The Supreme Court of the United States (SCOTUS) has been asked to resolve a split in the Circuit Courts about the validity of non-consensual third-party releases granted in bankruptcy, known as “channeling injunctions”. At issue is whether the SCOTUS will approve a roughly $6 billion bankruptcy settlement involving Purdue Pharma, the maker of the powerful and highly addictive pain medication OxyContin and its owners, the Sackler family, who are funding the settlement.

Argument was held in early December 2023 on a grant of certiorari from the United States Court of Appeals for the Second Circuit (Second Circuit), which approved the settlement.

In Purdue Pharma, L.P. v, City of Grand Prairie (In re Purdue Pharma, L.P.), No. 22–110 – Bk (2d Cir. May 30, 2023), the Second Circuit examined whether the inclusion of a channeling injunction prohibiting claims against the Sackler family as part of Purdue Pharma’s Chapter 11 plan was proper in light of jurisdictional and statutory considerations.  

The Second Circuit concluded that the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) had both jurisdictional and statutory grounds to approve the releases, finding that the Bankruptcy Court’s specific and detailed findings met seven (7) factors to be weighed when consider non-consensual third-party releases.

The Second Circuit articulated the following seven (7) factors for the first time in its opinion:

  1. whether there is an identity of interests between the debtors and released third parties, including indemnification relationships, “such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate”;
  2. whether claims against the debtor and nondebtor are factually and legally intertwined, including whether the debtors and the released parties share common defenses, insurance coverage, or levels of culpability;
  3. whether the scope of the releases is appropriate;
  4. whether the releases are essential to the reorganization, in that the debtor needs the claims to be settled in order for the res to be allocated, rather than because the released party is somehow manipulating the process to its own advantage;
  5. whether the non-debtor contributed substantial assets to the reorganization;
  6. whether the impacted class of creditors “overwhelmingly” voted in support of the plan with the releases;
  7. whether the plan provides for the fair payment of enjoined claims.

The Second Circuit noted,

Although consideration of each factor is required, it is not necessarily sufficient—there may even be cases in which all factors are present, but the inclusion of third-party releases in a plan of reorganization should not be approved.

The Justice of thew SCOTUS seemed dividing about approving the releases during the argument. A decision is not expected for several months and could overturn 30-year of jurisprudence in certain Circuits approving of the practice.

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