Purdue Pharma’s Bankruptcy Puts Nonconsensual Third-Party Releases—And Dignitary Justice—Into the Spotlight

Ella Epstein

 

In September of 2019, Purdue Pharma, the infamous manufacturer of OxyContin, filed for bankruptcy.^[1] This was an effort to simultaneously address the thousands of lawsuits—approximately 2,900 by the time of filing, more than 600 of which named members of the Sackler family as defendants—brought against the firm for its involvement in the opioid epidemic.^[2] A key question looming over the years-long proceeding is whether the Sacklers, Purdue’s multi-billionaire owners, will be held responsible for any part they may have played in the crisis.^[3] At first blush, the answer appears to be no. Purdue’s Chapter 11 plan, approved by Judge Robert Drain of the United States Bankruptcy Court for the Southern District of New York on September 17, 2021, shields the Sacklers from future opioid litigation and does not require them to admit wrongdoing. In exchange, the family will give up control and ownership of Purdue Pharma, and will contribute approximately $4.3 billion over the next 10 years to states’ and municipalities’ opioid abatement programs.^[4] The decision spawned controversy, as critics think it “lets the Sacklers off the hook” in exchange for a fraction of the profits the family is believed to have made from the opioid epidemic.^[5] Numerous entities have appealed the decision^[6]; however, as of the time of this writing, Purdue is implementing the plan.^[7]

 

I. A brief history of nonconsensual third-party releases

 

The mechanism that would shield the Sacklers is called a nonconsensual third-party release, thus named because the immunized party is not the debtor itself, and the debtor’s creditors do not consent to the release. Most courts rarely, if ever, authorize these releases, save for a handful of judges (including Judge Drain).^[8] These first emerged in the 1980s, and were originally fashioned to protect insurance companies from asbestos liabilities incurred by their clients, manufacturers who used the bankruptcy process to address mass tort lawsuits.^[9] Congress subsequently codified this mechanism in § 524(g) of the Bankruptcy Code, which applies solely to asbestos cases.[10] Starting in the 1990s, however, certain bankruptcy courts have sanctioned the use of these mechanisms outside of the asbestos mass tort litigation context.^[11]

 

II. Legal standards

 

At the moment, the Ninth and Tenth Circuits flatly prohibit nonconsensual third-party releases on the basis that 11 U.S.C. § 524(e), which provides generally that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt,” prohibits them.^[12] Most circuits, however, hold that the broad sweep of 11 U.S.C. § 105—which permits bankruptcy judges to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions” of the Code—authorizes courts to immunize nondebtors under certain circumstances.^[13] Some scholars argue that the circuit split hardly matters, since lax venue rules enable corporate debtors to easily pick their bankruptcy court of choice, and thus pick their laws as well.^[14]

 

In courts that permit them, the releases must meet certain criteria. While the exact test varies by jurisdiction, judges typically consider whether the releases are essential to the debtor’s reorganization, whether the non-debtor has contributed (or will contribute) significantly to the reorganization, whether there is an identity of interests between the debtor and the third party, whether the release is critical to the success of reorganization, whether affected creditors overwhelmingly support the plan, and whether the affected creditors will be paid.^[15]

 

III. Controversy surrounding the releases

 

Proponents of nonconsensual third-party releases point to the stringent standard for their use,^[16] the releases’ rarity^[17], the fact that they can act as a bargaining chip to secure consent to a plan,^[18] and the sense of finality they give to a proceeding to argue for their legitimacy as good bankruptcy policy.^[19] Beyond the jurisdictional issues described in Part II, opponents also note that multiple courts have recognized that these releases can be coercive.^[20]Moreover, nonconsensual releases are arguably violative of due process: when judges permit their use to protect third parties from liability prior to the adjudication of claims brought against them, they effectively impose an ultimate decision on a claimant without the claimant’s consent.^[21]

 

As the Purdue Pharma bankruptcy makes headlines, it is becoming increasingly clear that these releases offend the public’s sense of justice, and therefore threaten the integrity of the bankruptcy system as a whole.^[22] Moreover, the Sacklers are not the only ones who have, in the eyes of the public^[23] and some policymakers, abused this loophole to avoid accountability. Nondebtor releases featured in other recent, high-profile bankruptcy cases, including of USA Gymnastics to protect the Olympic Committee from potential liability stemming from Larry Nassar’s abuse,^[24] of the Weinstein Company, of the Boy Scouts of America,^[25] and of various Christian dioceses.^[26] Fueled by a perception that this tool allows the wealthy to “escape accountability for wrongdoing through bankruptcy proceedings,”^[27] a group of Democratic Congressmen introduced a new bill in the summer of 2021 that would ban its use altogether.^[28]

 

IV. Toeing the line between efficiency and justice

 

The injustice of the Purdue Pharma plan, which, in its current state, appears to allow the Sacklers to pay their way out of personal responsibility, is clear. However, litigation is onerous, time-consuming, expensive, and uncertain; third-party releases may result in higher, faster payouts to claimants than traditional litigation.^[29] Keeping nonconsensual third-party releases should not mean that all insults to justice be set aside in favor of efficiency.

 

One way to restore a sense of legitimacy in the public’s eye to the system is to carve out a space for involuntary tort claimants to air their grievances even outside of the litigation context. In Empire of Pain, Patrick Radden Keefe describes a moment when families affected by the opioid epidemic placed calls into a routine bankruptcy teleconference in the Purdue case, attempting to express their pain to someone close to the Sacklers.^[30] There is clearly a deeply-felt need to be heard; denying victims this opportunity wreaks significant dignitary harms.^[31] Courts have attempted to craft different fora: Judge Drain, for one, published dozens of letters from individuals harmed by the opioid crisis^[32]; in the wake of the General Motors bankruptcy, the presiding judge permitted retirees to call into open court and tell the public how the case affected them.^[33] Systematizing these practices would be one small step towards restoring dignity to thousands of involuntary creditors in mass tort cases.

 

^[1] Elizabeth Joseph, Purdue Pharma files for bankruptcy as part of a $10 billion agreement to settle opioid lawsuits, CNN (Sept. 16, 2019, 3:50 PM), https://www.cnn.com/2019/09/16/us/purdue-pharma-bankruptcy-filing/index.html.

^[2] Katie Benner, U.S. Seeks to Block Bankruptcy Plan That Would Free Sacklers From Opioid Claims, N.Y. Times (Sept. 16, 2021), https://www.nytimes.com/2021/09/16/us/politics/sackler-bankruptcy-plan.html?searchResultPosition=2

^[3] Patrick Radden Keefe, Empire of Pain (Doubleday 2021).

^[4]  Zachary Wolf, The worst drug dealers in history are getting away with billions, CNN (Sept. 3, 2021, 11:37 AM), https://www.cnn.com/2021/09/02/politics/what-matters-sackler-opioid-purdue-pharma/index.html

^[5] Jonathan Randles, Purdue Pharma Bankruptcy Plan Approved, Freeing Sacklers From Lawsuits, Wall St. J. (Sept. 1, 2021, 6:55 PM), https://www.wsj.com/articles/purdue-pharma-bankruptcy-plan-approved-freeing-owners-from-lawsuits-11630528636?mod=article_inline (quoting Washington Attorney General Bob Ferguson). See also Jan Hoffman & Danny Hakim, Purdue Pharma Payments to Sackler Family Soared Amid Opioid Crisis, N.Y. Times (last updated Dec. 17, 2020),https://www.nytimes.com/2019/12/16/health/sacklers-purdue-payments-opioids-.html?te=1&nl=dealbook&emc=edit_dk_20191217?campaign_id=4&instance_id=14605&segment_id=19661&user_id=0d3607f1daa902d7801987af9c1ceb4a&regi_id=9440883620191217&login=email&auth=login-email (describing a 2019 audit estimating that the Sacklers withdrew more than $10 billion from Purdue Pharma).

^[6] Jennifer McDermott & Geoff Mulvihill, Appeals are mounting in Purdue Pharma bankruptcy settlement, ABC News (Sept. 29, 2021, 1:03 PM), https://abcnews.go.com/Business/wireStory/appeals-mounting-purdue-pharma-bankruptcy-settlement-80306725.

^[7] Brian Mann, Federal judge rejects a government bid to delay Purdue Pharma’s bankruptcy settlement, NPR (Oct. 14, 2021, 8:43 AM), https://www.npr.org/2021/10/13/1045260292/federal-judge-rejects-a-government-bid-to-delay-purdue-pharmas-bankruptcy-settle. Judge McMahon emphasized that the only steps being taken are “preliminary and administrative,” and the plan itself is not being consummated. Id.; see also Jonathan Randles, Judge Eases Officials’ Concern Over Purdue Pharma Appeals, Wall St. J.(Oct. 14, 2021, 4:26 PM), https://www.wsj.com/articles/judge-eases-officials-concerns-over-purdue-pharma-appeals-11634227593.

^[8] Adam Levitin, Purdue’s Poison Pill: The Breakdown of Chapter 11’s Checks and Balances, 100 Tex. L. Rev. (forthcoming 2022), at 31, 69­–70; see also Brandon Auerbach, SDNY Bankruptcy Judges Have Differing Views on a Bankruptcy Court’s Jurisdiction to Issue Third-Party Releases, 12 St. John’s Bankr. Research Libr. No. 3 (2020).

^[9] What is the bankruptcy 'loophole' used in the Purdue Pharma settlement? The Economist explains, Economist (Sept. 3, 2021), https://www.economist.com/the-economist-explains/2021/09/03/what-is-the-bankruptcy-loophole-used-in-the-purdue-pharma-settlement.

[10] 11 U.S.C. § 524.

^[11] Ralph Brubaker, Bankruptcy Injunctions and Complex Litigation: A Critical Reappraisal of Non-debtor Releases in Chapter 11 Reorganizations, 1997 U. Ill. L. Rev. 959, 962 (1997) (describing this development).

^[12] 11 U.S.C. § 524; see also Andrew M. Butler, In Millennium, the Third Circuit Gives Nonconsensual Third-Party Releases in a Chapter 11 Plan a Stern Look, Jones Day Insights (Apr. 2020), https://www.jonesday.com/en/insights/2020/04/the-third-circuit-gives-thirdparty-releases-a-ster (collecting cases).

^[13] 11 U.S.C. § 105; see also Butler, In Millenium, the Third Circuit Gives Nonconsensual Third-Party Releases in a Chapter 11 Plan a Stern Look.

^[14] Levitin, Purdue’s Poison Pill, at 31, 53–54.

^[15] See, e.g., In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2006); see also Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005) (providing the test for the Second Circuit, which is similar to that in the Sixth).

^[16] Congressional Committees Propose Changes to Bankruptcy Code Prohibiting non-Consensual Releases of Third Parties and Limiting Other Important Bankruptcy Tools, Gibson Dunn (Aug. 2, 2021), https://www.gibsondunn.com/congressional-committees-propose-changes-to-bankruptcy-code-prohibiting-non-consensual-releases-of-third-parties-and-limiting-other-important-bankruptcy-tools/.

^[17] See, e.g., In re Metromedia Fiber Network, Inc., 416 F.3d 136, 141-43 (2d Cir. 2005) (noting that these releases are “rare”); see also Congressional Committees Propose Changes.

^[18] Richard L. Epling, Third-Party Releases in Bankruptcy Cases: Should There Be Statutory Reform?, 75 Bus. L. 1747, 1747 (2020); Dorothy Coco, Third-Party Bankruptcy Releases: An Analysis of Consent through the Lenses of Due Process and Contract Law, 88 Ford. L. Rev. 231, 258–259 (2019).

^[19] Epling at 1747.

^[20] Id. at fn.s 1, 14; see also In re Metromedia Fiber Network, Inc., 416 F.3d at 143 (“a nondebtor release is a device that lends itself to abuse”).

^[21] See, e.g. Ralph Bruebaker, Unwrapping Prepackaged Asbestos Bankruptcies (Part I): Non-Debtor “Releases” and Permanent Injunctions, 25 Bankr. L. Letter 1 (2005).

^[22] See, e.g., Melissa B. Jacoby, Corporate Bankruptcy Hybridity, 166 U. Penn. L. Rev. 1715, 1739–42.

^[23] Brian Mann, Critics Want Sacklers To Face Criminal Charges For Role In Opioid Crisis, NPR (Nov. 25, 2020, 3:05 PM), https://www.npr.org/2020/11/25/938801514/critics-want-sacklers-to-face-criminal-charges-for-role-in-opioid-crisis.

^[24] Maria Chutchian, Bankruptcy reform debate targets bad corporate actors, popular judges, Reuters (July 28, 2021, 6:48 PM), https://www.reuters.com/legal/transactional/bankruptcy-reform-debate-targets-bad-corporate-actors-popular-judges-2021-07-28/

^[25] Adam Levitin (@AdamLevitin), Twitter (Oct. 9, 2021, 11:12 PM), https://twitter.com/AdamLevitin/status/1447037281689288707.

^[26] Kyle Arendsen & Peter Morrison, Congress Proposes Significant Bankruptcy Code Changes to Protect Tort Claimants and Creditors, Restructuring GlobalView (Aug. 11, 2021), https://www.restructuring-globalview.com/2021/08/congress-proposes-significant-bankruptcy-code-changes-to-protect-tort-claimants-and-creditors/.

^[27] Warren, Nadler, Durbin, Blumenthal, Maloney Announce Legislation to Eliminate Non-Debtor Releases, Prevent Corporations and Private Entities From Escaping Accountability In Bankruptcy Proceedings, Elizabeth Warren (July 28, 2021), https://www.warren.senate.gov/newsroom/press-releases/warren-nadler-durbin-blumenthal-maloney-announce-legislation-to-eliminate-non-debtor-releases-prevent-corporations-and-private-entities-from-escaping-accountability-in-bankruptcy-proceedings

^[28] Id.

^[29] Clinton E. Cutler, Is a Legislative Crackdown Coming on Third Party Releases in Bankruptcy Plans?, Fredrickson & Byron, P.A. (Sept. 24, 2021), https://www.fredlaw.com/the_restructuring_report/is-a-legislative-crackdown-coming-on-third-party-releases-in-bankruptcy-plans/; Samir D. Parikh, The New Mass Torts Bargain, 91 Ford. L. Rev. __ (forthcoming 2022)

^[30] Empire of Pain at 425.

^[31] Oversight of the Bankruptcy Code, Part I: Confronting Abuses of the Chapter 11 System: H. Before the H. Comm. On the Judiciary Subcomm. On Antitrust, Commercial, and Administrative Law (Levitin testimony, https://docs.house.gov/meetings/JU/JU05/20210728/113996/HHRG-117-JU05-Wstate-LevitinA-20210728.pdf

^[32] As Purdue Pharma Bankruptcy Nears Approval, Family Members Write About The Human Toll, NPR (Aug. 9, 2021), https://www.npr.org/2021/08/09/1025171160/victims-of-purdue-pharmas-painkillers-read-their-letters-to-the-court

^[33] Jacoby, Corporate Bankruptcy Hybridity, at fn. 142.