Who is released in chapter 11? – Insolvency / Bankruptcy / Restructuring
United States: Who is released in chapter 11?
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In Chapter 11, a company or individual seeks to confirm a reorganization plan which, once complied with, will release him from any liability for certain claims and obligations.
But what about parties other than the debtor? Can officers, directors, members, managers, co-debtors, guarantors and affiliated or related entities also benefit from a discharge of their potential liability (without having to declare bankruptcy themselves)? A recent decision in the bankruptcy of Purdue Pharma casts doubt on the validity of some non-debtor discharges.
Purdue Pharma manufactured and sold OxyContin, an opioid-based pain reliever that contributed to the opioid crisis in the United States. Historically, the Sackler family owned and controlled Purdue. In 2007, Purdue Pharma pleaded guilty to one count of poor branding of OxyContin and agreed to pay the United States and 49 states more than $ 600 million to settle claims against it and its companies. directors and officers. Purdue Pharma was not out of the woods. A tsunami of litigation began in the 2010s, leading Purdue Pharma to file Chapter 11 in 2019.
During the bankruptcy, Purdue Pharma and the Sacklers negotiated a draft plan that called for members of the Sackler family to contribute $ 4.325 billion to fund various trusts for victims. In return, the Sacklers and the non-debtor entities they controlled would be released from all civil liability for direct claims filed against them as individuals. In September 2021, the bankruptcy court upheld the plan over objections from the U.S. trustee, eight states and others. The opposing parties appealed the bankruptcy court order to the United States District Court.
Just before Christmas, a United States district court in New York City overturned Purdue Pharma LP’s confirmed Chapter 11 plan. Specifically, the district court disapproved of the releases provided to members of the Sackler family. Historically, the Sacklers owned and controlled Purdue, but they had not filed for bankruptcy protection. The district court ruled that there was no legal authority to approve non-consensual releases of direct third party claims against third parties like the Sackler family.
The district court focused its decision on the non-consensual discharge of direct claims of third parties against non-debtors. For example, some states have claimed they have direct claims against the Sackler family based on their individual fraud, misrepresentation and willful misconduct, and under state consumer protection and unfair practices laws. and misleading. The district court ruled that, with the exception of the asbestos cases, there was no legal basis for a bankruptcy court to approve a discharge of such claims and quashed the plan confirming order. Purdue.
The district court distinguished between discharges of debts derived from debts held by the mass of a debtor or invoked against the mass of a debtor, which the Bankruptcy Code allows. All other things being equal, a waiver of a claim that would hold the Sacklers liable as a result of Purdue’s actions could be upheld. Ask whether, in a credit context, the principal’s collateral for the obligor’s obligations is a direct or derivative claim.
The decision of the district court is not the last word on this issue. Purdue Pharma intends to appeal the decision to the Second Circuit Court of Appeals. As it stands, different courts have reached different conclusions on the authority of non-consensual releases of direct third party claims against non-debtors. The Fourth Circuit, which includes the federal courts of North Carolina, allows non-consensual and debtorless releases in certain circumstances. The Fourth Circuit requires the bankruptcy court to consider these factors:
- Is there an identity of interests between the debtor and the third party?
- Has the non-debtor contributed substantial assets to the reorganization?
- Is the exit essential for the reorganization?
- Did the classes concerned vote overwhelmingly to accept the plan?
- Does the plan include a mechanism to pay for classes affected by the publication?
- Does the plan offer claimants who choose not to pay the option to recover their full benefits?
The Fourth Circuit is in the minority, and ultimately the United States Supreme Court can resolve the issue. Until then, Chapter 11 parties can expect uncertainty and litigation and should consult a lawyer when the issue arises.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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