The single biggest U.S. restructuring development over the past 12 months has been the U.S. Supreme Court ruling in Harrington v. Purdue Pharma L.P.
Purdue applied for Chapter 11 bankruptcy in September 2019 after thousands of lawsuits were filed against it over the company’s aggressive marketing of its blockbuster painkiller, OxyContin, one of the drugs blamed for fueling the U.S. opioid epidemic.
The proposed bankruptcy plan included a provision for the Sackler family, Purdue’s owners, to contribute approximately USD4.5billion to a settlement fund in exchange for broad legal immunity from more than 1,000 claimants, despite not filing for bankruptcy themselves.
These releases covered a wide variety of possible claims, including those relating to the effects of opioids themselves, derivative suits brought on behalf of Purdue over the Sacklers’ management of the company, and creditor claims against the family in relation to potential fraudulent transfers, among other things. (Following OxyContin’s launch in the mid-1990s, the Sacklers withdrew more than USD12bn from Purdue, almost USD11bn of which was pulled in the period after company executives had pleaded guilty to misleading regulators and consumers about OxyContin’s risks.)
Such “non-consensual third-party releases” – whereby non-debtors are forced to release other non-debtors– have been a common feature of bankruptcy proceedings in the U.S. for many years, with different courts taking opposing views on the types of consent required, specifically whether consent requires creditors to affirmatively opt in or out.
Bankruptcy court decision reversed on appeal
Here, the bankruptcy court approved the Purdue plan, but on appeal, the District Court for the Southern District of New York rejected it. The U.S. Court of Appeals for the Second Circuit reversed the District Court’s decision, with both the Sacklers and Purdue subsequently contributing a further USD3bn between them to the settlement fund.
The U.S. Supreme Court then granted certiorari and stayed enforcement of the plan, ruling in July that non-consensual third-party releases are not permissible under the U.S. Bankruptcy Code, noting that decisions concerning a proper discharge in specific cases requires authorization by Congress.
The 5-4 decision was authored by Justice Neil Gorsuch and backed by Justices Clarence Thomas, Samuel Alito Jr., Amy Coney Barrett and Ketanji Brown Jackson.
‘The Sacklers seek greater relief than a bankruptcy discharge normally affords’
In the decision, Justice Gorsuch wrote: “The Sacklers seek greater relief than a bankruptcy discharge normally affords, for they hope to extinguish even claims for wrongful death and fraud, and they seek to do so without putting anything close to all their assets on the table … nothing in the bankruptcy code contemplates (much less authorizes) it.”
It is currently unclear exactly how the Sacklers will respond – Purdue has since re-entered mediation – but the doctrine of res judicata (which prevents a court from re-examining a case that has already been decided) should prohibit the decision being used to attack historic bankruptcy judgments.
However, the ruling has already had a significant impact on Chapter 11 cases and will continue to shape ongoing and future proceedings.
- Firstly, we expect greater focus on what kind of claims non-debtors really have against other non-debtor parties, and to what extent those claims can be properly characterized as derivative claims. We anticipate increased efforts by debtors to resolve and settle those claims, and in particular, we anticipate more robust gatekeeping exercises in situations where the bankruptcy court has approved releases from certain derivative claims. If in the future creditors sue alleging the same common facts, are they bringing direct individual claims that were not released, or are they bringing derivative claims that were released? Here, we are likely to see creativity from debtors to ensure that any such gatekeeping exercise is conducted in a sophisticated forum that is knowledgeable on the issues and favorable to their position.
- Secondly, we anticipate some pressure for a legislative solution similar to the one that exists for asbestos liability, among others. However, with public opinion against the bankruptcy system providing a windfall for non-debtors, on balance this appears unlikely.
- Thirdly, as the Supreme Court ruled on the narrow issue of the legality of non-consensual third-party releases, we can expect continued focus on what constitutes consent. There are already circuit splits around whether consent can only be granted affirmatively (i.e., by opting in), or whether parties that remain silent or that do not participate are also tacitly providing consent. This issue has been resolved in the mass tort context outside of bankruptcy, where those that do not want to participate in an action must opt out, and we anticipate similar issues to be further explored in the bankruptcy courts.
- Fourthly, we expect multinational companies to file future restructuring plans in a foreign jurisdiction and use the U.S. Chapter 15 process to implement it within the United States. Many restructuring and insolvency regimes outside the U.S. – for example in the U.K., Australia, Hong Kong, Singapore and elsewhere – permit the release of creditor claims against non-debtors. The Chapter 15 process is charged with importing, recognizing and giving effect to foreign law proceedings in the U.S., subject to two constraints. First, is the foreign judgment procedurally fair? And second, is it void in some way, or does it run counter to U.S. public policy? Here, the fact that non-consensual third-party releases were permitted in the U.S. for decades before the Harrington v. Purdue Pharma L.P. decision should provide an opportunity to argue that such releases granted outside the U.S. are not an affront to U.S. policy even if they have not been expressly authorized by Congress.
