G. Devore, Ropes & Gray LLP, Boston, Massachusetts; Ryan Preston Dahl, Ropes & Gray LLP, Chicago, Illinois, for Amici Curiae Law Professors in support of Appellants.
Paul H. Zumbro, George E. Zobitz, Lauren A. Moskowitz, Cravath, Swaine & Moore LLP, New York, New York, for Amicus Curiae The Association of the Bar of the City of New York.
Andrew K. Glenn, Jed I. Bergman, Shai Schmidt, Glenn Agre Bergman & Fuentes LLP, New York, New York, for Amici Curiae Bankruptcy Law Professors Ralph Brubaker, George W. Kuney, and Bruce A. Markell.
Joshua L. Seifert, Joshua. L. Seifert PLLC, New York, New York, for Amici Curiae Law Professors in Support of Appellees Regarding the “Abuse” Standard.
Robert J. Keach, Bernstein Shur Sawyer & Nelson, P.A., Portland, Maine; Albert Togut, Togut, Segal & Segal LLP, New York, New York, for Amici Curiae Commissioners of the American Bankruptcy Institute‘s Commission to Study the Reform of Chapter 11.
Harold D. Israel, Levenfeld Pearlstein, LLC, Chicago, Illinois; Scott R. Bickford, Martzell, Bickford & Centola, New Orleans, Louisiana, for Amicus Curiae the Ad Hoc Committee of NAS Children.
EUNICE C. LEE, Circuit Judge:
Bankruptcy is inherently a creature of competing interests, compromises, and less-than-perfect outcomes. Because of these defining characteristics, total satisfaction of all that is owed—whether in money or in justice—rarely occurs. When a bankruptcy is the result of mass tort litigation against the debtor, the complexities are magnified because the debts owed are wide-ranging and the harm caused goes beyond the financial. That is the circumstance here.
The Debtor, Purdue Pharma L.P. (“Purdue“), was owned and operated by the Sackler family1 for decades. In the 1990s, Purdue introduced to market—and
The fallout from this crisis led to a veritable deluge of litigation against both Purdue and individual members of the Sackler family. Claimants, spread across the United States and Canada, included many sufferers of opioid addiction and the families of those lost to opioid overdoses. To settle the mass of civil claims, the parties, including Purdue and the Sacklers, agreed that in exchange for Purdue filing for bankruptcy, the Sacklers would personally contribute billions of dollars to the bankruptcy if all civil claims against them were released.2
This appeal followed. During the pendency of the appeal, the various parties to the mediation engaged in further negotiations, resulting in additional changes to the proposed bankruptcy plan. These changes resulted in several more parties dropping their opposition and supporting the further-revised bankruptcy plan. The Appellants, who are challenging the district court‘s rejection of the proposed plan, include the Debtors, various creditor and claimant groups, and
Aside from their legal arguments, the parties contend that various policy considerations should inform whether a bankruptcy plan containing nonconsensual third-party releases of direct claims may be approved. They also raise questions about fairness and accountability, particularly as it relates to the Sacklers, in releasing parties from liability for actions that cause great societal harm. They debate the very nature of bankruptcy, including the role it is intended to serve and the parties it is intended to benefit.
But, our role in this appeal does not require us to answer all of these serious and difficult questions. Instead, we are tasked only with resolving two key questions: First, does the Bankruptcy Code permit nonconsensual third-party releases of direct claims against non-debtors, and, Second, if so, were such releases proper here in light of all equitable considerations and the facts of this case. We answer both in the affirmative.
Accordingly, we REVERSE the district court‘s order holding that the Bankruptcy Code does not permit nonconsensual releases of third-party direct claims against non-debtors, AFFIRM the bankruptcy court‘s approval of the reorganization plan, and REMAND the case to the district court for such further
BACKGROUND
I. Factual Background
The following discussion is limited to those underlying facts that are necessary for a determination of the issues on appeal.3
A. Purdue and OxyContin
The Sackler brothers, including Mortimer and Raymond Sackler,4 purchased Purdue, a privately held pharmaceutical company, in the 1950s. Members of the Sackler family held various director and officer positions throughout the company and, from approximately 1993 to 2018, Purdue‘s Board of Directors contained at least six members of the Sackler family. Beyond the board, Sackler family members held other positions of influence in the company. For example, Mortimer and Raymond Sackler served as co-chief executive officers
In 1995, Purdue developed, and the Food and Drug Administration (“FDA“) approved, OxyContin, a controlled-release semisynthetic opioid analgesic. At that time, and for years following, Purdue advertised that the time-release formulation prevented OxyContin from posing a threat of abuse or addiction. OxyContin‘s FDA label reflected a purportedly low risk of addiction. From 1996 to 2001, Purdue aggressively marketed OxyContin to patients and doctors while downplaying growing addiction concerns. Over this time-period, both prescribed and illegal use of OxyContin increased across the country.
Starting in 2000, state governments began to alert Purdue to the widespread abuse of OxyContin, and, in 2001, the FDA required Purdue to remove from its label that OxyContin had a low risk of addiction. In the years that followed, lawsuits against Purdue—brought by, among others, individuals, state governments, and federal agencies—proliferated across the United States.
B. The 2004 Indemnity Agreement
At the end of 2004, Purdue‘s Board of Directors voted to indemnify, among others, Purdue‘s directors and officers against claims made in connection with their service to the company. Bryant C. Dunaway v. Purdue Pharma L.P. (In re Purdue Pharma L.P.), No. 19-cv-10941-CM (S.D.N.Y. June 22, 2020), ECF No. 24-2 (Appellees’ Suppl. App‘x at SA 627–36) (the “Sackler-Purdue Indemnity Agreement” or the “Indemnity Agreement“). As part of its obligations under the agreement, Purdue agreed to:
indemnify and hold harmless each Indemnitee from and against any and all expenses (including attorneys’ fees), amounts paid or incurred in satisfaction of or as part of settlements, judgments, fines, penalties, liabilities and similar or related items incurred or suffered or threatened to be incurred or suffered as a result of or in connection with such Indemnitee being made or threatened to be made a party to or participant in any pending, threatened or completed actions, suits or proceedings, whether civil, criminal, administrative, arbitrative or investigative . . . .
Id. at 628–29. Purdue further agreed to “advance all costs and expenses (including attorneys’ fees and expenses) incurred by the Indemnitee in defending any one or more Proceedings.” Id. at 630.
The protections conferred by the Indemnity Agreement were expansive and had no immediate time limit. The agreement ensured that “[t]he Indemnitee‘s rights under these provisions shall continue after the Indemnitee has ceased to serve” in his or her official capacity at Purdue, and “shall be binding on and inure to the benefit of successors, assigns, legatees, distributees, heirs, executors, guardians, administrators, estates and other legal representatives.” Id. at 635.
C. Sackler Conduct Between 2007 and 2019
Starting in 2007, the Sacklers anticipated that the effects of litigation against Purdue would eventually impact them directly. See, e.g., Deferred Joint App‘x at 5059 (David Sackler emailed Jonathan and Richard Sackler, “We will be sued . . . . [A]sk yourself how long it will take these lawyers to figure out that we might settle with them if they can freeze our assets and threaten us.“). From 2008 to 2016, Purdue distributed a significant proportion of the company‘s revenue—an approximated $11 billion in total—to Sackler family trusts and holding companies. This represented an increase in the distribution pattern from years prior and “drained Purdue‘s total assets by 75% and Purdue‘s ‘solvency cushion’ by 82%” during that same time period. Special App‘x at 40. By 2018, Purdue defended the many lawsuits against it from a significantly weakened financial position, and, by 2019, all Sacklers had stepped down from Purdue‘s Board of Directors.
In 2019, the United States Attorneys’ Offices for the Districts of New Jersey and Vermont, and the United States Department of Justice (“DOJ“) brought federal criminal and civil charges against Purdue. The criminal counts alleged that Purdue defrauded the government by inducing healthcare providers to prescribe OxyContin and violated the federal anti-kickback statute. The DOJ also brought civil claims under various federal statutes and common law doctrines (such as mistake, unjust enrichment, fraud, nuisance, and negligent entrustment).
In 2020, after filing for bankruptcy, Purdue entered into a plea agreement with the DOJ, the terms of which created future obligations on Purdue. First, in exchange for Purdue pleading guilty to violations of the federal anti-kickback statute, the DOJ agreed it would “not initiate any further criminal charges against Purdue.” Deferred Joint App‘x at 4798. Second, regarding its civil liability, Purdue agreed to a forfeiture judgment of $2 billion; the judgment gave the DOJ “superpriority” to collect on the forfeiture judgment in the event of a liquidation of Purdue‘s estate. Deferred Joint App‘x at 4804. Thus, in any future bankruptcy proceedings, the plea required that Purdue satisfy the DOJ‘s $2 billion claim ahead of all other creditors’ claims.
E. Purdue Files for Bankruptcy
On September 15, 2019, Purdue and its related entities5 declared bankruptcy; the Sacklers did not. The Estate of the Debtors (the “Estate” or the “res“) is estimated at approximately $1.8 billion.
Three days after the bankruptcy filing, the Debtors sought an injunction halting all other lawsuits (almost 3,000 actions against Purdue and over 400 actions against the Sacklers concerning liability for OxyContin). On October 11, 2019, the
II. Procedural History
A. The Mediation and Confirmation Process
Following discovery, as is typical in Chapter 11 bankruptcy, the bankruptcy court ordered mediation to reach a plan of reorganization and avoid liquidation of the Estate. In addition to Purdue and the Sacklers, there were a number of groups that participated in the mediation.6
The first phase of the mediation addressed the allocation of the Estate‘s available funds to non-federal public claimants, such as states and political subdivisions, and private claimants. The second phase largely focused on determining what the Sacklers would contribute to the Debtors’ estate. While this second phase resulted in an agreement in principle among the Sacklers, the
That agreement guaranteed that the Sacklers would contribute at least $4.275 billion to the Debtors’ estate over approximately nine years. In exchange, the Debtors’ plan of reorganization contained several nonconsensual releases (the “Shareholder Release,” the “Release,” or the “Releases“) that, in effect, permanently enjoined certain third-party claims against the Sacklers. As initially proposed, the Release provisions were extremely broad and included the release of claims pertaining to, inter alia, the same subject matter as any claim treated in the plan; any business or other contractual arrangements including transfers; any employment-related conduct; any pending opioid actions and opioid-related activities; and the bankruptcy process.
In the third phase of the mediation, the Sacklers reached a modified agreement with fifteen out of the twenty-five non-consenting states.7 The new terms of the modified settlement included additional payments of $50 million by the Sacklers, and the accelerated payment of an additional $50 million from a
Following mediation, a vote on the proposed plan was set in motion. Notice of the confirmation hearing was published in the summer of 2021, with votes for or against confirmation due by mid-July 2021, and reached 98% of adults in the United States and 86% of adults in Canada. More than 120,000 votes were cast, and each voting class voted “overwhelmingly” in favor of the plan. Special App‘x at 150–51 (“In the aggregate, the vote was over 95 percent in favor of confirmation . . . . In each class the percent voting in favor of the plan was above 93 percent with the exception of the class of hospital claims, which was over 88 percent . . . .“).
Ultimately, on September 1, 2021—after a confirmation hearing that included the live testimony of 41 witnesses and extensive oral argument—the bankruptcy court rendered an oral ruling stating that it would confirm the proposed plan, but with a few changes. Most relevantly, the court modified the Shareholder Release to ensure that the Debtors’ conduct must be a legal cause or a legally relevant factor of any released cause of action against the Sacklers:
I . . . require that the shareholder releases . . . be further qualified than they now are. To apply [only] where . . . a debtor‘s conduct or the
claims asserted against it [are] a legal cause or a legally relevant factor to the cause of action against the shareholder released party . . . .
Deferred Joint App‘x at 1330–31. The new Shareholder Release thus read in pertinent part:
[T]he Shareholder Released Parties . . . shall be conclusively, absolutely, unconditionally, irrevocably, fully, finally, forever and permanently released . . . from any and all Causes of Action, including any derivative claims [and future claims] . . . (x) based on or relating to, or in any manner arising from, in whole or in part, (i) the Debtors, . . . (ii) the Estates or (iii) the Chapter 11 Cases and (y) as to which any conduct, omission or liability of any Debtor or any Estate is the legal cause or is otherwise a legally relevant factor.
Special App‘x at 920.
B. Bankruptcy Court Order Confirming the Plan8
The bankruptcy court confirmed its modified version of the proposed plan (“the Plan“) on September 17, 2021, and issued an extensive opinion memorializing its decision. See In re Purdue Pharma L.P. (”Purdue I“), 633 B.R. 53 (Bankr. S.D.N.Y. 2021) (Robert D. Drain, Bankr. J.).
The bankruptcy court order began by describing its task as “resolv[ing] the collective problem presented by an insolvent debtor and a large body of creditors competing for its insufficient assets . . . especially when there are mass claims
1. Equitable Considerations
From there, the bankruptcy court asked whether the terms of the Plan created an equitable plan and answered in the affirmative. Purdue I, 633 B.R. at 84–95. The court explained that to approve a settlement, a bankruptcy court must determine whether the proposed terms are fair, equitable, and in the estate‘s best interest. Id. at 84. Here, in exchange for the Shareholder Release, the terms included:
$4.325 billion, coupled with the Sackler[s‘] other agreements, including the dedication of the two charities worth at least $175 million for abatement purposes, the Sacklers’ agreement to a resolution on naming rights, their agreement not to engage in any business with NewCo [Purdue‘s successor company], their agreement to exit their foreign companies within a prescribed time, their agreement to various ‘snap back’ protections to ensure the
collectability of their settlement payments, and their agreement to an unprecedented extensive document depository accessible to the public that will archive in a comprehensive way the Debtors’ history, including as it relates to the development, production, and sale of opioids.
Id. The bankruptcy court also highlighted the extensive mediation and discovery processes that led to the development of these terms. Id. at 85–87.
As a legal framework for balancing the equities and determining whether to approve the plan, the court was guided by the factors from In re Iridium Operating LLC, 478 F.3d 452, 464–66 (2d Cir. 2007):
(1) The probability of success, should the issues be litigated, versus the present and future benefits of the settlement; (2) the likelihood of complex and protracted litigation if the settlement is not approved, with its attendant expense, inconvenience and delay, including the difficulty of collecting on a judgment; (3) the interests of the creditors, including the degree to which creditors support the proposed settlement; (4) whether other interested parties support the settlement; (5) the competence and experience of counsel supporting, and the experience and knowledge of the court in reviewing, the settlement; (6) the nature and breadth of the releases to be obtained by officers and directors or other insiders; and (7) the extent to which the settlement is the product of arms-length bargaining.
In applying the Iridium factors, the bankruptcy court observed that, in this case, counsel on both sides were experienced and formidable. Id. at 86–87. Over 95% of the voters approved the Plan, showing clear creditor support, and the
The bankruptcy court also noted that, in exchange for the Shareholder Release, the Sacklers were contributing “the largest amount that shareholders have ever paid in such a context of these types of third party claims and closely related
2. The Authority of the Bankruptcy Court to Release Third-Party Claims Against the Sacklers
The bankruptcy court next turned to the Plan‘s release of third-party claims against the Sacklers, which included all claims that had by then been asserted in litigations against the Sacklers by third parties. The Release encompassed both
In addressing the question of its own authority, the bankruptcy court first evaluated threshold arguments and determined that it had subject-matter jurisdiction over the released claims. Id. at 95–98. But, in so finding, the court narrowed the Release even further to cover only those claims that directly affect the res—these claims included “insurance rights” and “the shareholder released parties’ rights to indemnification and contribution” from the Debtors. Id. at 97. Likewise, the court noted that “the Debtors’ ability to pursue the estates’ own closely related, indeed fundamentally overlapping, claims” against the Sacklers also directly affected the res. Id. at 97–98. The court did not exclude derivative claims from the Release, reasoning that those claims were similarly likely to affect the res. Id. at 98.
After clearing the constitutional hurdles, the bankruptcy court began its analysis of statutory authority by noting that the majority of Circuits permit nonconsensual third-party releases, while only three Circuits—the Fifth, Ninth,
The bankruptcy court instead looked to
The bankruptcy court then looked to this Court‘s decision in In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005), and other case law from this Circuit, to determine which factors a bankruptcy court should consider when determining whether third-party releases are appropriate. Id. at 105–06. The court identified the following factors: (1) the third-party releases were narrowly tailored; (2) monetary contributions were critical to the Plan; (3) the success of the Plan hinged on the third-party releases; (4) the affected class or classes overwhelmingly accepted the Plan; (5) the amount being paid under the Plan was substantial (which, the court noted, is not determined by the Sacklers’ net worth because
Evaluating those factors, the bankruptcy court found that they supported approval of the Plan. It pointed to the significant overlap in third-party claims against both the Debtors and the Sacklers, chiefly that: (1) claims against both derived from the Debtors’ conduct, and (2) to the extent that one or more of the Sacklers could be said to have directed that conduct, or to have possessed the knowledge and power to do so, the Sacklers’ and Debtors’ defenses would be the same. Id. at 108. And it added that the potential difficulty, as discussed above, of collecting on any judgment, the existence of spendthrift trusts, and the Estate‘s limited resources that the litigation process would likely deplete, also weighed in favor of approval of the Plan. Id. at 108–09.
In sum, the bankruptcy court predicated confirmation of the Plan on a few limitations to the third-party releases (namely that the Debtors’ conduct amount to a legally relevant factor to a released cause of action and that the settled claims affect the res), but otherwise—having established its authority to do so—confirmed the Plan. Id. at 115.
The bankruptcy court also rejected the objections of certain Canadian municipalities and First Nations (the “Canadian Creditors“) to the Plan, which were essentially based on an argument that the Plan improperly classified their claims. Id. at 69–72. Specifically, they objected on the basis that those claims should have been classified like the claims of American non-federal governmental creditors and tribal entities, such that they could participate in abatement trusts. Id. at 69. Yet, the bankruptcy court observed that, even if the Canadian claims had been otherwise classified, notwithstanding the resulting change in the Canadian Creditors’ voting status, the Plan still would have been approved. Id. The bankruptcy court‘s reasons for classifying the Canadian claims separately boiled down to: (1) different regulatory regimes of the United States and Canada, and (2) that the Canadian Creditors did not participate in the mediation process. Id. at 70. The bankruptcy court also noted that certain decisions to recognize or confirm the Plan would be left to the Canadian courts. Id. at 71.
4. Pro Se Objections
Several pro se parties also objected to the Plan, but the bankruptcy court similarly found their objections to be without merit. For example, one pro se objector asserted that it was improper and unfair that the Plan provided only $700–
C. District Court Order Rejecting the Plan
In a December 16, 2021 opinion, the district court vacated the bankruptcy court‘s decision to confirm the Plan. In re Purdue Pharma, L.P. (”Purdue II“), 635 B.R. 26 (S.D.N.Y. 2021) (Colleen McMahon, J.). Principally, the court ruled that no statutory authority permits third-party releases such as the ones found in the Plan. Purdue II, 635 B.R. at 89–90. The court based its reasoning on two propositions: first, that the Bankruptcy Code does not expressly allow such releases; and second, that this Circuit‘s case law “has not yet been required to identify any source [in the Bankruptcy Code] for [the] authority” to grant such releases. Id.
The district court‘s analysis of statutory authority was preceded by the preliminary question of the bankruptcy court‘s jurisdictional reach under the Bankruptcy Code to release the claims encompassed by the Shareholder Release. The district court agreed that the bankruptcy court had subject-matter jurisdiction over all claims because: (1) the third-party claims raised questions as to the distribution of the Estates’ property, id. at 85; (2) the third-party claims might have altered the liabilities of the Debtors and changed the amount available from the res, id. at 85–86; (3) the claims had a high degree of interconnectedness with claims against the Debtors, id. at 86–87; and (4) Purdue‘s insurance obligations to members of the Sacklers who were officers of Purdue could have burdened the res. Id. at 87–88. Accordingly, having found that the release of the third-party claims ”might have some conceivable effect on the estate of a debtor,” the district court concluded that they fell within the bankruptcy court‘s jurisdiction. Id. at 89 (emphasis in original).
2. Statutory Power to Release Third-Party Claims
Turning to the primary issue in this appeal, the district court next ruled that the bankruptcy court did not have statutory authority to release third-party direct claims against the Sacklers because the Sacklers were not the Debtors, and the
The district court‘s analysis on this issue considered the case law from this Court, the Supreme Court, and other circuit courts. It characterized this Court‘s holding in Metromedia as indicating that third-party releases could be permissible, but as being inconclusive as to whether “such releases [a]re consistent with or authorized by the Bankruptcy Code.” Purdue II, 635 B.R. at 101. And, to the extent that Metromedia suggested that such releases would be permissible in “unique instances,” the district court viewed the opinion as having failed to identify what those instances are. Id. (internal quotation marks omitted). Due to this perceived lack of clarity, the district court concluded that “while Metromedia said a great deal, the case did not hold much of anything,” id., and thus a bankruptcy court‘s statutory authority to impose third-party releases is “questionable.” Id. at 89.
Moving on to the Supreme Court, the district court acknowledged that although the Court has never spoken directly on whether the Bankruptcy Code provides authority for these types of releases, it has held, “albeit in contexts different from the one at bar, that a bankruptcy court lacks the power to award
At bottom, the district court concluded that no section of the Bankruptcy Code expressly or impliedly provided the requisite statutory authority for the Releases. Id. at 115. The district court also rejected the argument that the bankruptcy court possessed residual equitable authority to impose the Releases. Id. at 112–14. The district court further ruled that the fact that the Plan required the Releases for confirmation did not vest the bankruptcy court with authority to approve them. Id. at 108–09.
3. Classification of Canadian Claims
Finally, the district court agreed with the bankruptcy court that the Canadian Appellants’ claims were properly classified differently than those of the domestic claimants, and that all the Bankruptcy Code requires is a reasonable basis for differentiation. Id. at 116–17. The equal treatment mandate applies only to creditors within the same class, and the district court held that, under this Court‘s precedent, there was a reasonable basis to differentiate the Canadian creditors’
This Appeal followed.
D. This Appeal
The Appellants include a variety of interests unified in favor of the confirmation of the Plan: the Debtors, the Official Committee of Unsecured Creditors (the “UCC“),10 the Ad Hoc Committee of Governmental and Contingent Litigation Claimants (the “AHC“),11 the Ad Hoc Group of Individual Victims of Purdue Pharma, L.P. (“Pl. Ad Hoc Group“),12 the Multi-State Governmental
While this Appeal was pending, eight states—California, Connecticut, Delaware, Maryland, Oregon, Rhode Island, Vermont, and Washington—and the District of Columbia (the “Nine“) that had appealed the confirmation of the original settlement, the Debtors, and the Sacklers filed a new settlement agreement with the bankruptcy court that provided for an additional $1.175–$1.675 billion in Sackler contributions (resulting in an aggregate $5.5 to $6.0 billion contribution to the Plan). See Order Pursuant to
As a result, the Appellees currently left defending the district court‘s decision include only U.S. Trustee William K. Harrington (“the Trustee“),14 several Canadian municipalities and indigenous nations (the “Canadian Creditors“), and several individual pro se personal injury claimants (Ronald Bass, Ellen Isaacs, Maria Ecke, Richard Ecke, Andrew Ecke, the Estate of David Jonathan Ecke, and Peter Sottile).
DISCUSSION
I. Standard of Review
A. The Bankruptcy Court‘s Adjudicatory Authority
As stated by the district court, to the extent claims encompassed by the third-party releases are non-core under Stern v. Marshall, the bankruptcy court was required to submit “proposed findings of fact and conclusions of law to the district
It is true, as Debtors note, that the resolution of the third-party claims might impact the res of the Estate—a fact determinative of the district court‘s statutory jurisdiction under the Code—but the same was true for the counterclaims held in Stern to be beyond the bankruptcy court‘s constitutional reach to finally
B. Appellate Review of the District Court
In an appeal from a district court‘s review of a bankruptcy court‘s decision, this Court “independently” reviews the bankruptcy court‘s conclusions of law de novo and its factual findings for clear error. Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 132 (2d Cir. 2013). A factual finding is clearly erroneous when “the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). “[I]n reviewing factual findings for clear error, an appellate court is not confined to evidence cited in a lower court‘s
This Court may uphold a bankruptcy court decision on any ground—even one not relied upon by the district court. Resol. Tr. Corp. v. Best Prods. Co. (In re Best Prods. Co.), 68 F.3d 26, 30 (2d Cir. 1995). As such, we decide all pertinent issues necessary to confirm the Plan and do not limit our analysis solely to the issues addressed below.
II. Nonconsensual Third-Party Releases of Direct Claims
The two primary questions posed on appeal are: (1) whether the bankruptcy court had the authority to approve the nonconsensual release of direct third-party claims against the Sacklers, a non-debtor, through the Plan; and (2) whether the text of the Bankruptcy Code, factual record, and equitable considerations support the bankruptcy court‘s approval of the Plan. We answer both in the affirmative.
To explain our reasoning, we begin by describing the scope of the Shareholder Releases (including the types of claims covered and the claims at issue here). We then address the various statutory and constitutional arguments raised by the parties. Finally, we evaluate the bankruptcy court‘s findings regarding the
A. The Scope of the Releases
The original version of the Release from the September 2, 2021 Plan of Reorganization settles
any and all Causes of Action, including . . . [present and future claims], (x) based on or relating to, or in any manner arising from, in whole or in part, (i) the Debtors, . . . (including the Debtors’ Opioid-Related Activities, manufacture, marketing and sale of Products, interaction with regulators concerning Opioid-Related Activities or Products, and involvement in the subject matter of the Pending Opioid Actions, and the past, present or future use or misuse of any opioid by a Releasing Party) . . . and (y) as to which any conduct, omission or liability of any Debtor or any Estate is the legal cause or is otherwise a legally relevant factor.
Special App‘x at 920. As discussed supra, the bankruptcy court subsequently limited the releases such that they only “apply where . . . a debtor‘s conduct or the claims asserted against it [are] a legal cause or a legally relevant factor to the cause of action against the shareholder released party,” Deferred Joint App‘x at 1330–31, and the released claims directly affect the res, Purdue I, 633 B.R. at 97–98.
The released claims can be grouped into two categories: direct claims and derivative claims. In this context, direct claims are causes of action brought to redress a direct harm to a plaintiff caused by a non-debtor third party. See Marshall v. Picard (In re Bernard L. Madoff Inv. Secs. LLC), 740 F.3d 81, 89 n.9 (2d Cir. 2014).
By contrast, derivative claims are “ones that arise from harm done to the estate and that seek relief against [the] third part[y] that pushed the debtor[s] into bankruptcy.” Id. at 89 (internal quotation marks and alterations omitted); see also Tronox Inc. v. Kerr-McGee Corp. (In re Tronox Inc.), 855 F.3d 84, 100-04 (2d Cir. 2017) (explaining the law of derivative claims in the bankruptcy context). The potential claims released against the Sacklers include, inter alia, fraudulent transfer, constructive fraudulent transfer, deceptive marketing, public nuisance, unfair competition, fraudulent misrepresentation, violation of state consumer protection acts, civil conspiracy, negligence, and unjust enrichment. Some of these claims are direct, and some are derivative. As conceded by the parties, fraudulent transfer claims, for example, are typically derivative claims in that the real injury is to the Debtors’ estate,15 and it is well-settled that a bankruptcy court may approve not only third-party releases which are consensual, but also third-party releases of derivative claims because those claims really belong to the estate of the
The bankruptcy court‘s ability to release claims at all derives from its power of discharge. See generally
Thus, the primary dispute is whether direct claims brought by creditors of Purdue against the Sacklers (for which the Debtors’ conduct is legally relevant) can be released. As described in the following sections, we conclude that the bankruptcy court possessed both jurisdiction and statutory authority to approve the Releases because the limitations on the scope of the releases are significant and no other argument bars their imposition.
B. Subject-Matter Jurisdiction
As an initial matter, we must ensure the bankruptcy court had subject-matter jurisdiction, pursuant to the Bankruptcy Code, over the released claims. See Joseph v. Leavitt, 465 F.3d 87, 89 (2d Cir. 2006) (“[W]e have an independent
A bankruptcy court‘s subject-matter jurisdiction under the Code is broad. It extends to all civil actions so long as “the action‘s outcome might have any conceivable effect on the bankrupt estate.” Parmalat Cap. Fin. Ltd. v. Bank of Am. Corp., 639 F.3d 572, 579 (2d Cir. 2011) (internal quotation marks omitted); see also
A direct claim brought against non-debtors, such as the Sacklers, “that nevertheless poses the specter of direct impact on the res of the bankrupt estate may just as surely impair the bankruptcy court‘s ability to make a fair distribution
We agree with both the bankruptcy court and the district court that the bankruptcy court had statutory jurisdiction to impose the Releases because it is conceivable, indeed likely, that the resolution of the released claims would directly impact the res.
First, as both courts below noted, at least some of the third-party claims, although directly asserted against the Sacklers, are closely related to the derivative claims which the Estate might bring against the Sacklers. For example, many of the states that, below, objected to the Plan (but have since withdrawn their claims in favor of settlement) have laws which impose direct liability on individuals who, as officers of a corporation, personally participated in acts of corporate fraud. See, e.g., U.S. Trustee‘s App‘x at 2644–47, 2765, In re Purdue Pharma L.P., No. 21-07532 (S.D.N.Y. Sept. 9, 2021), ECF Nos. 91-7, 91-8. However, although the various state
Second, the Sacklers are covered by the Sackler-Purdue Indemnity Agreement, and, therefore, depending on the outcome of any given claims against them, would have a reasonable basis to seek indemnification from the Debtors.16 That possibility is enough to implicate the bankruptcy court‘s “related to” jurisdiction under our precedent. See SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 341-42 (2d Cir. 2018).17
C. Bankruptcy Code Authority
The ultimate authority for the imposition of nonconsensual releases of direct third-party claims against non-debtors is rooted—as it must be—in the Bankruptcy Code, specifically
1. Statutory Authority
The bankruptcy court correctly grounded its authority for approving the Releases in
First, although we have stated that
As previously stated,
We are not persuaded by Appellees’ arguments. First, as the Court‘s language in Energy Resources indicates,
Our sister circuits that have held that the Bankruptcy Code does not support the imposition of nonconsensual third-party releases rely upon the provisions limiting the discharge of debt under
This language assures that an entity also liable with a bankruptcy debtor for “such debt” remains liable notwithstanding the debtor‘s discharge of its obligation. For example, the entity might be jointly liable for the debt.
In contrast to these holdings, we do not consider
§ 524(e) does not purport to limit the bankruptcy court‘s powers to release a non-debtor from a creditor‘s claims. If Congress meant to include such a limit, it would have used the mandatory terms “shall” or “will” rather than the definitional term “does.” And it would have omitted the prepositional phrase “on, or . . . for, such debt,” ensuring that the “discharge of a debt of the debtor shall not affect the liability of another entity” — whether related to a debt or not.
2. Second Circuit Case Law
Despite the district court‘s pronouncement to the contrary, Purdue II, 635 B.R. at 89, this Court‘s precedents permit the imposition of nonconsensual third-party releases. Appellants uniformly agree that our precedents support the approval of a plan containing nonconsensual third-party releases. See, e.g., AHC Br. at 18 (“This Court has held on multiple occasions that third-party releases are allowed in appropriate circumstances.“); Debtors Br. at 32 (“For more than three decades, this Court has held that bankruptcy courts are authorized to enjoin and release third-party claims against non-debtors, as part of a plan of reorganization, in appropriate circumstances.“). But Appellees contend that such releases are the equivalent of an inappropriate discharge, that this Circuit at no point has
Manville I stated that injunctive orders barring third-party claims are not necessarily impermissible discharges. 837 F.2d at 91. There, we were presented with a Chapter 11 bankruptcy plan that released over $2 billion in asbestos victims’ claims against the insurers of Manville, a distributor of asbestos products. 837 F.2d at 90. While Manville was a debtor in the bankruptcy, its insurers were not. Id. at 91. Thus, to obtain the releases, the insurers paid Manville a $770 million settlement. Id. at 94. Before this Court, the appellant (a distributor of Manville‘s products) challenged the bankruptcy court‘s jurisdiction and authority by arguing that the third-party releases operated as a bankruptcy discharge that cannot be
We also stated in Manville I that the bankruptcy court properly imposed the releases under the Bankruptcy Code. While the bankruptcy court primarily relied on
Appellees argue, however, that it is significant that Manville I, unlike the current appeal, concerned asbestos products because the Bankruptcy Code now explicitly authorizes releases in such circumstances. Trustee Br. at 41–42. That is because in 1994 Congress enacted
The first blow to Appellees’ restrictive reading of the statute comes from the text of the Bankruptcy Reform Act of 1994 itself, which states:
RULE OF CONSTRUCTION.—Nothing in [the language since enacted as
§ 524(g) ], shall be construed to modify, impair, or supersede any other authority the court has to issue injunctions in connection with an order confirming a plan of reorganization.
More importantly, this Court‘s opinion in Metromedia flatly rejects a restrictive interpretation of the Bankruptcy Code by stating that third-party releases can be valid outside of the asbestos context. 416 F.3d at 141. In that case, the debtor Metromedia‘s reorganization plan allowed certain non-debtor directors and officers of the company to “receive a full and complete release, waiver and discharge from . . . any holder of a claim of any nature . . . arising out of or in connection with any matter related to” Metromedia or its subsidiaries. Id. at 141 (alterations in original). Creditors challenged the imposition of these types of releases generally on statutory grounds, and specifically on equitable grounds. Although this Court ultimately rejected the imposition of the releases, we did so based on insufficient factual findings, not because we found that such releases could not ever be approved. Id. at 143.
Regarding the third-party releases themselves, the Metromedia court faced many of the same arguments we are presented with today. There, appellants had
Thus, while we ultimately ruled that the bankruptcy court‘s findings were insufficient for the imposition of releases under the facts of that case, Metromedia nevertheless rests upon the premise that such releases may be permitted so long as bankruptcy courts make sufficient factual findings and satisfy certain equitable considerations. Id. at 143.
For these reasons, our precedents permit the imposition of third-party releases jointly under
D. Factors Relevant to Releasing Direct Third-Party Claims Against Non-Debtors
Having upheld the bankruptcy court‘s statutory authority and jurisdiction to impose such releases, we now turn to the circumstances under which releases may be approved. The Trustee appears to take issue with the fact that the Releases were approved despite their failing to satisfy certain factors stated in Metromedia. The Debtors, by contrast, contend that this is exactly the sort of case that epitomizes when third-party nonconsensual releases are proper because (1) the releases are essential to the confirmation of the Plan (including serving as its primary financing); (2) litigation of the settled claims would negatively impact the
We now clarify any ambiguity and identify the factors that should be considered in order for a bankruptcy court to approve of nonconsensual third-party releases of direct claims against a non-debtor and to include them in a plan. In doing so, we remain conscious of the “heightened” “potential for abuse” posed by such releases, and our analysis of pertinent factors is informed by that risk.19
Metromedia, 416 F.3d at 140. We wholeheartedly endorse the view that “third-party releases are not a merit badge that somebody gets in return for making a positive contribution to a restructuring,” nor are they “a participation trophy” or “gold star for doing a good job.” In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 726-27 (Bankr. S.D.N.Y. 2019).
First, courts should consider whether there is an identity of interests between the debtors and released third parties, including indemnification relationships, “such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate.” Dow Corning, 280 F.3d at 658; see also In re Master Mortgage Investment Fund, 168 B.R. 930, 935 (Bankr. W.D. Mo. 1994) (same).20 This requirement reflects our observation in Metromedia that non-debtor releases have been allowed in circumstances including those where “the enjoined claims would indirectly impact the debtor‘s reorganization by way of indemnity or contribution.” Metromedia, 416 F.3d at 142 (internal quotation marks omitted).
Second, courts should consider whether claims against the debtor and non-debtor are factually and legally intertwined, including whether the debtors and the released parties share common defenses, insurance coverage, or levels of
Third, courts should consider whether the scope of the releases is appropriate. This is the second factor evaluated in Metromedia. 416 F.3d at 143. In our view, a release is proper in scope when its “breadth” is “necessary to the Plan.” Id.
Fourth, courts should consider whether the releases are essential to the reorganization, in that the debtor needs the claims to be settled in order for the res to be allocated, rather than because the released party is somehow manipulating the process to its own advantage. In other words, it must be the case that, without the releases, “there is little likelihood of [a plan‘s] success.” Master Mortg. Inv. Fund, 168 B.R. at 935. This factor also reflects the first factor required by Metromedia—that the release be important to the plan. 416 F.3d at 143.
Fifth, courts should consider whether the non-debtor contributed substantial assets to the reorganization. This factor was mentioned by this Court
Sixth, courts should consider whether the impacted class of creditors “overwhelmingly” voted in support of the plan with the releases. Master Mortg. Inv. Fund, 168 B.R. at 935. A reference point to define “overwhelmingly” can be found in
Seventh, and finally, courts should consider whether the plan provides for the fair payment of enjoined claims. In Metromedia, we noted that other courts have found such releases permissible when “the plan . . . provided for the full payment of the enjoined claims.” 416 F.3d at 142; see also Dow Corning, 280 F.3d at 658 (requiring that “[t]he plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction“). While the full payment of the enjoined claims would of course tend to favor the approval of a plan containing such releases, we are concerned with the fairness of the payment, as opposed to the final amount of payment. Because the amount of the payment does not
Although consideration of each factor is required, it is not necessarily sufficient—there may even be cases in which all factors are present, but the inclusion of third-party releases in a plan of reorganization should not be approved. Further, as contemplated by Dow Corning, the bankruptcy court is required to support each of these factors with specific and detailed findings. 280 F.3d at 658. For the bankruptcy court to make such findings, extensive discovery into the facts surrounding the claims against the released parties will most often be required.
Finally, as with any term in a bankruptcy plan, a provision imposing releases of claims like that at issue here must be imposed against a backdrop of equity. See Energy Resources, 495 U.S. at 549 (describing the authority conferred by
E. Application of These Factors Based Upon the Bankruptcy Court‘s Findings
In light of these factors, we now evaluate the bankruptcy court‘s findings supporting its approval of the Plan. The thorough bankruptcy court opinion, which indicated that it grounded its findings in the tens of millions of documents produced in discovery, informs our analysis.21
Factor 1. Identity of Interests Between Debtors and Released Parties
We have described supra the identity of interests between the Debtors and those Sacklers named as defendants in the litigations, chiefly that the named Sacklers were directors and officers of the Debtors. Purdue was a closely held corporation, and, according to the bankruptcy court, the record tended to show that the Sacklers “took a major role in corporate decision-making, including Purdue‘s practices regarding its opioid products that was more akin to the role of
Factor 2. Factual and Legal Overlap Between Claims Against Debtors and Settled Third-Party Claims
In the prior sections, we also discussed the factually and legally intertwined nature of the claims against both the Debtors and the Sacklers. More importantly, the bankruptcy court required that the releases only “apply where . . . a debtor‘s conduct or the claims asserted against it [are] a legal cause or a legally relevant factor to the cause of action against the shareholder released party,” Deferred Joint App‘x at 1330–31, and the released claims directly affect the res, Purdue I, 633 B.R. at 97-98. Cf. Metromedia, 416 F.3d at 141 (ruling that factual circumstances and equitable considerations did not support a broad release that included the “waiver and discharge from . . . any holder of a claim of any nature . . . of any and all claims . . . arising out of or in connection with any matter related to [the Debtor] or one or more subsidiaries . . . based in whole or in part upon any act or omission or transaction” (alterations in original, emphasis added)). By so narrowing the Releases, the bankruptcy court ensured sufficient overlap between claims against the Debtors and the settled third-party claims.
We next evaluate, in tandem with our analysis of the Releases’ scope, whether the Releases are essential to reorganization.22 See Metromedia, 416 F.3d at 143. The Releases are essential to reorganization for two reasons. First and foremost, as described supra, the Releases are required to ensure that the valuation of the res is settled. Otherwise, the Debtors would, in all likelihood, be required to litigate indemnity and contribution claims brought against them by the Sacklers, which would likely deplete the res, no matter the ultimate outcome of those claims. The bankruptcy court limited the Releases extensively in order not to exceed its jurisdiction, restricting their scope to ensure that the released claims related to the Debtors’ conduct and the Estate. Second, the res itself amounted to only approximately $1.8 billion. Without the Plan, the government would recover its $2 billion first, thereby depleting the res completely. As a result, many victims of the opioid crisis would go without any assistance and face an uphill battle of
On the question of what is essential to the Plan, the Trustee argues that the Sacklers themselves created the conditions that make these releases essential, and that, as a term of their contribution, the Sacklers had insisted upon these releases before the Debtors even entered bankruptcy. Per the Trustee, these facts demonstrate the Sacklers’ unworthiness of receiving the benefit of the releases. First, we are not called upon to determine whether the Sacklers are worthy of receiving the benefit of the releases. As noted supra, the various equities of the Plan were carefully considered by the bankruptcy court. However, to the extent that there is a fear that this opinion could be read as a blueprint for how individuals can obtain third-party releases in the face of a tsunami of litigation, we caution that the key fact regarding the indemnity agreements at issue is that they were entered into by the end of 2004—well before the contemplation of bankruptcy. Acts taken ““in contemplation of” bankruptcy ha[ve] long been, and continue[] to be, associated with abusive conduct.” Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 240 (2010). We would be far less persuaded if the party seeking to be released entered into this type of indemnity agreement in
As our precedents have suggested, and as we make clear today, if the only reason for the inclusion of a release is the non-debtor‘s financial contribution to a restructuring plan, then the release is not essential to the bankruptcy. See Manville III, 517 F.3d at 66 (cautioning against this type of situation as abusive). But that is not the present case. Here, the Releases are both needed for the distribution of the res and to ensure the fair distribution of any recovery for claimants. Thus, we deem the scope of the Releases—as limited by the bankruptcy court—appropriate and the Releases essential to the reorganization.
Factor 5. Substantial Contribution to the Reorganization
When evaluating the substantial nature of the released parties’ contribution, our primary focus is on the impact of the financial contribution. The bankruptcy court found the financial contribution by the Sacklers, which totaled approximately $4.325 billion, to be substantial and of course did not change its
The Trustee primarily argues that the Plan is inequitable because it improperly provides a quid pro quo to the Debtors, and that if the Sacklers had declared bankruptcy, under the Bankruptcy Code they would have had to dedicate substantially all of their net worth (an estimated $11 billion) to the Estate—well more than the approximately $5.5-6.0 billion they have agreed at this point to fund.23 It is not for this Court to determine whether a greater contribution from the Sacklers would be desirable, but rather our role is simply to decide
Factor 6. Overwhelming Approval by Creditors
The claimants voted overwhelmingly to approve the Plan. Over 95% of the personal injury classes voted to accept the plan, which is well above the 75% benchmark. Moreover, with the Nine no longer pursuing their objection, the main challenge to this appeal is not by creditors, but by the Trustee—a government entity without a financial stake in the litigation.
Factor 7. Fair Payment of Enjoined Claims
Finally, the Plan provides for the fair payment of claims. As Appellees concede, the valuation of the claims—estimated at $40 trillion—far exceeds the total funds available, as well as the Sacklers’ personal wealth. The bankruptcy court also acknowledged that although “in a vacuum the ultimate judgments that could be achieved on the estates’ claims (and the closely related third-party claims that are being settled under the plan) might well be higher than” the Sacklers’ contribution to the plan, “the vast size of the claims against the Debtors and the vast number of claimants creates the need for the plan‘s intricate settlements.”
* * *
For the reasons stated, the bankruptcy court‘s detailed findings support approval of the Plan under each of the seven factors that we announce in this opinion. We would also note the additional concessions made by the Sacklers—including governance requirements, abatement trusts, the public document archive, and divestment of the Sacklers from the opioid business worldwide—contribute to the Plan‘s equity. Purdue I, 636 B.R. at 107. We therefore find no error with the bankruptcy court‘s weighing of the equitable considerations.
Although the bankruptcy court found that there was adequate notice to impose the releases,24 on appeal, the Trustee asserts that the releases in this action did not comply with due process. We, however, find no due process violation.
A procedural due process claim entails a two-part inquiry: whether claimants were deprived of a protected interest and, if so, whether claimants received adequate notice and a meaningful opportunity to be heard. Spinelli v. City of New York, 579 F.3d 160, 168 (2d Cir. 2009). The releases extinguish causes of action, which, as the parties impliedly concede, are a constitutionally protected property interest. See Logan v. Zimmerman Brush Co., 455 U.S. 422, 428 (1982) (“a cause of action is a species of property protected by the Fourteenth Amendment‘s Due Process Clause“); Rosu v. City of New York, 742 F.3d 523, 526 (2d Cir. 2014) (“[T]he cause of action itself constitutes a cognizable property interest.“). Thus, the only remaining question is whether claimants lacked adequate notice or a meaningful opportunity to be heard. Spinelli, 579 F.3d at 168.25
The Trustee also questions whether such a release, without an ability to opt-out, can comply with due process because it effectively denies claimants their day in court. But, again, the Due Process Clause does not absolutely protect against the deprivation of property; it instead ensures that a deprivation does not occur without due process. In bankruptcy, the sufficiency of process turns on the adequacy of notice and a meaningful opportunity to be heard, both of which, as explained above, occurred here.26 The Trustee‘s argument would essentially call into question all releases through bankruptcy, including bankruptcy discharges (which are one of the most important features of bankruptcy). We decline to so undermine such a critical component of bankruptcy. As described supra, the bankruptcy court here acted within its jurisdiction over the bankruptcy estate—
* * *
In sum, we reverse the district court‘s holding that the bankruptcy court lacked the authority to approve the Plan that included the nonconsensual third-party releases. We instead hold that the bankruptcy court properly approved the Plan and made the requisite detailed factual findings to approve of the Shareholder Releases.
IV. The Canadian Creditors’ Foreign Sovereign Immunity Act Claim
The Canadian Creditors raise various arguments based upon their contention that Section 10.7(b) of the Plan imposes liability personal to the Canadian Creditors in a manner that violates their sovereign immunity.
As a threshold matter, it is not clear that sovereign immunity is even implicated by the releases. To the contrary, at least in the context of discharging claims against a debtor, “[a] debtor does not seek monetary damages or any affirmative relief from a State by seeking to discharge a debt; nor does he subject an unwilling State to a coercive judicial process. He seeks only a discharge of his debts.” Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 450 (2004). The releases
V. The Cross-Appeal
The bankruptcy court and the district court both determined that the Plan properly differentiated the Canadian objectors’ claims from their domestic counterparts. The Canadian Creditors contend it is inequitable that they do not have access to the abatement trusts, but domestic creditors do. Thus, in their view,
Section
The Cross-Appellants argue regulatory differences do not suffice to account for the different classification. However, we see no reason to disturb the conclusions of the bankruptcy court and the district court. There are substantive differences among the claims, including both the types of claims and elements of causes of action. Moreover, the Canadian objectors have another source of recovery: Purdue Canada.27 We believe those reasons alone provide enough
CONCLUSION
For the reasons set forth above, we REVERSE the district court‘s order holding that the Bankruptcy Code does not permit nonconsensual third-party releases of direct claims, and AFFIRM the bankruptcy court‘s approval of the Plan, including the modification made on March 10, 2022, and the case is REMANDED to the district court for such further proceedings as may be required, consistent with this opinion. We also AFFIRM the district court‘s denial of the Canadian Creditors’ cross-appeal.
Does a bankruptcy court have the power to release direct or particularized claims asserted by third parties against nondebtors without the third parties’ consent? Yes—this Court said so in In re Drexel Burnham Lambert Grp., Inc., 960 F.2d 285, 293 (2d Cir. 1992). Drexel has not been overruled either by the Supreme Court or by this Court sitting en banc. It is binding. Consequently, although the parties have sacrificed a forest on the matter—and rightly so, weighty as it is—that ship has, for better or worse, sailed. I therefore reluctantly concur with the majority‘s conclusion that a bankruptcy court has the authority to approve a Chapter 11 reorganization plan that includes nonconsensual nondebtor releases. Again: Drexel says so.
That said, neither Drexel, nor our subsequent discussion of nonconsensual nondebtor releases in Metromedia, traces that power back to any provision of the Bankruptcy Code. See In re Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005). In fact, although Metromedia acknowledged that Drexel had already crossed the bridge, it also appreciated its questionable structure, and was wary to traverse it once more. To the point, Judge Jacobs carefully explained “the reluctance to approve nondebtor releases,” and cautioned that nowhere—apart
Those provisions of the Bankruptcy Code say nothing about nondebtor releases, and I am not convinced that statutory footing is up to the task. Accordingly, although mindful that, for this Court, the issue has already been settled (albeit without any basis in the Code), I write separately to highlight my concerns.
Those concerns are, in brief: extinguishing direct, particularized claims against nondebtors without the claimholder‘s consent, and without compensating the claimholder, is an extraordinarily powerful tool for a bankruptcy court to wield—indeed, for any court to wield. Congress once before provided clarity on the propriety of third-party releases in bankruptcy. It could do so again, but, since 1994, has not. Absent any movement on that front, the question, which has divided the courts of appeals for decades, would benefit from nationwide
I
The majority‘s overview of the facts, procedural history, and opinions below, is thorough and well stated. For present purposes, it is sufficient to emphasize exactly what the Shareholder Release1 purports to do.
Prior to Purdue‘s Chapter 11 filing, widespread efforts to hold Purdue legally accountable for its role in the opioid epidemic eventually revealed, at least in the eyes of countless plaintiffs, that certain members of the Sackler family were heavily involved with unlawful efforts to boost Purdue‘s opioid sales. See In re Purdue Pharma, L.P. (”Purdue II“), 635 B.R. 26, 50-51 (S.D.N.Y. 2021). Seeking to hold the Sackler family members directly liable for their part in perpetuating the opioid epidemic, both private litigants as well as state Attorneys General turned to various state statutes, including consumer protection laws, which, notwithstanding considerable factual overlap with allegations of corporate liability, impose a separate and independent duty on individuals who, by virtue
[I]t is undisputed that these laws impose liability, and even penalties, on such persons independent of any corporate liability (or lack of same), and independent of any claim the corporation could assert against them for faithless service as a result of those same acts.
Id. at 91. These claims “arise out of the Sacklers’ own conduct.” Id.
The Shareholder Release forever halts those proceedings in their tracks. It permanently enjoins the private and state litigants, as well as all future plaintiffs, from pursuing those claims against the Sacklers—indeed, any claim “of any kind, character[,] or nature whatsoever, Special App‘x 798—so long as the Debtors’ “conduct, omission, or liability” is “the legal cause or is otherwise a legally relevant factor.”2 Id. at 920. No carveout exists for claims based on fraud—claims
On top of that, the Release does not “channel[]” the enjoined claims “to a settlement fund” for compensation, Metromedia, 416 F.3d at 142, but instead mandates that any value paid to personal injury claimants regarding, for example, the opioid-related death of another person, be based only upon claims “held against the Debtors, and not to any associated . . . Channeled Claim against a non-Debtor party.” Special App‘x 634, 693, 734-35. In other words, the value of a channeled claim is only the value of claims against the estate.3
Finally, the Release is non-consensual; it binds consenting and objecting parties, without providing an opt-out option to those who object.
In summary, the Release enjoins a broader swath of claims than a debtor himself could seek to discharge under the Bankruptcy Code, and it does so without providing any compensation to the claimholders, who must abide by its terms whether they like it or not. The Release encompasses a potentially wide range of
In exchange, the Sacklers have agreed, under the Plan, to offer a substantial sum of money to the Debtors’ estate.5 No doubt, those funds help make possible (a) a more meaningful distribution of the Debtors’ estate to its creditors and (b) recovery for those who hold claims against the Debtors. It is equally apparent that the Sacklers mean what they‘ve said: no release, no money. However, our task today is not to decide whether, as a policy matter, the Release is justified. Instead, without ignoring that the Sacklers’ substantial contribution will likely play a meaningful role in providing some measure of finality to the countless families who have suffered as a result of the opioid crisis, the dispositive question is whether, under the Bankruptcy Code, a bankruptcy court is authorized to approve the Release.6
The Bankruptcy Code is silent on the matter. That is no surprise. Bankruptcy is the “subject of the relations between a[]... debtor[] and his creditors, extending to his and their relief.” Wright v. Union Cent. Life Ins. Co., 304 U.S. 502, 513-14 (1938). To that end, Congress created a “comprehensive federal system . . . to govern the orderly conduct of debtors’ affairs and creditors’ rights.” Eastern Equip. & Servs. Corp. v. Factory Point Nat‘l Bank, 236 F.3d 117, 120 (2d Cir. 2001). In short, the Bankruptcy Code‘s central focus is on the adjustment of the debtor-creditor relationship. Of course, that adjustment can implicate the interests
Against that backdrop, there is little to glean from Congressional silence where, as Judge McMahon put it, “one would not expect Congress to speak.” Purdue II, 635 B.R. at 110. Appellants ask us to accept the remarkable premise that Congress, while believing it wise to except certain claims (i.e., claims for fraud) from a debtor‘s discharge, took no issue with the idea that such claims could be effectively discharged for nondebtors, who might contribute funds to settle claims against the debtor, but who would face no consequences from their own, independent liability—even though state laws mandate otherwise. Not only that, appellants ask us to ground this grant of authority in congressional silence, as, again, the Bankruptcy Code does not expressly authorize the practice.
And yet that silence is, effectively, what the majority sees as granting the bankruptcy court a power that is nothing short of extraordinary. It points to
To be sure, the Court in Energy Resources characterized
Again: that case concerned the adjustment of a creditor-debtor relationship, which, as provided above, is a bankruptcy court‘s raison d‘etre. Courts should understand any congressional grant of equitable authority to the bankruptcy court with that principal purpose in mind. Releasing nondebtors from their own liability—provided for under state law—over the objection of a claimholder and without compensating that claimholder is so far afield from that purpose that plugging-and-playing Energy Resources’ description of
Moreover, the Court has, in other contexts, explained that a bankruptcy court‘s equitable authority is not “unlimited,” but instead incorporates “traditional standards in equity practice,” and that courts can look to “cases outside the bankruptcy context” to help understand the limits of that authority. Taggart v. Lorenzen, 139 S. Ct. 1795, 1801-02 (2019).10 The majority does not liken the equitable authority recognized today to anything traditionally recognized at equity. I too am at a loss. Indeed, the idea that bankruptcy courts can order the involuntary release of direct claims against nondebtors is “an extraordinary thing” that is “different . . . from what courts ordinarily do.” In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 723 (S.D.N.Y. 2019).
At bottom, if Congress intended so extraordinary a grant of authority, it should say so. See Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 465 (2017) (requiring “more than simple statutory silence if, and when, Congress were to
This difference in views has consequences. As it stands, a nondebtor‘s ability to be released through bankruptcy turns on where a debtor files. Forum-dependent results are anathema to the establishment of “uniform Laws on the subject of Bankruptcies throughout the United States.”