As a result of Purdue Pharma’s proposed plan of reorganization, and the ongoing opioid epidemic that continues to grip the nation, the debate over non-consensual third-party releases has gone mainstream despite being a popular tool for debtors for decades.
The origins of non-consensual third-party releases can be traced back to massive asbestos class actions that increased exponentially at the end of the twentieth century. Facing massive liability from current plaintiffs as well as an unknown and unknowable group of future plaintiffs, asbestos manufacturers filed for chapter 11. Bankruptcy protection allowed debtors to shed their massive tort liabilities through the creation of litigation trusts that would be funded in exchange for non-consensual third-party releases. This structure enabled companies to successfully emerge from bankruptcy while also providing a route for injured plaintiffs, including future plaintiffs, to obtain some kind of recovery.
This approach became so widely accepted that it is now codified in the Bankruptcy Code. See 11 U.S.C. § 524(g). Although a narrow reading of section 524(g) permits non-consensual third-party releases in asbestos-related cases only, there are certain parallels between the opioid crisis that precipitated Purdue Pharma’s bankruptcy filing and the asbestos cases that initiated this practice. In both situations, the debtors face massive tort liabilities from a known group of claimants as well as an unknowable group of potential future claimants suffering from life-threatening medical issues. Furthermore, there is evidence in both cases that the manufacturers were aware of the dangers their product presented to the public and continued to market it.
Although there is a split among the circuits, the majority of circuits have approved the use of third-party releases beyond the asbestos context. See e.g., In re Drexel Burnham Lambert Grp., Inc., 960 F.2d 285 (2d Cir. 1992) (approving third party releases that were an essential element of the reorganization); In re Millennium Lab Holdings II, LLC, 945 F.3d 126 (3d Cir. 2019) (approving releases given the exceptional facts of the case); In re A.H. Robins Co., Inc., 880 F.2d 694 (4th Cir. 1989) (establishing test for appropriate third-party releases); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (same); Airadigm Commc’ns, Inc. v. FCC (In re Airadigm Commc’ns, Inc.), 519 F.3d 640 (7th Cir. 2008) (same); SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying, Inc. (In re Seaside Eng’g & Surveying, Inc.), 780 F.3d 1070 (11th Cir. 2015) (upholding bankruptcy ruling approving third-party releases).
Nonetheless, on December 16, 2021, the U.S. District Court for the Southern District of New York ruled that the bankruptcy court did not have authority to grant the releases and vacated the confirmation order. See In re Purdue Pharma L.P., No. 7:21-cv-08566-CM, 2021 WL 5979108 (S.D.N.Y Dec. 16, 2021). This appears to be a part of a larger trend disfavoring the use of third-party releases. For example, following the Purdue Pharma decision, the United States District Court for the Eastern District of Virginia (a jurisdiction that has become popular for complex chapter 11 filings in recent years) reversed a bankruptcy court ruling approving certain third-party releases. See Patterson, et al., v. Mahwah Bergen Retail Group, Inc., Civil No. 3:21cv167 (DJN), ECF No. 79 (E.D. Va. 2022). Additionally, before either of these decisions, Congress began considering proposed legislation that would largely prohibit the use of non-consensual third-party releases.
The next case to watch is Boy Scouts of America, where the plan confirmation hearing commenced on March 14, 2022. In that case, the plan provides for a $2.7 billion settlement fund for payments to sexual abuse claimants in exchange for releases granted to the debtors, its insurers and various Scouting entities. Several parties have objected to the plan’s releases, arguing that the bankruptcy court lacks authority to approve such releases. The debtors’ reply argues that this “is an extraordinary case” where the releases and settlement fund are “integral to adjustment of the debtor-creditor relationship at the core of the Plan.” See Boy Scouts of America and Delaware BSA, LLC, Case No. 20-10343, ECF No. 9114 at ¶ 206. Since the confirmation hearing commenced, the debtors have reached a settlement with the Roman Catholic Ad Hoc Committee, one of the parties that objected to the releases, but the other objections (including one by the U.S. Trustee) remain. The bankruptcy court’s decision in this case may signal continued movement away from third-party releases or may signal a remaining friendly jurisdiction for debtors hoping to grant third-party releases.