The Uncertain Power of Bankruptcy Courts to Approve Non-Consensual Third-Party Releases

Katharine Manganello 

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff 


            In Purdue Pharma, L.P. v. City of Ground Prairie (In re Purdue Pharma L.P.), the Second Circuit held that a bankruptcy court has statutory jurisdiction to approve a plan that includes a nonconsensual third-party release of direct claims against non-debtors.[1] In 1995, Purdue, a privately held pharmaceutical company owned and governed by the Sackler family developed and the FDA approved Oxycontin. From 1996 to 2001, Purdue aggressively marketed Oxycontin to patients and doctors.[2] Starting in 2000, the FDA told Purdue to remove from the drug’s label that it was not highly addictive.[3] In 2007, Purdue began facing a number of claims from states and individuals, and at the same time, distributed approximately $11 billion to Sackler Family Trusts.[4] In 2019, the United States Attorneys’ Offices for the Districts of New Jersey and Vermont, and the United States Department of Justice brought federal and civil charges against Purdue.[5] On September 15, 2019, Purdue filed a voluntary petition under chapter 11 of title 11 of the Unted States Code (the “Bankruptcy Code”).[6] The claims against the Purdue Debtors and the Sacklers were estimated to be more than $40 trillion.[7] The key issue with the plan is the third-party release, pursuant to which the Sacklers will contribute $4.275 billion to the Debtor’s estate over nine years, and in exchange, all third-party claims against the Sacklers will be released.[8] The U.S. Bankruptcy Court for the Southern District of New York approved the Debtors’ plan including the nonconsensual third-party releases.[9] The U.S. District Court for the Southern District of New York reversed, holding, in part, that the bankruptcy court lacked authority to approve a plan with nonconsensual third-party releases.[10] The U.S. Court of Appeals for the Second Circuit reversed the district court holding that bankruptcy courts do possess statutory authority to approve a plan with nonconsensual third-party releases of direct claims, and providing a seven-factor test for analyzing the appropriateness of such releases in a plan.[11] The Second Circuit’s decision was appealed, the U.S. Supreme Court granted certiorari, and oral arguments are set for December 2023. This summary focuses on the Second Circuit’s decision. 

            The Second Circuit’s decision reversed the district court’s order and held that the Bankruptcy Code does permit nonconsensual third-party releases of direct claims.[12] First, the Second Circuit held that a bankruptcy court’s power to release claims comes from its power of discharge.[13] The Second Circuit noted that although the Bankruptcy Code forbids a “discharge of a non-debtor’s claim under § 524(e), the releases at issue on appeal do not constitute a discharge of debt for the Sacklers because the releases neither offer umbrella protection against liability nor extinguish all claims.”[14] Second, the Second Circuit held that Bankruptcy Code section 1123(b)(6) permits the inclusion of “any other appropriate provision” in a plan as long as it is “not inconsistent” with other provisions of the Bankruptcy Code.[15] The Second Circuit relied on its decision in Energy Resources, which held that section 1123(b)(6) is limited only by what it explicitly forbids, not what is explicitly allowed.[16] Third, the Second Circuit relied upon its prior holding in Metromedia, binding precedent in the Second Circuit allowing third-party releases as part of a chapter 11 plan of reorganization under certain circumstances, stating that “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.”[17]

            The Second Circuit’s decision also articulated for the first time a seven (7) factor test bankruptcy courts should apply when considering whether to approve a chapter 11 plan with a nonconsensual third-party release: (1) whether there is an identity of interests between the debtors and released third parties; (2) whether the claims against the debtor and non-debtor to be released are factually and legally intertwined; (3) whether the scope of the release is appropriate; (4) whether the releases are essential to reorganization; (5) whether the non-debtor releases contributed substantial assets to the reorganization; (6) whether the impacted class of creditors “overwhelmingly” voted in support of the plan with the releases; and (7) whether the plan provides for the fair payment of enjoined claims.[18] The Second Circuit then held that in light of the bankruptcy court’s detailed findings in Purdue supporting satisfaction of all of the factors, approval of the Purdue Debtors’ plan was appropriate.[19]

            The case is now before the U.S. Supreme Court to determine a bankruptcy court’s authority to approve nonconsensual third-party releases as part of chapter 11 plans. 

[1] Purdue Pharma, L.P. v. City of Grand Prairie (In re Purdue Pharma L.P.), 69 F.4th 45, 57 (2d Cir. 2023).

[2] Id. at 58. 

[3] Id. 

[4] Id. at 59

[5] Id. 

[6] Id. at 60. 

[7] Id. 

[8] Id.

[9] Id.

[10] Id.

[11] Id. at 67. 

[12] Id. at 85.

[13] Id. at 70 (citing 11 U.S.C. §524(a)). 

[14] Id. at 71. 

[15] Id.

[16] Id. at 76.

[17] Id. (citing In re Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005).

[18] Id. at 78–79.

[19] Id. at 82.