Should A Mass-Tort Bankruptcy Plan, With 95% Creditor Approval, Be Confirmed? (In re Purdue Pharma)

Court authority? (Photo by Marilyn Swanson)

In a mass-tort bankruptcy, when 95% of 120,000 creditors vote to accept a mediated plan paying over $7 billion to creditors, shouldn’t the plan be confirmed?

That’s the question, decided in favor of plan confirmation by the Second Circuit Court of Appeals, in In re Purdue Pharma L.P. A Petition for writ of certiorari is expected to be filed with the U.S. Supreme Court.

The main question in Purdue Pharma is about bankruptcy court authority to confirm a plan that releases claims against Debtor’s owners. The owners aren’t in bankruptcy but agree to contribute at least $5.5 billion to creditors under the Purdue Pharma Chapter 11 plan, in exchange for a release of claims against them.

Plan Confirmation and Appeals

Here’s how Purdue Pharma’s plan confirmation unfolds:

Bankruptcy Court confirms the plan;
District Court reverses—because of the claims releases;
a three-judge panel of the Second Circuit Court of Appeals:
- affirms the Bankruptcy Court’s confirmation and reverses the District Court’s reversal; but
- a one-judge concurring opinion reads like a dissent—concurring in the result only because “Drexel says so” (Drexel is a 1992 Second Circuit opinion allowing third party releases); and
U.S. Trustee declares an intention to file a Petition for writ of certiorari with the U.S. Supreme Court.

Second Circuit Opinion

The Second Circuit declares that confirmation of the plan, with its release of claims against third parties, is authorized by both:

the Bankruptcy Code:
- § 105(a) says, “The court may issue any order . . . that is necessary or appropriate to carry out the provisions of this title”; and
- § 1123(b)(6) says, “a plan may— . . . (6) include any other appropriate provision not inconsistent with the applicable provisions of this title”; and
Second Circuit case law, including:
- In re Drexel Burnham (“In bankruptcy cases, a court may enjoin a creditor from suing a third party, provided the injunction plays an important part in the debtor’s reorganization plan,” 960 F.2d 285, 293);
- In re Manville I (the releases were “essential” to a “workable reorganization,” 837 F.2d 89, 94); and
- In re Metromedia (permits third-party releases in bankruptcy, 416 F.3d 136, 142).

What follows is a summary of information from the Second Circuit’s Purdue Pharma opinion.

Facts

Purdue Pharma L.P. is privately owned. In the 1990s, Purdue Pharma introduces OxyContin, an opioid pain reliever, and promotes it as non-addictive.

Since then, OxyContin is blamed for one of the largest public health crises in U.S. history: the opioid epidemic.

The fallout is a deluge of litigation against Purdue Pharma and its owners. Plaintiffs include individuals with opioid addictions and the families of those who died from opioid overdoses.

To settle civil claims, the parties agree that Purdue Pharma will file bankruptcy, its owners will personally contribute billions of dollars to creditors, and the owners will receive releases of claims against them.

In accordance with that agreement, Purdue Pharma files Chapter 11. Its owners don’t.

An intensive, months-long and multi-phase bankruptcy mediation results in a plan of reorganization that the Bankruptcy Court approves—but with these limitations:

the release of claims against owners will cover only claims, (i) that directly affect Debtors’ estate, and (ii) for which Debtor’s conduct is a legal cause or a legally relevant factor; and
the owners agree to expand the amount of their previously-agreed contributions to $5.5 to $6.0 billion.

Seven-Factors Test

The Second Circuit establishes a seven-factors test for evaluating non-debtor releases in a Chapter 11 plan for mass-tort cases (at 64-67).

As to using the seven factors, the Second Circuit explains:

A consideration of all factors is required—but in some cases, third-party releases should not be approved, even when all seven factors are present;
The bankruptcy court must support each of the factors with specific and detailed findings, based on extensive discovery into facts surrounding the claims against released parties; and
Any such releases must be viewed against a backdrop of equity—and given the potential for abuse, such releases are to be evaluated with particular care (at 67-68).

Seven-Factors Applied

Here is how the Second Circuit applies the seven factors in Purdue Pharma to reach the plan confirmation result (at 68-75).

–First factor

Is there an identity of interests, including indemnification relationships, so that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate?

Application: Purdue Pharma is a closely held corporation, and the parties being released are the directors and officers who, (i) made decisions on the Purdue Pharma practices for opioid products, and (ii) have indemnification agreements with Purdue Pharma.

–Second factor

Are the claims against the debtor and the released non-debtor factually and legally intertwined—e.g., do they have common defenses, insurance coverage, and levels of culpability?

Application: The Bankruptcy Court requires that, (i) the releases apply only where debtor’s conduct is a legally relevant factor in claims against the party being released, and (ii) the released claims directly affect Debtor’s res. This narrowing of the releases ensures a sufficient overlap.

–Third & fourth factors

These two factors are considered together: (i) Third, is the scope of the release appropriate—i.e., is the breadth of the release necessary to the Plan? (ii) Fourth, are the releases essential, in that debtor needs the claims to be settled—not because the released party is manipulating the process to its own advantage?

Application. Purdue Pharma’s assets have a value of only $1.8 billion, and such amount (if those were the only available assets) would be entirely consumed by the government’s first-priority claim of $2 billion;
Additionally, the releases are needed to assure a fair recovery on and distribution of claims against the non-debtor parties being released—without the $5.5 to $6.0 billion of contributions from the parties being released, victims would be without any assistance and face an uphill battle of litigation against the owners, with a likelihood of disproportionate recoveries; and
Moreover, while it is true that the non-debtor parties being released may have created the indemnification provisions that make their releases essential, such provisions arose before the end of 2004—well before any contemplation of Debtor’s bankruptcy.

–Fifth factor

Are the released non-debtor parties contributing substantial assets to the reorganization?

Application. This factor focuses on the impact of the financial contribution. The plan provides for parties being released to provide $5.5 to $6.0 billion to pay creditors. It is not for this Court to determine whether a greater contribution would be desirable—but rather to decide whether the bankruptcy court erred in finding the contribution to be substantial. This Court finds the $5.5 billion minimum amount (purportedly the largest contribution in the history of such releases) to be substantial.

–Sixth factor

Have the creditors “overwhelmingly” voted in support of the plan—i.e., a 75% approving vote would be a “bare minimum” threshold for a plan with such releases of non-debtor parties.

Application. Over 95% of the personal injury classes vote to accept the plan. And the main challenge to confirmation in this appeal is not even a creditor—it’s the U.S. Trustee, a governmental entity without a financial stake in the litigation.

–Seventh factor

Does the plan provide for a fair payment of enjoined claims—i.e., whether the contributed sum permits a 100% payment or other fair resolution of the enjoined claims?

Application. The Plan provides for a fair payment of claims. The valuation of claims—estimated at $40 trillion—far exceeds the total funds available plus the total personal wealth of all the non-debtor parties being released; and
Moreover, since a full payment of all claims is not possible, fair allocation among all claims is prioritized over full payment of any one claim—and there is no allegation of any unequal treatment among claimants, and there is no reason to disturb the bankruptcy court’s findings of “fair and equitable” settlements and allocations.

News Reports

Recent news reports suggest that creditors are opposing the U.S. Trustee’s expressed intention to file a Petition for writ of certiorari with the U.S. Supreme Court.

The concern of opposing creditors appears to be that any further appeal will:

at best, delay distributions to creditors under the confirmed plan; and
at worst, prevent creditors from achieving a substantial-and-fair recovery on their claims.

Conclusion

It will be interesting to see what happens with the Purdue Pharma case at the U.S. Supreme Court. Will the Court:

grant the Petition and address the issue head-on;
deny the Petition and allow the Second Circuit’s opinion to stand;
encourage Congress to address mass-tort bankruptcies and related issues, like third-party releases; or
do something different?

It will also be interesting to see if the U.S. Trustee takes heed of the no-further-appeals position of creditors.

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