[ad_1]
Purdue Pharma LP’s appeals court win granting its Sackler family owners immunity from future opioid lawsuits deepens a circuit split over controversial litigation releases.
The opinion Tuesday from the US Court of Appeals for the Second Circuit reversed a district court decision and found the drugmaker’s owners, members of the billionaire Sackler family, can be shielded against future opioid lawsuits as part of a bankruptcy plan. The Sacklers, in exchange, have agreed to pay up to $6 billion and give up their ownership of the company to resolve widespread litigation accusing them of contributing to the national opioid epidemic.
In a practical sense, the decision allows a process to begin for opioid victims and their families to receive some compensation.
Legally, the opinion—which comes from one of the most influential US appeals courts—is expected to embolden businesses to use bankruptcy to address mass tort litigation.
The ruling reaffirms that corporate debtors can go to bankruptcy courts in the Second Circuit to pursue plans of reorganization that contain limited, non-consensual releases for individuals and entities that are not in bankruptcy, even as three other circuits have rejected such protections. Those releases can eliminate potential plaintiffs’ ability to pursue certain claims down the road.
Circuit Split
US District Judge Colleen McMahon took the restructuring world by surprise in December 2021 when she struck down Purdue’s bankruptcy plan, specifically finding that the releases were not permissible under bankruptcy law.
That opinion caused many restructuring professionals to worry that the landscape for third-party, non-consensual releases could dramatically change in the Southern District of New York, one of the most popular venues for large Chapter 11 cases, according to Lindsey Simon, a professor at the University of Georgia School of Law.
If the Second Circuit upheld McMahon’s ruling, a major jurisdiction for mass tort cases like Purdue would no longer be a desirable place to force a global settlement, Simon said.
“I think it will further encourage companies to do whatever they can to use Chapter 11 when they want to resolve mass tort exposure,” Simon said, noting bankruptcy can provide superior relief over other venues.
The Fifth, Ninth, and Tenth Circuit Courts of Appeal all ban similar releases. While the Second Circuit’s opinion isn’t binding on other circuits, it serves as “persuasive authority” for other courts to reject the arguments McMahon made in her district court opinion, said Tancred Schiavoni of O’Melveny & Myers LLP, an attorney who often represents insurers in bankruptcies.
“Resolution of the uncertainty over how the Second Circuit would rule in Purdue will also clear the way for debtors facing mass tort liabilities to seek bankruptcy protection in the Second Circuit,” Schiavoni said.
A Seven-Factor Test
Before McMahon’s opinion, conventional wisdom had been that non-consensual, third-party releases were acceptable in the Second Circuit. On Tuesday, the Second Circuit made that explicit.
The Second Circuit emphasized that debtors should consider a seven-factor test when embedding releases into their plans. Those factors include that the releases be narrowly tailored, that their monetary contributions be critical to a plan, and that the success of the plan hinge on those releases, according to the opinion.
While binding, the Second Circuit’s opinion still gives judges a lot of discretion over how they use those factors, said Melissa Jacoby, a bankruptcy professor at the University of North Carolina School of Law.
Bankruptcy judges can decline approval of such releases even if a debtor presents some evidence satisfying all seven factors, making winning such releases an uphill battle, she said.
“While I am troubled by the message the decision sends to the public, that bankruptcy is an alternative justice system for big companies and their super-rich owners, the details of the decision make clear that the path to getting a release is complicated and expensive,” Jacoby said. “Still, the opinion keeps the leverage on the side of the defendants by keeping the option open.”
Unsettled
Bound by precedent, a concurrence authored by Circuit Judge Richard Wesley to Tuesday’s opinion reads as more of a “dissent in disguise,” Simon said.
Wesley’s concurrence makes clear the “weaknesses of the analysis of the majority decision,” Jacoby said. She said she agreed with Wesley that relying on two “generic” provisions of bankruptcy law to allow such releases were weak.
Opponents of the settlement could still appeal the decision to the full panel of Second Circuit judges or the Supreme Court.
Wesley’s opinion notes several reasons why third-party releases may be illegal. But he acknowledged the three-judge panel was bound by prior Second Circuit precedent in the cases of In re Drexel Burnham Lambert Group, Inc. and In re Metromedia 11 Fiber Network, Inc., said Proskauer Rose LLP bankruptcy attorney Martin Bienenstock.
Those precedents can only be overruled by the Supreme Court or the Second Circuit sitting en banc, he said.
Samir Parikh, a bankruptcy law professor at Lewis & Clark Law School, said the Purdue opinion highlights a distinct circuit split that includes “messy constitutional issues.”
“The Appellants may be willing to appeal to the Supreme Court,” Parikh said. “In fact, Judge Wesley’s concurring opinion ostensibly asks for Congress or the Supreme Court to intervene to establish uniformity on this foundational issue.”
Bienenstock noted that the Second Circuit only dealt with one constitutional issue: due process. But others remain, he said, such as whether each creditor will be paid just compensation for the claim against the Sackler family that’s taken from them.
“The issue of bankruptcy courts ordering third-party releases is far from settled,” Bienenstock said.
[ad_2]
Source link