By Mike Spector and Dan Levine
(Reuters) – Federal judge’s decision to unwind a settlement protecting Sackler family members from future opioid litigation could upend a controversial aspect of U.S. bankruptcy law: protecting third parties who have not filed themselves chapter 11 of chapter 11.
In an opinion written Thursday evening, U.S. District Judge Colleen McMahon said federal law “does not allow” the so-called non-debtor discharges granted in September to members of the Sackler family as part of the restructuring. judicial review of their company, the maker of OxyContin Purdue Pharma LP.
Granting such releases was the “big open question” of the case, which had divided federal appeals courts for decades, McMahon said.
Businesses or individuals who file for bankruptcy are entitled to protections from creditors, including plaintiffs suing them, as they attempt to reorganize.
Over the years, judges have increasingly protected non-debtors with discharges when approving a reorganization plan, especially when these third parties contribute money to the restructuring.
Indeed, in the absence of any statements, the Sacklers threatened to withdraw their $ 4.5 billion contribution to the Purdue reorganization – a settlement designed to resolve thousands of opioid-related lawsuits by transferring money to the American communities reeling from the epidemic.
“This, if maintained, will completely disrupt the practice of Chapter 11,” said Lindsey Simon, assistant professor of law at the University of Georgia Law School. “This effectively eliminates discharges from non-debtors. “
Washington State Attorney General Bob Ferguson, among those who opposed the Purdue reorganization, said Thursday he was ready to take his case to the United States Supreme Court.
Purdue announced Thursday night that he would appeal McMahon’s decision. On Friday, the company said discharges of non-debtors have “long been permitted by law in most jurisdictions … because they have long played a pivotal role in the successful resolution of mass tort bankruptcies in the United States.”
Representatives for Sackler declined to comment or did not immediately respond to a request.
Such releases, or the potential for their use, have sparked controversy not only in the Purdue case, but also in bankruptcy proceedings stemming from a sexual abuse dispute involving the Boy Scouts and the former US gymnastics doctor. Larry Nassar.
Members of the bankruptcy bar who favor discharges argue they facilitate complex settlements, encouraging otherwise reluctant third parties to contribute funds to reorganizations that rehabilitate businesses or resolve widespread disputes.
Critics argue that the releases allow wealthy and powerful corporations, directors, executives and investors to file for bankruptcy and extinguish legal liability without submitting to their own Chapter 11 filing.
According to some legal experts, Congress designed bankruptcy filings for debtors facing crushing debts, not for defendants seeking to end the race around lower courts and juries.
In October, Johnson & Johnson Inc formed a company to take responsibility for 38,000 lawsuits alleging that the talc in its iconic baby powder contained asbestos and caused cancer. The subsidiary then filed for bankruptcy.
In what is often a precursor to third parties obtaining releases for non-debtors, a judge granted an injunction ending the litigation not only against the company under bankruptcy protection, but also against J&J, who did not file a Chapter 11 case.
J&J maintains that its talcum-based consumer products are safe and confirmed by thousands of tests to be asbestos-free.
Over the years, federal appellate courts have made conflicting decisions on whether such releases are permitted, paying particular attention to whether they are granted without the permission of creditors.
McMahon, in his ruling overturning Purdue’s bankruptcy plan, lamented a 2005 US 2nd Court of Appeals opinion that urged non-debtors to be discharged sparingly in single cases because they are ripe. for abuse.
“It won’t work anymore,” McMahon said, noting that the appeals court has questioned whether bankruptcy law allows discharges. “Either legal authority exists or it does not.” She said the Bankruptcy Code only allows discharges by non-debtors on objections from creditors in cases resulting from asbestos exposure.
In 1994, Congress authorized the releases of non-debtors specifically to help companies facing monumental asbestos liabilities. Under the law, insurers would contribute to a trust to pay the claims of people who died of mesothelioma and other asbestos-related illnesses.
In return, these insurers received non-debtor discharges to prevent asbestos victims from turning around and suing them after recovering from the trust.
In his ruling, McMahon said Congress never authorized the release mechanism beyond these circumstances.
More than 95% of Purdue’s more than 120,000 voting creditors have approved the company’s reorganization, including 43 states and territories, the company said.
Those opposed to Purdue’s plan included eight states and more than 2,600 personal injury claimants, McMahon said. The US Department of Justice’s bankruptcy watchdog and the US attorney’s office in Manhattan also objected.
Democratic lawmakers have introduced legislation that would virtually ban discharges of non-debtors and further restrict the ability of third parties to stay litigation against them while a debtor’s bankruptcy is pending.
“The Sacklers must not be allowed to evade liability by abusing our bankruptcy system, and I applaud the District Court for recognizing what I have long believed – that non-consensual third party releases are not only immoral and unjust, but also illegal, “House Surveillance Chair Caroyln Maloney, among supporters of the legislation, said in a statement Thursday evening.
U.S. Attorney General Merrick Garland also applauded McMahon’s decision to cancel the Purdue plan Thursday night.
(Reporting by Mike Spector in New York and Dan Levine in San Francisco; Editing by Amy Stevens and Jonathan Oatis)