Nonconsensual Third-Party Releases: The End of an Era

I’ve written many times before that the in-court process can seem, at first blush, to be one defined by a certain level of rigidity – as if debtors are placed onto a conveyor belt, methodically going through the motions all under the watchful eye of a judge who’s more or less there to make sure that the rigid rules of the Bankruptcy Code are followed.

And, I mean, that's all true enough and there is a certain monotony (by design) to the in-court process. However, this line of thinking elides the fact that bankruptcy courts are courts of equity, and that the Code endows bankruptcy courts with a broad latitude to move both within and beyond the explicit text of the Code insofar as it’s necessary or appropriate to orchestrate an outcome.

This is because Congress understood that it would be impossible – even in their near infinite wisdom – to craft a Code that envisioned every possible case that would fall at the feet of bankruptcy courts and every possible plan that would need to be crafted to maximize estate value and creditor distributions. Sometimes extratextual elements would need to be added to plans that Congress did not and could not envision at the time and thus may not find explicit statutory support within the Code.

However, if these extratextual elements don’t conflict with other aspects of the Code then they’ve been considered (more or less) acceptable due to a catchall provision placed within the Code by Congress that’s been interpreted to be limited, first and foremost, by what the Code disallows, not what the Code allows (in other words, an inversion of the cannon of construction expressio unius est exclusio alterius that we talked about vis-à-vis Serta some time ago).

This idea, in some loose form, stretches back centuries as the Supreme Court observed vis-à-vis the Bankruptcy Act of 1841 in a 1845 decision, Ex Parte Christy: “[I]t is manifest that the purposes so essential to the just operation of the bankrupt system, could scarcely be accomplished except by clothing the courts of the United States sitting in bankruptcy with the most ample powers and jurisdiction to accomplish them; and it would be a matter of extreme surprise if, when Congress had thus required the end, they should at the same time have withheld the means by which alone it could be successfully reached.”

This is all reasonable enough as it’s somewhat self-evident that bankruptcy isn’t really about finding a perfect outcome, it’s about finding an outcome – and sometimes even an outcome, never mind one that everyone is happy with, requires creativity being employed and, if push comes to shove, endowing someone with the right to ring the bell, call the squabbling to a halt, and cram down the best possible plan on everyone.

In bankruptcy justice, in a more ephemeral sense, is subordinated both practically and philosophically to feasibility. Bankruptcy courts are not here to right the ills of the world, they’re here to reorganize debtors and maximize the recovery of creditors within the broad contours of the Code.

To this end, it’s been recognized by real (Article III) courts that when an issue flows up to them a certain benefit of the doubt should be extended to the judges who have lived with the case day in and day out and have, for lack of a better turn of phrase, a better intuition on what should be done. Not least because contentious or controversial plans often are like a Jenga tower after many turns have been taken – remove one wrong piece and it all comes crumbling down which could redound, in the end, to everyone's detriment (in not only the case at issue but also in future cases). Be careful about opening Pandora's Box.

Note: The above all sets up, as best as I can, the foundation for the actual arguments we’re about to discuss. But before any rx lawyers email me, the above is all a bit (or more than a bit) tongue-in-cheek as Article III courts have, uh, become a bit tired of how much latitude bankruptcy court judges have availed to themselves (as I mentioned in the conclusion to my last post vis-à-vis the Fifth Circuit being quite unlikely to find Judge Jones’ vibes-based approach to determining what “open-market purchases” means compelling even if, as I believe, it's the only sensible outcome).

Note: Since every post needs a little Serta digression, remember that back in 2020, in the wake of Serta's transaction, the Apollo, et al. complaint stated front and center that, "If permitted to stand, it will not only strip Plaintiffs of the collateral protecting their loans, but will cause havoc in the corporate loan market. If majority lenders can conspire with borrowers to subordinate the minority, there are billions of dollars of loans that are at risk of having value stripped away in an instant." We're now three years removed from this prediction and we've seen only a handful of similar transactions and, more importantly, the market has erred on the side of caution, assumed that non-pro rata uptiers or their ilk would be upheld in the end, and Serta blockers are now just another among a long list of bargained-for elements in debt doc negotiations with around 50% of all new lev. loans this year containing them. (Notice how the doomer-ism has been dropped from the Fifth Circuit appeal and we're back to the same tired arguments being trotted out.)

Note: It should be somewhat self-evident that bankruptcy court judges have a significant amount of latitude in how they handle cases. If this weren’t the case and they were more or less indistinguishable from each other due to the confides of the Code or whatever, forum shopping (the bête noire of many academics) wouldn’t be a thing. But there is a reason that the Southern District of Texas turned into the hottest venue in bankruptcy both literally and figuratively in only a few years, and there’s a reason that Judge Jones handled 17% of all cases with over a billion dollars in liabilities since 2020 – and the reason isn't because Kirkland, et al. wanted an excuse to fly down to Houston for some Tex-Mex and to take in the Houston Livestock Show and Rodeo.

Top 10 Most Active Bankruptcy Court Judges


Anyway, back in August – before I discussed disqualified lender lists and mustered a defense of Apollo – we talked about (nonconsensual) third-party releases: an extratextual element to be sure, but one that has been accepted by most (not all!) Circuit Courts for decades because of the recognition that they enable the creation of plans in certain situations that would otherwise have little chance of coming together.

The reason for bringing them up then was that the knock-down, drag-out fight over the permissibility of nonconsensual third-party releases in Purdue’s case was set to be decided once and for all: because after the Second Circuit’s opinion reversed the Southern District of New York’s decision that reversed the bankruptcy court’s approval of Purdue’s plan, SCOTUS took up the case to make a final decision with oral arguments taking place on Dec 4 of 2023.

As I wrote back in August, “Given the extratextual nature of third-party releases and the textualist majority now ruling the roost at SCOTUS, this could shape up to be the end of third-party releases as we know them. If this is the end, it’ll be a mess. And it’ll all be because a common practice – rooted in pragmatism and past precedence, but not much else – managed to raise the ire and indignation of enough people to get it in front of SCOTUS. The nail that sticks out gets hammered.”

It's important to never read too much into oral arguments, and a decision won’t come down until the first half of 2024. However, sometimes oral arguments leave little to the imagination: it was already baked into the cake that some (e.g., Justice Thomas and Justice Gorsuch) would take issue with nonconsensual third-party releases on more constitutional grounds and that some (cough, cough Justice Roberts) would invoke the major questions doctrine because that needs to be shoehorned into almost every case these days.

The real fight was always going to be over the squishy middle of the Court (of which there remains few) who could perhaps be swayed by more pragmatic considerations such as the fact that nonconsensual third-party releases in Purdue were supported by almost everyone with an economic interest in the case, the fact that nonconsensual third-party releases stretch back decades with most Circuit Courts approving their use in limited circumstances, etc.

But, as Patel of Akin, representing the UCC, recognized in his exasperated final pleas before the Court the squishy middle seems to think - in concert with the media, politicians, and the public - that these third-party releases are a way for the Sackler family (a nebulous collection of dozens of people criss-crossing the world) to skirt responsibility for their actions and shortchange creditors when this will likely prove to be quite the opposite.

Not to ruin the story before it even begins but it’s almost assuredly the case that the Second Circuit’s opinion upholding Purdue’s use of nonconsensual third-party releases will be reversed. I’d personally bet on it being 8-1 with Kavanaugh in dissent, or at best 6-3 with Kagan and Roberts hopping on board too. (I think that Justice Jackson could go either way, but there aren’t many who agree on this, so I’ll bow to the court watchers here).

If the Second Circuit is reversed, this will all be a bit of a mess. First, Purdue’s case will drag on for even longer and those most harmed (the opioid victims themselves) any honest commentator would, or should, acknowledge will almost assuredly be left worse off (there will per se be no recovery from the estate, and a default to the tort system or multi-district litigation will be retread that will have their own challenges). Second, it’ll fundamentally impair the ability to use chapter 11 as a way to efficiently, effectively, and equitably come to fulsome resolutions around mass tort claims – especially when the amount of claims are orders of magnitude in excess of what the debtor and those who’d otherwise be beneficiaries of releases can provide (the recent 3M / Aearo settlement isn’t much of a counterpoint to this). Third, it could throw a wrench into the ability of some sponsors, in some circumstances, to secure global peace through the use of third-party releases when one of their PortCos files (although I’m a bit unfazed on this – it shifts leverage a bit, sure, but should only make the price of peace in limited circumstances a bit more than it otherwise would be).

Instead of bludgeoning you with my views here – that, like all my views, have some obvious biases although less so here than with more “core” restructuring issues such as the permissibility of non-pro rata uptiers, double-dips, etc. – I’ll do a quick and dirty overview of some interesting points, and leave lots of links for you to read up on the case from those who know more than me, and make better arguments than I can, in case it’s of interest over what remains of the Holiday Season.

Note: Keep in mind that this is a case, like all other mass tort cases, that for most exists on the periphery of restructuring – a case that’s of interest, but that almost no one has an interest in. PJT is debtor-side with HL and Jefferies having creditor-side mandates. But this isn’t a case where restructuring bankers make much of an appearance (except in being called out for fees, which is unfair in this instance), and there are no distressed fund shenanigans going on. As in most in-court cases, the fees earned to-date help tell the story, and that story is one of a legal fight that’s dragged on for years (to-date fees are set to surpass $700mm in toto, with a relative pittance going to PJT, et al.). (You can read PJT’s fee breakdown here if for some reason that’s of interest.)

Purdue Pharma Professional Fees

Nonconsensual Third-Party Releases and Purdue’s Predicament

There’s no sense rehashing the rise and fall of Purdue Pharma here – the briefs that I’ll link to in a moment offer a nice play-by-play of the history that’s sufficient for our purposes (if more sensational or salacious accounts are what you’re after then there are countless books, Netflix series, etc.).

There’s no doubt that Purdue’s the most infamous filing since the financial crisis. Purdue’s story captured the public’s imagination, and, for most, Purdue has become the posterchild of the entire opioid crisis. This is all understandable since the script pretty much writes itself. There was a profit-maximizing firm that was hell-bent on peddling highly addictive drugs with seemingly reckless abandon. There was a secretive family - full of social climbers, literal climbers, and assorted creative-types - that were the sole beneficiaries of the firm’s billions in profits and ensconced those profits in difficult-to-breach trusts in difficult-to-reach locales. There was even a cameo from McKinsey who seems to have taken the mantle of the “great vampire squid wrapped around the face of humanity” from Goldman in the public’s mind (absurd article, fantastic turn of phrase).

Anyway, by the late 2010s the need to file became self-evident as the level of litigation from individuals and, eventually, states piled up to an unprecedented degree (most states were notable by their absence prior to the opioid crisis becoming a more politically sensitive issue, and make no mistake that the states have diminished victim payouts from what they otherwise would be due to their inherent leverage in the case, but we’ll leave that aside for now). In the end, Purdue filed in 2019 in the Southern District of New York and, as of today, there are an estimated forty trillion in claims against both the Sacklers and Purdue (so, most creditors won’t be getting a full recovery here...).

No different than in any other case, upon filing all litigation against Purdue was stayed. However, since Purdue and the Sacklers were so impossibly intertwined (Purdue distributed around $11b to the Sacklers over the two decades prior to filing and Sackler family members had served as co-CEO, president, and held six board seats at various times) there was parallel (duplicate) litigation against the Sacklers pre-filing.

So, even though none of the Sacklers filed personal bankruptcy, the litigation against them was also stayed when Purdue filed. This was for several reasons not least of which is that everyone understood at the time that any eventual Purdue plan would involve a sizeable contribution to the estate from the Sacklers in return for third-party releases, so allowing litigation to proceed against the Sacklers would allow some creditors to jump the line and, by extension, lower the amount available to the rest of the creditors of the estate due to diminishing the value that the Sacklers could contribute to Purdue. (The backstory isn't terribly important for our purposes here but the filing occurred because, after Purdue's MDL trials and tribulations, bankruptcy became viewed by the Sacklers, rightly, as the only way for there to be an actual global resolution for all parties involved - most importantly themselves.)

Note: It’s also important not to lose sight of the fact that the “Sackler family” is often thrown around as if it’s, like, a few siblings who ran and controlled Purdue. In reality, there are dozens that are considered, for our purposes here, members of the Sackler family. Some were intimately involved in Purdue, and some were more or less disinterested parties that had an economic stake in the company. Likewise, not all the Sacklers are residents of the US and, as I alluded to back in August, the vast majority of their wealth would not be accessible in a personal bankruptcy proceeding to begin with.

Note: I can’t write 10,000+ word posts every month, and this is a rabbit hole not worth venturing down too far, but millions were spent prior to the plan being developed determining how much of the Sacklers’ assets are collectible and what other forms of settlement, outside the bankruptcy context, could look like. So, take it as an article of faith, read the Purdue and UCC briefs, or read through the docket: not all that wealth, or even a majority of it, would be accessible to claimants outside of it being voluntarily offered as part of a comprehensive settlement. This is one of those things that was self-evident in 2020 and 2021, but somehow is an issue of debate now. Here's Judge Drain, almost in tears, trying to make this case that there's a central unfairness here but the realities must be dealt with as they are...

Judge Drain Purdue

In the end, after much back-and-forth, in Sept. of 2021 Judge Drain (now retired) confirmed Purdue’s Plan – the result of pain-staking negotiations that almost entirely revolved around a $4.325b contribution coming from the Sacklers in return for (nonconsensual) third-party releases. (The Sacklers’ also agreed to exit the opioid business worldwide and make Purdue’s records public for future study on the causes of the opioid crisis).

Now, as I wrote back in August, third-party releases can come in many flavors – with some being tightly tailored, and some being extremely expansive. The simplest explanation of third-party releases is that they prevent the beneficiaries of a release (non-debtors, such as directors or lenders or subsidiaries or in this case the Sacklers writ large) from being sued by existing creditors or (sometimes) relevant other non-debtors for their actions either directly or (sometimes) indirectly related to filing. The nonconsensual descriptor comes into play when even those that aren’t in favor of the releases within a plan are nevertheless bound by them due to a majority being in favor and the plan being confirmed (in Purdue in excess of 95% of all creditors voted for the Plan, including between 95.7-98.0% of personal-injury claimants who, for obvious reasons, have no love lost for the Sacklers or Purdue).

To be clear, from the outset of Purdue’s case the fact that there would be third-party releases was taken for granted by almost all involved: the only question was how tightly tailored they would be and how much the Sacklers would pay for them. So, as you’d expect, the initial salvo by the Sacklers after Purdue filed involved them agitating for extremely expansive releases that would encompass, well, pretty much everything they could ever be sued for. However, over time the releases were whittled down and down to the core of the issue that brought Purdue to filing in the first place – in fact there was even a last-minute amendment before confirmation by Judge Drain to make the releases even more narrow than what was originally agreed to.

Second Circuit Findings - Third-Party Releases

So, here’s a basic overview: the releases at issue here would enjoin all creditors from i) pursuing current claims against the Sacklers, either directly or indirectly via the investment vehicles they control, as long as those claims are based on the debtor’s (or the estate’s) conduct and are opioid related and ii) initiating future litigation against the Sacklers, either directly or indirectly via the investment vehicles they control, as long as those claims are based on the debtor’s (or the estate’s) conduct and are opioid related. In other words, these releases would resolve, in one fell swoop, all current and future claims against the Sacklers connected with the conduct of Purdue in the context of opioids. This includes all direct claims (harm to individuals by the non-debtors) and derivative claims (harm to the estate by non-debtors, such as fraudulent transfer, deceptive marketing, negligence, etc.). But these releases don’t cover claims that are i) not held by a creditor of Purdue ii) not opioid-related or iii) opioid-related but not dependent on Purdue’s actual conduct.

If a visual helps, then here’s one from Purdue’s brief that was done in an attempt to drive home the point that these releases don’t absolve the Sacklers of all responsibility but rather absolves them, in return for billions, of claims that are inextricably intertwined with the actions of Purdue (with Venn diagrams like these, don’t say that the hundreds of millions in legal fees are all for not – look at the attention to detail with the red and blue mixing into purple within the intersection...).

Third-Party Releases Diagram

Note: I’ll circle back to this later, and I don’t want to repeat myself too much. But, since this is a point that seemed to elude some, I’ll touch on it here. Without these nonconsensual releases creditors could still pursue claims against the Sacklers. However, because the claims at issue here per se revolve around the Sacklers conduct through Purdue as a kind of conduit, it would trigger claims by the Sacklers for indemnification or insurance coverage against the estate and start a whole new front of internecine legal fights. And because the total claims here are in the trillions, far in excess of the amount Purdue or the Sacklers can come up with, one or two individual creditors could i) drain the estate of its value and/or ii) drain the Sacklers of funds that’d otherwise go to the estate and be distributed, of course, equitably. This is the rationale behind almost all creditors insisting on these releases being nonconsensual – they weren’t foisted on creditors, they were demanded by them. Because it was understood by almost all creditors that to allow a few creditors to enter the backdoor, cut in the queue, skip to the front of the line, etc. would be to the direct detriment of all other creditors with similar claims who didn’t.

There was never a doubt that there would be an appeal over the Plan’s confirmation. True, most states, and most claimants, were on board. But there was still a sizeable number (eight states and DC, along with 2,683 individual claimants) who weren’t. So, the Plan’s future was punted up to the US District Court for the Southern District of New York. This is where the trouble began, and is the reason why we’re over two years removed from the confirmation of the Plan without a dollar having flowed to victims and hundreds of millions more in legal fees having been racked up.

Judge McMahon – a faster writer than I am, as she somehow delivered a 142-page decision in a few months – ruled that a bankruptcy court can’t, on a nonconsensual basis, bar third-parties from asserting direct claims (e.g., harm to individuals) against a non-debtor (the Sacklers). In other words, nonconsensual third-party releases aren’t permissible under the Code.

This was a decision that struck at the heart of the Plan and rendered it unsalvageable because the vast majority of the Plan’s value stemmed from the Sacklers’ contribution for these nonconsensual releases. So, the District Court’s decision was appealed to the Second Circuit that hadn’t previously offered a full-throated opinion on nonconsensual third-party releases (four other Circuit Courts had ruled they were permissible with three Circuit Courts having held that they aren’t on narrower grounds).

Unlike the District Court, the Circuit Court took, uh, a bit more time. Enough time that while the appeal was pending, the Plan was revised: in return for the Sacklers’ upping their total contributions to $5.5-6.0b, everyone outside of the US Trustee who has no economic interest in the case, a few Canadian First Nations, and a small subset of individual claimants approved of the Plan. And there’s no doubt that this reality – that those who most loathed the Sacklers were now in almost unanimous support of the Plan – weighed on the Second Circuit in their decision.

The Second Circuit issued its opinion – that reversed the District Court and affirmed the Bankruptcy Court – in May of 2023. In my view – for however much value you want to ascribe to it – the Second Circuit’s opinion is still the most compelling take on Purdue’s predicament. It confronts the reality that there can appear to be somewhat shaky statutory support for nonconsensual third-party releases, but that, in a bankruptcy context, it shouldn’t be dismissed as irrelevant that near unanimous support exists for the current Plan and it shouldn’t be dismissed that other avenues for resolution are almost assuredly going to lead to inferior outcomes for those most harmed here (the opioid victims themselves).

But just as it was baked in that the District Court’s decision would be appealed, so too was it baked in that the Second Circuit’s opinion would be. So, with there now being an even larger split between the Circuit Courts and with Purdue being such a high-profile case, it was all but certain that SCOTUS would take up the case and decide the issue of nonconsensual third-party releases once and for all.

In August 2023 SCOTUS granted cert and scheduled oral arguments for December 4. The (narrow) question before the Court is as follows: Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by non-debtors against non-debtor third parties, without the claimants’ consent.

Oral Arguments and Agitations Over Third-Party Releases

Thus far I’ve been mum on the actual statutory arguments here. Why did the District Court think that nonconsensual third-party releases are not permissible? Why did the Second Circuit disagree? Why do (some) Circuit Courts disagree with the Second Circuit? What, like, are the arguments that SCOTUS will need to wrestle with?

I figured it’d be better to save all this until we talked about oral arguments, because oral arguments laid bare the most important aspects of the case (although some, like Justice Sotomayor, used oral arguments to enter into disorienting discursions on definitional matters that left everyone, not least of all Sotomayor herself, a bit dazed and confused).

On December 4, we had three people argue before the Court. First, the Deputy Solicitor General, Gannon, arguing on behalf of the US Trustee. Second, Garre, of Latham, on behalf of Purdue. Third, Shah, of Akin, on behalf of the UCC (remember: almost all creditors, including those represented by the UCC, approved of the Plan and, by extension, the releases contained within).

Note: You can read the briefs filed by the US Trustee, Purdue (excellent), and the UCC that lay out their full views – something that’s worth doing to really understand the issues here since oral arguments are often used by justices to test out the limits of arguments, throw out half-baked hypotheticals to see how they’re handled, etc. It’s also worth reading the Second Circuit’s decision since that’s kind of the base case the fight centers around (there were also an insane number of amici briefs filed – lots from academics trying to have their moment in the sun, but there are some like from The American College of Bankruptcy that grapples with the broader ramifications of a reversal of the Second Circuit in a more dispassionate sense and tries to make sure consensual releases aren't disrupted).

In the end, since textualism – always in all ways – is the modus operandi at the Court now, most of the argument centered around two snippets of the Bankruptcy Code: 1123(b)(6) and 105(a). The Fourth and Eleventh Circuits believe that 105(a), on its own, authorizes nonconsensual third-party releases, and the Sixth, Seventh, and (now) Second Circuits believe that 105(a) and 1123(b)(6), when read together, authorizes these kinds of releases.

Section 1123(b)(6) says that “a plan may... include any other appropriate provision not inconsistent with the applicable provisions of [the Code]”, whereas Section 105(a) says that a bankruptcy court can “...issue any order, process, or judgement that is necessary or appropriate to carry out”.

The thinking of the Second Circuit – that was mirrored by the Sixth and Seventh circuits, along with Garre and Shah in this case – is basically that 105(a) endows a bankruptcy court with the authority to take actions that are necessary or appropriate to get a plan across the finish line, and 1123(b)(6) allows the inclusion of what I’ve called “extratextual elements” in a plan so long as they’re appropriate and not in contradiction with any other part of the Code. This draws on United States v. Energy Resources Co., Inc where SCOTUS held that 1123(b)(6), when read together with 105(a), granted bankruptcy courts a “residual authority” that’s consistent with “the traditional understanding that bankruptcy courts, as courts of equity, have broad authority to modify creditor-debtor relationships”. In other words, 105(a) superglued to 1123(b)(6) allows for the inclusion of plan provisions that find no direct support within the Code so long as these plan provisions are appropriate and not expressly disallowed elsewhere in the Code (per the Second Circuit, 105(a) can't be relied on alone and must be tied to some other section of the Code).

This is what I was alluding to – without getting into the legal underpinning – in the preamble: there’s been a long history at the Court of appreciating that bankruptcy courts need broad latitude, and that Congress understood that not all plan provisions could be envisioned and thus explicitly expressed in the Code. So, when it comes to the Code, there aren’t really elephants hiding in mouseholes. Rather, there are elephants, in this situation, hiding in elephant-sized holes that Congress explicitly and deliberately placed into the Code.

But – and there’s a big but here – the above is more or less uncontroversial vis-à-vis the modification of creditor-debtor relationships. But what we’re talking about here is the relationship between creditors of a debtor (Purdue) and non-debtors (the Sacklers) that haven’t filed bankruptcy themselves (the Sacklers have, as we’ve discussed, been lumped into this case because of how inextricably intertwined to Purdue they are).

So, sure, sure, 105(a) and 1123(b)(6) can be read together to modify creditor-debtor relationships – that kind of, like, is the heart of what bankruptcy is all about, is why bankruptcy courts are courts of equity, etc. But can we extend this to stripping a non-consenting creditor’s right to their day in court against some non-debtor that (per se) hasn’t filed? Does the fact that duplicate claims were filed against both Purdue and the Sacklers, since the two are so inextricably intertwined, make a difference here? If we’re saying that the Sacklers are de facto debtors – but aren’t, like, actual debtors – then why shouldn’t they have to put “all their assets on the table” and have them divided up among creditors as Purdue itself is doing here? Is the fact that non-consenting creditors can have their say in a bankruptcy court context sufficient, or must their day in court against non-debtors come outside the bankruptcy context if they so choose? What if it’s in the best interests, in the view of the bankruptcy court, of all creditors to force releases, and the associated settlement amount attached to them, on everyone – inclusive of the few creditors who refuse to capitulate?

Note: Due process and Seventh Amendment concerns were something (surprise, surprise) that Justice Gorsuch kept circling back to because he seemed flabbergasted that claimants could have their due process and Seventh Amendment rights stripped away without their consent when the Sacklers didn’t file themselves. See, pp. 74-77 of the transcript – I think Garre handled it well, but no line of argument will be persuasive to Gorsuch on this.

Look, the optics here overall aren’t fantastic. Because it sure looks like the Sacklers are using Purdue as a conduit, once again, to skirt justice as somehow, with over forty trillion in estimated claims, the Sacklers under the Plan would still be walking away from all of this as billionaires (at least in a collective sense). It sure looks like they’re getting the benefits of bankruptcy but aren’t shouldering the costs (read: putting all their assets on the table). And this is all due to the fact that Purdue, as a standalone entity, is so deprived of assets, partly because of the Sacklers sweeping billions out of Purdue over the last few decades, that the only way any recovery can reach down to victim classes is through a Sackler contribution of their “ill-gotten” gains – so, even though the Sacklers aren’t putting all their assets on the table, they’re able to strongarm creditors into begging for them to be given releases that eviscerate the litany of (civil) litigation against them.

But Purdue, the UCC, et al. have argued that No True Textualist would buy what the US Trustee is trying to sell (some ejusdem generis gobbledygook in relation to 1123 that is meant for short, tight list of items not separate provisions as is the case here). 1123(b)(6) is a catchall that is limited by what the Code doesn’t allow, and the Trustee can’t point to any other area of the Code disallowing these. Them's the breaks.

Further, sure, 1123(b)(6) is most often invoked when the creditor-debtor relationship is the only operative one (since in most cases there isn’t a non-debtor issue of consequence in play). But the whole reason these releases are so essential is that the Sacklers and Purdue are so intertwined that the absence of these releases will impact actual creditor-debtor relationships. Because without these releases – that, once again, are limited to claims against the Sacklers that depend on Purdue’s conduct – creditors could pursue claims against the Sacklers that would trigger indemnification / insurance claims against the estate should these claims depend on Purdue’s conduct (whether these are of merit or not, the cost to litigate will be absurd, even by the lofty standards already set by the case to-date, and deplete the estate of even more value).

In other words, these releases do have an impact on creditor-debtor relationships, if one believes that’s relevant to 1123(b)(6) by departing from a "stricter" textualist reading of it, because their absence or presence fundamentally shifts not only the recovery that’s due to various classes, but the relationship of the debtor to the Sacklers that’ll have knock-on ramifications on all creditors. As Purdue said in its brief, “Resolving those claims [between Purdue and the Sacklers] to maximize the value of the estates for all creditors directly impacts the creditor-debtor relationship. Indeed, without the releases, there is no settlement, the Debtors likely would be forced into a Chapter 7 liquidation, and ‘unsecured creditors would probably recover nothing from the Debtors’ estates’”. (This wasn’t elaborated much because, I mean, it is a bit of connect the dots but the creditor-debtor relationship must be, in some sense, modified when the absence of a plan provision, even if it's to the benefit of non-debtors, turns a case into a liquidation instead of reorganization and when a class of creditors goes from getting something from the debtor to probably getting nothing.)

The other major line of argument – that most didn’t think would feature quite as prominently as it did – surrounded whether these releases, in effect, constitute a discharge. Under Section 524(a), in bankruptcy a debtor can be released, through a discharge, from liability relating to any pre-petition debt so long as the debtor complies with the Bankruptcy Code (the proverbial, “putting all your assets on the table” as was frequently invoked by the justices in oral arguments).

The Fifth, Ninth, and Tenth Circuits have said that nonconsensual third-party releases are not permissible under 524(e) because they conflate third-party releases with discharges. However, the Second Circuit departed from this interpretation because the third-party releases at issue here, due to how tightly tailored they eventually ended up being, do not, in their view, constitute a discharge.

Discharge vs. Third-Party Release

Per Gannon the releases here are a “functional” discharge. In other words, a discharge in all but name. But this functional discharge is being granted, unlike in a classic bankruptcy context, without the Sacklers putting all of their assets on table (as mentioned before, it’s important to note that Gannon is eliding the fact that most of the Sacklers assets wouldn’t be eligible for a personal bankruptcy, and it’s not altogether clear what Sacklers would be filing, where they would be filing, and what actions they could take against the smoking wreck of Purdue’s estate sans-releases). But if one thinks that these releases are indistinguishable from discharges then all this 105(a) and 1123(b)(6) talk is moot: if these releases are just discharges dressed up in different garb, then these releases aren’t permissible.

Here I think Garre did as well as he could – at least given the predisposition of the majority of his audience:

Nonconsensual Third-Party Releases - Justice Kagan Oral Arguments

Note: Some have become a bit preoccupied with Section 524(g) that explicitly allows for an injunction of claims between non-debtors in asbestos cases (with lots of caveats). This was added to the Code in the 1990s after the Johns-Manville case and some have basically said, “If Congress intended that nonconsensual third-party releases could be permitted in any mass tort case, then they would have said so when they added 524(g). Instead, they crafted a very narrow exception to the implied prohibition of these releases, with lots of caveats, for asbestos related cases.” However, Congress made it clear at the time that no one should read 524(g) to infer other limitations within the Code. Further, this argument strikes Purdue, et al. as a bit backwards: nonconsensual releases were in the ether before 524(g) was added, and have been used thereafter. If Congress believed there was a general prohibition against nonconsensual releases, but wanted to create a defined carveout for handling asbestos cases, then they would have added language to that effect to preclude nonconsensual releases being used in other cases in the decades to come – or, at the very least, revisited all of this after realizing their error.

So, the US Trustee’s argument boils down to, “Look, Section 1123(b)(6) and 105(a) can’t expand the bankruptcy court’s authority to extinguish claims, without consent, between two non-debtors (claimants and the Sacklers) unless the Code expressly allows it with clear language (as it does in asbestos cases). Because to allow this is to rob nonconsenting claimants of the ability to exercise their rights and, if that isn’t enough, these releases are tantamount to a discharge, in all but name, to those that haven’t earned the right to that discharge by putting all their assets of table. In short: the Sacklers are getting the benefits of bankruptcy without incurring the significant costs – they’re having their cake and eating it too.”

From a more practical perspective, the natural consequence of affirming the Second Circuit, per Gannon, is that it will provide “...a roadmap for corporations and wealthy individuals to misuse the bankruptcy system to avoid mass-tort liability. Such releases deprive tort victims of their day in court without consent. And they erode public confidence in the bankruptcy system.”

An uncharitable reading of this is that Gannon seems more preoccupied with public perception – since the public, as we all know, has deeply held views on how expansive of a catchall Section 1123(b)(6) really is – than with the perspective of the opioid victims, the overwhelming majority of whom support the Plan and, by extension, the releases contained within sans a few “nut-case holdouts” (Justice Kagan’s words from a hypothetical question, not mine!).

In contrast, Purdue and the UCC, the latter representing those most harmed by the Sacklers actions, are saying, “I mean, c’mon, the most active Circuit Courts have allowed nonconsensual third-party releases for decades, and the Second Circuit here has implemented a seven-factor balancing test to ensure that these releases can’t be abused by ‘wealthy individuals’. Section 1123(b)(6) is a catchall and, when read with 105(a), has two limitations i) what’s being done must be appropriate and ii) not inconsistent with other provisions of the Code. So, what’s a better definition of “appropriate” here than what almost all creditors, inclusive of those who most despise the Sacklers, deem by dint of their approval of the Plan to be appropriate? What have these other Circuit Courts missed in the Code that expressly disallows these? Isn’t the truest textualist reading here that if you can’t point to a part of the Code that disallows these, then these releases are allowed? The US Trustee is suggesting that the Second Circuit is playing policy maker – but that’s backwards. If Congress wanted to exempt these, then surely they would’ve done so when crafting 524(g). Since they didn’t, then tossing out nonconsenual releases would be the real act of policy-making (something that, as all faithful followers of the major questions doctrine can attest, is best left for the hallowed halls of Congress). Further, this isn’t a classic discharge, and it’s not a functional equivalent to one: these releases are only binding on the intersection of Purdue-related and opioid-related conduct (look at our color-coded Venn diagram!) and doesn’t absolve the beneficiaries of these releases from allcurrent or future legal liability (criminal, tax, non-opioid-related, etc. liability can still be pursued!). These releases were negotiated with creditors in the driver’s seat, over a period of years, and represent the single biggest contribution (by far!) to the estate. It’s a settlement, based on the fact that identical claims exist against Purdue and the Sacklers, and is additive to the estate value in more ways than one: if the Sacklers didn’t agree to the releases then they’d have claims against the estate themselves that at a minimum would lead to even more litigation cost, even more delays in creditor distribution, and drain the minimal estate value of Purdue that would exist sans a Sackler contribution. In other words, the addition of the releases adds $6b, and the negation of the releases won’t just get the estate value back to neutral, it’ll all but ensure there’s not a dime to distribute to victims or to run abatement programs. And, when it comes to these constitutional concerns that the Trustee is playing footsy with purely because of the composition of this Court: c’mon, there are often modifications of debtor, creditor, and non-debtor relationships in bankruptcy. These ‘nut-case holdouts’ were notified well in advance of the Plan, we explained the releases in excruciating detail, and they have had lots of time to have their fair say within a court, albeit a bankruptcy court. They’ve been heard, but so have the other 95% of those that voted in favor of the Plan who will have justice as they see it ripped from them so that a small minority can pursue justice as they see it to the detriment of the overwhelming majority and almost assuredly of themselves too.”

Nonconsensual Third-Party Releases - Shah Opening Statement

Shah’s Soliloquy Falls on Deaf Ears

I’m not a SCOTUS spectator, and some were a bit nonplussed about how oral arguments went. But I think most in favor of nonconsensual third-party releases listened to the first eighty or so minutes with a feeling of increasing exasperation.

Gannon did a masterful job of paying homage to textualist arguments then sidestepping Justice Thomas’ obvious question on how third-party releases of any kind are consistent with his line of argument; leaving an indelible impression that, of course, this was a sweetheart deal for the Sacklers and a better one would be on offer if SCOTUS reversed the Second Circuit but then was fleet of foot when asked, like, what the contours of some hypothetical better deal would look like; etc.

Garre, on behalf of Purdue, and the second to step into the batter’s box, was then forced into a more defensive position on issues that are better covered in the briefs: on direct vs. derivative claims, on discharges vs. releases, etc. And then there was Justice Gorsuch who seemed more preoccupied with drawing laughs from the cheap seats than much else (per Gorsuch, there’s “a lot going against” Garre here – something that, at a minimum, is dismissive of all the Circuit Courts who think these releases are permissible and in some cases have thought this for decades).

Anyway, the increasing exasperation among many listeners that the core arguments in support of these releases weren’t coming to the fore and that the justices weren’t at ease with the issues here seems to have been shared by Shah too (the head of Akin’s SCOTUS practice, arguing on behalf of the UCC that overwhelming approved of the Plan).

It’s hard to say what Shah’s gameplan was at the start of the day – but it’s almost certainly the case that as he watched Gannon and Garre he felt he needed to say his piece: that the Court would be overturning what has been viewed, for three decades, as the most equitable way, sometimes the only way, to handle these narrow types of cases; that the Court would be defying the wishes of almost all opioid claimants; and that the Court would be getting hoodwinked by the US Trustee and their implied argument that the bluster of Purdue, the UCC, the states, etc. is all for show and that if the Second Circuit is reversed some better settlement will come to the fore and that, no, victims will not be devastated in this case or any similar ones to come (there's a reason that Boy Scouts of America filed an amicus brief here in support of nonconsensual releases).

This is something that Justice Kagan seemed to understand, and an argument she wanted to hear made in full. So, when the opportunity presented itself Shah let loose in what may not move the needle, but I’m sure proved cathartic in the moment (it’s worth listening to this section of oral arguments, as the heartfelt frustration doesn’t bleed through in the transcript and, for someone that’s before the Court often, it’s not in Shah’s best interest to be so exasperated about the justices not quite getting it...).

l Third-Party Releases - Oral Arguments - Shah

The frustration above is borne out of the fact that there is little doubt about the outcome should the Second Circuit be reversed: there will be a liquidation, there will be no renewed global settlement, there will be no reconstituted Purdue as a public-benefit company, etc. Instead, there will most likely be, per Shah, a mad dash to the courthouse and whoever strikes it lucky first (one of the states, most likely) will reap all the rewards. The inherent equity of the bankruptcy process – with the split of the spoils within a class occurring without discrimination – will be tossed and a few (at best) winners, after millions more of legal fees, will hit the jackpot with the rest left in the wake.

Note: Here I think Shah is laying it on a bit thick to his own deteriment. What will happen to Purdue should the Second Circuit be reversed is more or less a known quantity, and that isn't non-trivial as Purdue being reconstituted as a public-benefit company, etc. would be a good thing. However, while it's impossible to envision what the contours of a consensual settlement outside of bankruptcy would look like there'll need to be one of some kind at some point. (What percent of claimants are brought in, what the distribution will look like, etc. is anyone's guess.) But Shah's tact of not giving an inch on the idea of a (somewhat) broad settlement outside the bankruptcy context - since he was probably worried that the justices would misinterpret him as saying that there's a possibility of a similar (maybe better!) settlement being reached if they reverse the Second Circuit - made him look a bit slippery and weakens his broader argument that in a non-bankruptcy context there will per se be those, after much more time and expense, that are left behind completely or left with a modicum of what's in their hands now (this could be nearly all creditors or it could be a somewhat small percent – it's all unknowable now). In other words, it's pre-ordained that whatever is to come, should the Second Circuit be reversed, is going to be less equitable from a distribution perspective and (maybe, maybe not!) dollar perspective – but that doesn't mean the only possibility is a much larger distribution to a handful of creditors as he suggested. (This is a possibility, and the worst possibility thus why Shah invoked it, but not the only possibility. However, that doesn't mean that the best possibility, on balance, isn't the Plan as currently constituted.)

Unfortunately, Shah – before reaching his crescendo where he’d explain how the incentive structure of the current settlement would be inverted on its head by a reversal of the Second Circuit’s decision – was cut short because he was going too fast and being too “dramatic” for Justice Sotomayor’s taste.

Thus ensued an elongated back-and-froth that illustrated why the aforementioned squishy middle of the Court – those most predisposed to equity-style arguments, or at least those who care about outcomes as opposed to only statutory issues – are so apprehensive: a failure to understand what Shah called the “collective action problem”.

Justice Sotomayor, and later Justice Jackson, seem to think, “Well, there’s already a settlement here between almost everyone – all the states, almost all the victims, etc. So, what’s the issue here? Just settle here with almost everyone based on the current terms without making it binding on those who don’t consent. Then settle or litigate with the sliver of claimants who don’t consent thereafter. Sure, that’ll mean the Sacklers will have to pony up a bit more money to deal with these holdouts but no one should shed a tear over that and we all know the Sacklers have more than $6b of assets. So, again, what’s the issue here?”

The issue here is that the incentive structures, without the ability to force the releases on the few “nut-case holdouts”, become inverted. Without nonconsensual releases, there will not only be no global peace, there will be no immediate peace of any kind. Instead, we’ll probably be back to square one. This is because there’s limited incentive for the Sacklers to contribute nearly as much for consensual releases, even if it involves 97%, because with trillions in estimated total claims even a few “nut-case holdouts” could win an amount that exhausts their total assets and will come, at a minimum, with millions more in legal fees. The settlement value to the Sacklers was based on the presumption of global peace not piecemeal peace – and for what should be intuitive reasons the value of a settlement with 97% is far less valuable to them than with 100%. That’s why they have no interest in going forward with these releases on the current terms if they’re not binding on everyone.

Likewise, without nonconsensual releases the incentive structure of individual claimants, opportunistic contingency-fee lawyers, and non-federal entities (e.g., states, municipalities, etc.) shifts too: now there’s the possibility, remote or not, of extracting orders of magnitude more for themselves if they happen to be the first to win a case or settle with the Sacklers before their assets are exhausted. This is a classic collective action issue: no one wants to sign onto something when the returns to being a holdout, from an expected value perspective, can appear much higher. So, as Shah argued, even if the Sacklers offered the same deal but with the releases not being binding on holdouts – which wouldn’t happen but let’s suspend our disbelief – there wouldn’t be 97% that’d take it to begin with. Most creditors and the Sacklers will, with the Second Circuit’s decision overturned, have their magnetic poles flipped. Instead of being tightly bound together – as they are today with both arguing in favor of the Plan and its releases – they’ll be repelled from each other with global peace being relegated to an aspiration.

The briefs from Purdue and the UCC may be to blame for a lot of the confusion here as both offer scant discussion of the incentives at play. So, it's understandable that Justice Sotomayor, for example, seems to be under the impression that the states – irrespective of the Court’s decision – will be more than happy to go along with the current deal if it’s reconstituted to be consensual (e.g., kind of similar to the 3M situation). But Shah says that’s not what the states have said, and that’s not what will happen.

As with most of the issues that arose in oral arguments, this issue was beat to death in bankruptcy court years ago – and perhaps that's why Garre and Shah seemed so exasperated by the line of questioning coming from the Court. They thought these battles had already been fought and won and didn't think that they'd have to be fought again (or erred in presuming that the justices would delve beyond the briefs and into the lower courts' findings to see how these battles were won to begin with...).

Bankruptcy Court - Third-Party Releases

Anyway, in a bizzarro-world twist, one of the central pillars of the bankruptcy system, the equitable distribution of recovery among similarly situated creditors, may be bowdlerized here due to the hold out problem that the bankruptcy system is meant to be a solution to. As the UCC brief states, “Critically, the Release provided in exchange was demanded ‘as much, if not more’ by the Official Committee and other creditor groups exercising fiduciary duties, JA 348, to prevent the Sacklers from ‘exhaust[ing] their collectible assets fighting and/or paying only the claims of certain creditors with the best ability to pursue the Sacklers in court’”. In other words, the nonconsensual aspect of the releases isn’t only something that the Sacklers wanted, it’s something that almost all creditors wanted to maximize (read: protect) their own recovery from others.

Third-Party Releases - Oral Arguments - Justice Sotomayor

Since Shah’s soliloquy was cut short, Justice Kavanaugh stepped in with some leading questions that he knew would illicit answers that allowed Shah to layout his full argument but without fear of interruption this time. This could have been partly out of pity for Shah who clearly had more to say. But it was liable that Kavanaugh understood by this time that he was the lone one in favor, without reservation, of nonconsensual third-party releases. So, this was his opportunity to use Shah as a mouthpiece for himself – asking questions that he already knew the answers to in order to encourage the aforementioned squishy middle over toward his position.

Nonconsensual Third-Party Releases - Justice Kavanaugh

This was followed by some Justice Jackson questions that – in contrast to her questions to Garre – showed perhaps some movement toward the notion that, no, there’s not liable to be some broader settlement outside of bankruptcy that is better for (almost all) creditors than what's on offer here.

Nonconsensual Third-Party Releases - Justice Jackson

Oral Arguments - Third-Party Releases - Justice Jackson

The End of an Era

Unlike the future of non-pro rata uptiers or drop-downs or double-dips, it doesn’t matter too much to me what the future holds for (nonconsensual) third-party releases in a narrower sense.

So, since I don’t have a vested interest here and haven’t followed every twist and turn in Purdue, I’ve tried not to be too one-sided and to explain the main issues here (at least as I see them) to give you some things to chew on. For a broader (read: better) perspective, the paper by Casey and Macey (In Defense of Chapter 11 for Mass Torts) is excellent and it’s largely informed by own views on all of this as I do believe chapter 11 should be able to play a role in (most) mass tort cases.

I’ve heard a few theories for how a (narrow) decision by SCOTUS that cuts against the Second Circuit could be worked around within a bankruptcy context. However, the most liable outcome here – especially in the early years before lawyers test out some workarounds – is a default to the tort system (more or less handling litigation on a case-by-case basis leading to the “race to the courthouse” issue that Shah was so emphatic about along with inconsistent outcomes for those that do manage to reach the courthouse) or multi-district litigation (that likewise comes attached with some thorny issues of its own but would at least be a bit more equitable; although there's a reason why we're here with a Plan that's so broadly supported to begin with and with few pining for the "simpler" days of Judge Polster's MDL).

There’s no doubt that there’s a shakier statutory basis for upholding nonconsensual third-party releases than one would hope for. It all comes down to whether or not one thinks 105(a) duck-tapped to 1123(b)(6) is so expansive as to allow for non-debtors to be released without the consent of all in certain (tightly controlled) situations.

It’s fair enough for Gannon to say there’s no issue with these kinds of releases should Congress amend the Code to expressly allow for them. But, needless to say, there’s precisely zero chance of Congress stepping in no matter how many victims in mass tort cases, now or in the future, wish that they would. The optics would be terrible, and the outraged op-eds from onlookers would come in fast and furious.

Back in August I mentioned that nonconsensual releases are one example of an “extratextual element” that has become common practice in certain situations, but that rests on a foundation of pragmatism and precedence and not much else. This uneasy status-quo was always going to be challenged at some point – and Purdue was the perfect case to knock these releases off their precarious precipice.

There couldn’t be a less sympathetic group that these releases are to the benefit of, and there couldn’t be a less sympathetic entity than a defunct opioid manufacturer. But lost in all of this, as Shah was so exasperated to make clear, is that those who find the Sacklers least sympathetic and Purdue most odious are precisely those that most want these releases – but this is deemed to be of little consequence to the US Trustee who decided to assert itself here to protect the right of creditors to, in the end, almost certainly achieve an inferior outcome to what is in their hand today.

So, whether Justice Kavanaugh stands alone, or Justice Kagan and (maybe) Justice Roberts hop on board, it seems that we’re at the end of the line for nonconsensual third-party releases, and we’ll see what the future of releases writ large holds based on how the opinion is crafted. It’s not the end of the world, but it’s an end of an era. Even if one is sympathetic to the constitutional concerns raised or the supposedly shaky statutory support here it should be recognized that, even if one is right on the law, it’ll almost assuredly be an unfortunate outcome for victims in this case and I believe future cases.

Perhaps the most frustrating part of oral arguments was that the Court seemed skeptical of Garre and Shah vis-à-vis their claims of what is to come should nonconsenual releases be relegated to the dustbin of history – perhaps assigning their views even less credibility than Gannon’s.

However, it’s not their views that were on offer – it’s the views arrived at after millions were spent in court on countless independent experts, mediators, etc. who determined the Sacklers wealth, it’s collectability, the alternatives available to creditors large and small, and how a Plan could be constituted not to reverse the harm of the actions of Purdue and, by extension, the Sacklers but how a Plan could be constituted to at least somewhat mend the damage done through the creation of a public-benefit company, an archiving of most Purdue materials for future use, and the distribution of billions of dollars to victims abatement programs. As Judge Drain said the creditors led the creation of the Plan and tens of millions of documents were reviewed – it was an exhaustive, extensive, and hugely expensive process that culminated in a Plan that, now, appears all for not.

In the opening lines of the Second Circuit decision, Judge Lee wrote that, “Bankruptcy is inherently a creature of competing interests, compromises, and less-than-perfect outcomes. Because of these defining characteristics, total satisfaction of all that is owed—whether in money or in justice—rarely occurs. When a bankruptcy is the result of mass tort litigation against the debtor, the complexities are magnified because the debts owed are wide-ranging and the harm caused goes beyond the financial. That is the circumstance here.” The reversal of the Second Circuit will allow everyone to attempt to achieve more satisfaction in what is owed in both money and in justice – the issue is that almost nobody wanted to, and almost 100%, if not 100%, will find such an attempt illusory on both counts. But at least it’s not like hundreds of millions were spent on a Plan that is liable to become a handful of dust that can’t be, and won’t be, reconstituted...

Happy Holidays!

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