Third Party Releases Under the Bankruptcy Code After Purdue Pharma

Abstract

The biggest bankruptcy case ever (as measured by unsecured claims against a debtor-in-possession) is In re Purdue Pharma, LLC. The bankruptcy court affirmed a plan discharging the Sackler family (equity owners and often officers of Purdue) of all “derivative” claims that belonged to the debtor-in-possession. The settlement was bought for a substantial sum payable over time by the Sacklers. A debtor-in-possession is the sole owner of a derivative claim and has the power to bind all the creditors to a settlement. Under the Bankruptcy Code, a plan discharging derivative claims is confirmable. In fact, as we will, show, a great many third-party releases are consistent with the Bankruptcy Code. Our article offers a taxonomy.

But, in Purdue, the bankruptcy court interpreted the phrase “derivative” to include tort actions arising from wrongful acts of the Sacklers—claims for which the Sacklers were jointly and severally liable with Purdue. Claims that overlap derivative claims are thought themselves to be derivative claims. These overlapping claims do not belong to the debtor-in-possession. They belong to persons who often happen to be creditors of Purdue. So interpreted, the plan was not confirmable. This article establishes that confirmation of the Purdue plan was therefore rightfully reversed, if the expanded definition of “derivative” governs. Furthermore, the article maintains that federal court jurisdiction and Constitutional principles have nothing to do with the analysis. The only question is whether the Bankruptcy Code authorizes third-party releases of third party claims, in exchange for less-than-full compensation. We show that it does not.

Keywords: bankruptcy, Purdue Pharma, Sackler, derivative claim, third party claims