This browser is not actively supported anymore. For the best passle experience, we strongly recommend you upgrade your browser.
Welcome to Reed Smith's viewpoints — timely commentary from our lawyers on topics relevant to your business and wider industry. Browse to see the latest news and subscribe to receive updates on topics that matter to you, directly to your mailbox.
| 4 minutes read

Second Circuit Joins Circuits Allowing Nonconsensual Third-Party Releases In Chapter 11 Plan

Summary of Purdue Pharma, L.P. v, City of Grand Prairie (In re Purdue Pharma, L.P.), No. 22–110 – Bk (2d Cir. May 30, 2023)

In a long awaited decision, the United States Court of Appeals for the Second Circuit (“Second Circuit”) addressed whether non-consensual third-party releases included in the Purdue Pharma, LP chapter 11 plan (“Plan”) were proper. After concluding that the Bankruptcy Court had a jurisdictional and statutory basis to approve the non-consensual third-party releases, the Second Circuit concluded that the Bankruptcy Court’s specific and detailed findings under each of the seven (7) factors (articulated for the first time in its opinion) support the propriety of the releases.  This latest decision underscores the circuit split on whether non-consensual third-party releases are properly included in chapter 11 plans.

The facts of the case and the issue presented is widely known - the potential nationwide opioid settlement with the Sackler family.  The Bankruptcy Court originally confirmed the Plan proposed in the Purdue Pharma case, and on an initial appeal, the District Court reversed.  The Debtor further appealed, seeking to reinstate the Bankruptcy Court’s original confirmation.  After a detailed recitation of the facts leading to the appeal – and the Bankruptcy Court’s hearings and findings made in support of confirmation – the Second Circuit framed the issue: whether the inclusion a non-consensual third-party release in a plan was proper in light of jurisdictional and statutory considerations.  If so, the Second Circuit then evaluated whether the Bankruptcy Court appropriately approved the release under existing precedent.

The Second Circuit noted that the Bankruptcy Court plainly had jurisdiction over the bankruptcy case and proceedings in or related to the bankruptcy case. While confirmation of a plan was within a bankruptcy court’s plain jurisdiction, a bankruptcy court’s jurisdictional reach to claims of creditors against non-debtor parties only exists if those claims are “related to” the bankruptcy case.  A claim would relate to the case only if the claim could have a conceivable effect on the bankruptcy case.  The Bankruptcy Court found – and the Second Circuit agreed – that the third-party release in the Plan only affected claims asserted against the third-party releasees which had a direct and clear indemnity back to the Debtor.  Releasing those claims does have a conceivable – indeed likely – effect on the bankruptcy case.  Because of the direct impact on the bankruptcy case (and bankrupt assets), the Bankruptcy Court had appropriate subject matter jurisdiction to consider the propriety of a non-consensual third-party release in the Plan.

The Second Circuit then focused on whether the Bankruptcy Court had an appropriate statutory authority for including a non-consensual third-party release in a plan. The Second Circuit noted that § 524(e) of the Bankruptcy Code generally prohibits the bankruptcy “discharge” from extending to claims asserted against parties co-liable with the debtor. However, a third-party release is not the same as extending the debtor’s discharge to non-debtors.  They do not involve the same claims. The released claims are independent claims against third-parties (for which those third-parties would otherwise seek indemnity from the debtor).  Therefore, the separate release of the separate claim does not violate § 524(e) of the Bankruptcy Code.

Concluding that § 524(e) of the Bankruptcy Code does not bar third-party releases, the Second Circuit then analyzed whether non-consensual third-party releases in a plan were authorized by the Bankruptcy Code. Section 1123(b)(6) of the Bankruptcy Code provides that a plan may include any provision that is not inconsistent with an applicable provision to the Bankruptcy Code.  Because a third-party release was not inconsistent with § 524(e) of the Bankruptcy Code, the inclusion in a plan was appropriate.  The Second Circuit further commented that § 524(g) of the Bankruptcy Code specifically includes provisions governing the inclusion of third-party releases and channeling injunctions in plans affecting asbestos and silica related liabilities.  The Second Circuit held that under the Bankruptcy Code’s rules of construction (11 U.S.C. § 102) does not mean that specific inclusion there implies that releases cannot be used in other contexts.  Further, § 105(a) of the Bankruptcy Code – authorizing bankruptcy courts to issue any and all orders which implement the Bankruptcy Code (i.e., the court’s “residual” authority) – further supports inclusion in a plan. 

Having concluded that there was bankruptcy court jurisdiction and an appropriate statutory basis, the Second Circuit next reviewed whether the Bankruptcy Court’s approval of a non-consensual third-party release was consistent with its existing precedent.  The Second Circuit previously addressed the inclusion of non-consensual third-party releases in MacAurthur Co v. Johns Manville Corp., 837 F.2d. 89 (2d Cir. 1988), In re Drexel Burnham Lambert Corp., 960 F.2d 285 (2d Cir. 1992); and In re Metromedia Fiber Network Inc., 416 F.3d 136 (2d Cir. 2005).   The Second Circuit reiterated those holdings and articulated a seven (7) part test from those precedential decisions – including the identity of interest between the debtor/non-debtors, intertwining of the claims, contribution of the non-debtors to the reorganization (among others), whether the release was essential to the reorganization and whether the creditors voted (overwhelmingly) in support of the plan.  The Bankruptcy Court made detailed factual findings supporting each of these factors which were adequately supported by the detailed factual record (developed after extensive discovery). 

The Second Circuit held that the that the releases in the Plan were proper because the Bankruptcy Court had jurisdictional and statutory basis for the non-consensual third-party releases and the Bankruptcy Court’s findings were adequately supported.  Therefore, the Second Circuit remained with the Third, Fourth and Seventh Circuits in authorizing non-consensual third-party releases in certain contexts.  Courts in the Fifth, Ninth and Tenth Circuits do not permit the inclusion of non-consensual third-party releases.  

There was a concurring opinion which highlighted that major circuit split and called upon Congress or the Supreme Court to resolve the split.   


restructuring & insolvency, second circuit, chapter 11, bankruptcy