Mitigate the releases of non-debtors? Purdue Pharma and Bill SACKLER – Insolvency / Bankruptcy / Restructuring

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On Friday, March 19, 2021, lawmakers in Congress introduced a bill to amend the U.S. Bankruptcy Code to prohibit bankruptcy judges from banning or permanently discharging legal claims from states, tribes, municipalities, or the US government against non-debtors.

According to media reports, the bill, which is titled “SACKLER Act” (meaning “Stop Shielding Assets from Corporate Known Liability by Eliposing Non-Debtor Releases Act”) is specifically designed to prevent members from the Sackler family, who own OxyContin Purdue Pharma LP, to use the bankruptcy process to obtain legal releases from government lawsuits. Purdue Pharma LP filed for bankruptcy in September 2019, but none of the Sackler family members filed for bankruptcy as individuals. Nonetheless, the Sacklers have offered to contribute around $ 4.28 billion under a proposed bankruptcy plan to fund payments to victims who have suffered opioid-related injuries from Purdue Pharma over the next decade in return. legal releases that would bar claims against the Sackler family. If approved, these legal releases would protect the Sackler family from additional liability related to the opioid crisis, something many state attorneys general have strongly opposed.

But if passed in its current form, the SACKLER Act would have significant implications that would extend beyond the Purdue Pharma bankruptcy case itself. More specifically, the bill would amend section 105 (b) of the Bankruptcy Code by adding the following:

“A court cannot -. . . except as provided in section 524 (g) of this title, prohibit or release a claim against a non-debtor by a state, municipality, tribe recognized by the federal government or the United States. “

In other words, all Chapter 11 plan releases of government claims against non-debtors would be prohibited, except those permitted under Section 524 (g) (which relate to channeling injunctions into asbestos-related cases).

Currently, federal appeals courts are divided on whether the Bankruptcy Code allows Chapter 11 plans to include statutory releases for non-debtor parties. Under Second Circuit Law, applicable in the Bankruptcy Court of the Southern District of New York where the Purdue Pharma case is pending, bankruptcy courts have both equitable and statutory power to order proceedings against non-debtor parties under a Chapter 11 plan of a debtor. See MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir. 1988). In other circuits, however, including the Ninth and Tenth circuits, such releases are not permitted. See In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995) (the fact that the Bankruptcy Code prevents bankruptcy courts from fulfilling the obligations of non-debtors); In re Western Real Estate Fund Inc., 922 F.2d 592 (10th Cir. 1990) (idem).

If it were to become law, the SACKLER Act would effectively codify the views of the Ninth and Tenth Circuits (at least for government claims) and nullify potential liability protections for non-debtor stakeholders of bankrupt companies in jurisdictions like the second circuit and also in the Fourth and Sixth Circuits, which allow releases for non-debtors who contribute to the reorganization plans. See for example In re AH Robins, 972 F.2d 77 (4th Cir. 1992); In the Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002).
On Tuesday, March 23, the Sackler family told Purdue Pharma bankruptcy court that they would revoke their proposal to contribute $ 4.28 billion to the Purdue Pharma bankruptcy plan if the injunction put in place at the start of the year. The Purdue Pharma case (which barred lawsuits against the Sackler family) has been dropped. In response, and to allow negotiations to continue, the bankruptcy court agreed to extend the injunction, which was originally scheduled to expire in April. The SACKLER Act would also limit such injunctions in the future to 90 days.

The SACKLER Act is still in its infancy and it is not certain that it will have sufficient support from one or both parties to move forward. That said, both the law, and the Purdue Pharma case more generally, have led to heightened sensitivities regarding discharges of non-debtors in bankruptcy cases and are therefore likely to have an impact on discharge negotiations in bankruptcy. the future.

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This article by Mayer Brown provides information and commentary on legal issues and developments of interest. The foregoing does not constitute a complete treatment of the matter at hand and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action on the matters discussed in this document.

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