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Oh, and Section 105, as Well—Limitations on The Bankruptcy Court’s Equitable Powers

Section 105 of the U.S. Bankruptcy Code, titled “Power of Court,” is often cited and used as a “catch-all” provision when requesting certain relief or when a bankruptcy court enters an order granting (or denying) certain relief not prescribed by a particular provision of the Bankruptcy Code. That section provides that a “court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title . . . [and nothing shall] preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent abuse of process.”[1] Its broad and discretionary language, however, is not unlimited.[2] A bankruptcy court exercising its equitable powers must remain within the confines of the Bankruptcy Code.

In the  December 16, 2021 decision[3] by District Court Judge Colleen McMahon, she, over some 142 pages, dissected a bankruptcy court’s ability to grant non-consensual releases for non-debtors as part of a chapter 11 plan confirmation process. On appeal from the bankruptcy court, Judge McMahon reversed the plan confirmation in In re Purdue Pharma, L.P.[4]

As been highly publicized, the Sackler family owns Purdue and have profited handsomely from the manufacture and sale of opioid drugs. When Purdue filed for bankruptcy protection on September 15, 2019, nearly 3,000 lawsuits had been filed across the country against Purdue seeking damages for untold injuries caused by opioids. And another 400 lawsuits had been filed against the Sacklers for their role in the opioid crisis.

The proposed Purdue plan was the result of mediation lasting over a year in three separate phases. Crucially, it included a provision (Section 10.7), wherein the Sackler family would contribute $4.325 billion towards a fund to resolve public and private civil claims as well as civil and criminal settlements with the federal government. In exchange for that contribution, the Purdue plan would include releases, on a non-consensual basis, of direct and/or particularized claims asserted by third parties against the Sacklers. That is, claims other than those which may be derivative of claims asserted against Purdue; claims based on the Sacklers’ individual liability and based on their own alleged misconduct.

The bankruptcy court relied upon Bankruptcy Code sections 11 U.S.C. §§ 105(a), 1123(a)(5), 1123(b)(6), and 1129(a)(1) and the court’s “residual authority” to grant the Sacklers’ releases. But Judge McMahon found that nothing in those sections provide the authority necessary to grant such broad releases of non-debtors. Section 524(g) of the Bankruptcy Code authorizes a court to release non-debtors from third party claims in asbestos cases—but only asbestos cases—upon satisfaction of a number of conditions, but that authority would not extend to other subject matters.

Ultimately, Judge McMahon held that, even if the bankruptcy court found that the Sacklers’ releases were necessary or essential for a confirmable plan, the non-consensual release of a non-debtor of this nature is beyond the authority granted by the Bankruptcy Code, including the broad and discretionary language contained in Section 105. There is no “residual authority” granted to bankruptcy courts that would allow them to act contrary to the Bankruptcy Code.

Judge McMahon’s order not only unwinds a confirmed plan of considerable weight, it also takes great pain to demonstrate circuit splits regarding non-consensual releases of non-debtors for direct or particularized liability. The Fifth, Ninth, and Tenth Circuits expressly prohibit non-debtor releases outside of the asbestos context. The Third Circuit has signaled its prohibition of non-debtor releases under the guise of Section 105(a). The Second Circuit has not addressed it head-on, outside of asbestos scenario. The Fourth and Eleventh Circuits conclude that Section 105(a) alone does provide the authority necessary for such releases, while the Sixth and Seventh Circuits conclude that Sections 105(a) and 1123(b)(6) together grant the “residual authority” necessary for non-consensual releases of non-debtors. The First, Eighth, and D.C. Circuits, on the other hand, have not addressed whether statutory authority exists to grant non-debtor releases.

The Purdue bankruptcy case (and the Sackler family) has been under a microscope since filing. The ultimate confirmed plan, if allowed to be consummated, would result in payments to hundreds of thousands of claimants seeking damages related to the opioid crisis. Given the huge sums involved and Circuit splits identified, this case is ripe for Supreme Court consideration for a final determination on the power and scope of Section 105 as it relates to non-consensual releases.

FOOTNOTES

[1] 11 U.S.C. § 105(a)

[2] See In re FirstEnergy Solutions Corp., 945 F.3d 431, 451 (6th Cir. 2019); In re Simonini, 69 F. App’x 169, 171 (4th Cir. 2003); In re Momentum Mfg. Corp., 25 F.3d 1132, 1136 (2nd Cir. 1994)

[3] In re: PURDUE PHARMA, L.P., No. 21-cv-7532, 2021 WL 5979108 (S.D.N.Y. Dec. 16, 2021).

[4] In re: PURDUE PHARMA, L.P., No. 19-cv-23649, --- B.R. ----, 2021 WL 4240974 (Bankr. S.D.N.Y. Sep. 17, 2021).

Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XI, Number 356
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About this Author

Woods Drinkwater Bankruptcy Associate Attorney Nashville Tennessee Commercial Litigation Nelson Mullins Riley & Scarborough LLP
Associate

Woods focuses his practice in the areas of bankruptcy, creditors’ rights and restructuring, bankruptcy and insolvency-related litigation, and general commercial litigation.

615-664-5307
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