Third-Party Releases At U.S. Supreme Court & Strong Views Of Individual Victims (In re Purdue Pharma)

By: Donald L Swanson

Here’s my take on third-party releases in a bankruptcy plan [not that anyone asked]:

• third-party releases should be rare and hard-to-get; but
• in exceptional circumstances (i.e., when a third-party release is needed to get lots of money to claimants quickly under a plan, and informed claimants overwhelmingly vote to accept the plan), a third-party release should be allowed; and
• a doctrinaire refusal to accept any third-party release in any bankruptcy plan—ever—is bad policy, because informed people who want and need their money, under the plan provisions, should be entitled to get it.

Whether a doctrinaire position on third-party releases becomes the law of the land in these United States will be determined—probably in the 2024 calendar year—by the U.S. Supreme Court.  The case is William K. Harrington, U.S. Trustee v. Purdue Pharma, L.P., Case No. 23-124 (Petition for writ of certiorari granted on 8/10/2023).

Background

In the Purdue Pharma opioid bankruptcy, Debtor’s plan of reorganization is confirmed—over objection by the U.S. Trustee.

Plan confirmation is supported, nearly unanimously, by individual victims.  They support the plan, despite its release of Debtor’s owners, because it will pay out billions of dollars being contributed by those owners.

But the U.S. Trustee opposes the plan and appeals its confirmation.  The U.S. Trustee is opposed to any type of third-party release in any bankruptcy plan—ever!  And the billions of dollars to be contributed by Purdue Pharma’s owners are contingent upon those owners receiving, in exchange, a release of claims against them.

The U.S. Second Circuit Court of Appeals affirms the confirmation of Debtor’s plan, its payout of billions of dollars, and its third-party releases for Debtor’s owners.

On July 28, 2023, the U.S. Trustee asks the U.S. Supreme court, (i) to grant a stay of the Second Circuit’s ruling pending appeal, and (ii) to treat the stay request as a Petition for writ of certiorari.

On August 10, 2023, Justice Sotomayor enters a text order, (i) granting the U.S. Trustee’s stay request, (ii) treating the stay request as a Petition for writ of certiorari, (iii) granting that Petition, and (iv) directing the parties “to brief and argue the following question”:

• “Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.”

Opposition of Ad Hoc Group of Individual Victims

An “Ad Hoc Group of Individual Victims,” comprised of 60,000 individuals injured by direct exposure to Debtor’s opioid product, file their “Opposition” to the U.S. Trustee’s actions.

What follows is a summary of their reasons for opposition.

–A Mediated Deal

Through diligent collective action, lengthy mediation, chapter 11 plan processes and the self-funded efforts of the Ad Hoc Group, the opioid victim community has achieved a remarkable settlement that will benefit personal injury victims and will work toward abatement of the opioid crisis.

–U.S. Trustee’s Campaign

Despite the benefits of the plan, the U.S. Trustee has waged a (nearly) solo campaign against this settlement because it contains third-party releases that the U.S. Trustee opposes as a matter of legal policy.

Not content to advance its own agenda, the U.S. Trustee wages its solo campaign purportedly on behalf of “tens of thousands of personal injury claimants” whose direct claims against Debtor’s owners – as the U.S. Trustee incorrectly contends – are being released without compensation.

–Does Not Speak for Victims

The notion that the U.S. Trustee speaks on behalf of personal injury victims cannot be further from the truth:

• the U.S. Trustee has no ties to the opioid crisis, has no economic stake in the outcome of the personal injury cases, and has never identified a single claimant, let alone tens of thousands, who has authorized the U.S. Trustee to vindicate his or her constitutional rights;
• at no point during the plan negotiation – which lasted over a year – did the U.S. Trustee ever intervene on behalf of the personal injury victims to assist in their litigation or settlement efforts or even advocate for more compensation or a better deal; and
• instead, the U.S. Trustee’s pursuit of its inflexible policy continues to harm personal injury victims every day.

–Ad Hoc Group

By contrast, the Ad Hoc Group (i) speaks for over 60,000 actual people (including those whose rights the U.S. Trustee purports to assert), and (ii) actively and vociferously supports the Plan, including its third-party releases:

• as a group, personal injury victims (the ones who have suffered most) voted overwhelmingly in favor of Debtor’s plan, with less than 4% of the estimated class voting “No”; and
• personal injury victims recognize that the third-party releases are necessary to a global settlement that delivers critical value to all opioid-affected communities in America through:
  • direct payments to those injured;
  • billions of dollars of abatement funds to prevent further injuries; and
  • etc.

–No Alternative

Debtor’s owners are committing billions of dollars in abatement and victim compensation funds to the plan.  These billions of dollars are critically needed now.  But the commitment of these funds hinges on the confirmation and consummation of Debtor’s plan.

If the Plan fails, the personal injury victims (whose rights the U.S. Trustee purports to vindicate) will return to the status quo:

• there will be no financial recovery, no abatement funds for their communities, etc.; and
• the U.S. Trustee offers no solution—offers nothing in lieu of the existing plan, beyond a speculation that another deal will be possible without third-party releases.

Given what is at stake, the Ad Hoc Group implores the U.S. Supreme Court to stop the U.S. Trustee’s campaign:

• allowing the U.S. Trustee’s actions to proceed will make personal injury victims wait at least another year for critically needed relief.

–Bad Policy & High Price

The U.S. Trustee’s policy goal of eliminating all nonconsensual third-party releases from every bankruptcy case—and the pursuit of that goal in this particular case:

• comes at little cost to the offices of the U.S. Trustee and Solicitor General; but
• comes at a very high price to the personal injury claimants in this case.

Conclusion

It’s disappointing that the U.S. Supreme Court has decided to tackle the third-party release issue in this particular case—given the amounts of money involved, the votes in favor of the plan, and the harms that individual victims have identified.

And a concern is that the U.S. Supreme Court will side with the Solicitor General—as it often does in bankruptcy cases. The Solicitor General speaks for the U.S. Trustee in this case.

Time will tell how this case plays out.  But time is costly for the 60,000 individual victims who have expressed their views and hopes and concerns in their Opposition summarized above.

And worst of all—the victims just might lose.

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