Limitations on the Equitable Powers of the Bankruptcy Court

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Section 105 of the United States Bankruptcy Code, titled “Power of Court”, is often cited and used as a “catch-all” provision when seeking relief or when a bankruptcy court issues an order. granting (or refusing) certain remedies not prescribed by a particular provision of the Bankruptcy Code. This section provides that a “court may issue any order, proceeding or judgment which is necessary or proper to carry out the provisions of this title. . . [and nothing shall] prevent the court, on its own initiative, from taking any action or making any decision necessary or proper to enforce or implement the orders or rules of the court, or to prevent abuse of process”.[1] Its broad and discretionary language is not unlimited, however.[2] A bankruptcy court exercising its equitable powers must remain within the bounds of the Bankruptcy Code.

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

As has been widely publicized, the Sackler family owns Purdue and has profited heavily from the manufacture and sale of opioid drugs. When Purdue filed for bankruptcy 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 400 other lawsuits had been filed against the Sacklers for their role in the opioid crisis.

The proposed Purdue plan was the result of more than a year-long mediation in three distinct phases. Basically, it included a provision (section 10.7), in which the Sackler family would contribute $4.325 billion to a fund to resolve public and private civil claims as well as civil and criminal settlements with the federal government. In exchange for this contribution, the Purdue plan would include waivers, on a non-consensual basis, of direct and/or specific claims asserted by third parties against the Sacklers. That is, claims other than those that may arise from claims made against Purdue; claims based on the individual liability of the Sacklers and based on their own alleged misconduct.

The bankruptcy court relied on 11 USC §§ 105(a), 1123(a)(5), 1123(b)(6), and 1129(a)(1) of the Bankruptcy Code and the ” residual power” of the court to grant the Sacklers’ exits. But Judge McMahon found that nothing in those sections provides the necessary authority to grant such broad releases to 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 – subject to satisfaction of a number of conditions, but this authority would not extend to other matters.

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

Judge McMahon’s order not only unravels a confirmed plan of considerable weight, but also makes it very difficult to demonstrate circuit divisions regarding non-consensual releases of nondebtors for direct or special liability. The Fifth, Ninth, and Tenth Circuits expressly prohibit nondebtor releases outside of the asbestos context. The Third Circuit has signaled its ban on releases of non-debtors under the guise of Section 105(a). The Second Circuit didn’t tackle it head-on, outside of the asbestos scenario. The Fourth and Eleventh Circuits conclude that Section 105(a) alone provides the necessary authority for such releases, while the Sixth and Seventh Circuits conclude that Sections 105(a) and 1123(b)(6) together grant the “residual power” necessary for non-consensual releases of non-debtors. The First, Eighth, and DC Circuits, on the other hand, did not address the issue of whether there is a legal power to grant releases to nondebtors.

The Purdue (and Sackler family) bankruptcy case has been under the microscope since it was filed. The confirmed Ultimate Plan, if allowed to be consummated, would result in payments to hundreds of thousands of plaintiffs seeking damages related to the opioid crisis. Given the huge sums at stake and the identified circuit divisions, this case is ripe for consideration by the Supreme Court for a final ruling on the power and scope of Section 105 as it relates to unreleased versions. consensual.

FOOTNOTES

[1] 11 USC § 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, LP, No. 21-cv-7532, 2021 WL 5979108 (SDNY 16 Dec. 2021).

[4] In re: PURDUE PHARMA, LP, No. 19-cv-23649, — BR —-, 2021 WL 4240974 (Bankr. SDNY 17 Sept. 2021).

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

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