“Take-Four”: Another Court Overturns Third-Party Authorizations – Insolvency/Bankruptcy/Restructuring

There has been much discussion regarding the recent appeal decision of the District Court of Purdue Pharma. See In re Purdue Pharma, Case No. 21 cv 7532 (main case), 2021 WL 5979108 (SDNY 16 Dec. 2021). We have been monitoring developments related to Purdue Pharma and Questions Regarding Third Party Waivers: Purdue Pharma: Is Automatic Stay Protection of Third Parties an Oxymoron? – Cullen and Dykman LLP (cullenllp.com); Purdue Pharma Restructuring Plan Effectively Stalled…for Now – Cullen and Dykman LLP (cullenllp.com); Will third party releases be licensed? : Leave to appeal granted in backlogged matter – Cullen and Dykman LLP (cullenllp.com).

Many have questioned District Court Judge McMahon’s ruling in Purdue Pharma could mean for other bankruptcy cases where third party releases are required to confirm a reorganization plan. Now, Judge David J. Novak of the Eastern District of Virginia appears to have agreed with Judge McMahon in another case. He rejected confirmation of a Chapter 11 plan that also included third-party releases. Patterson vs. Mahwan Bergen Retail Grp., Inc.Civil No. 3:21cv167 (DJN), 2022 WL 135398 (ED Va. 13 Jan 2022).

In this case, the patterson the debtors operated name-brand retail stores that battled the COVID-19 pandemic, amassing $1.6 billion in secured debt and up to $800 million in unsecured debt. the patterson the debtors liquidated their businesses before filing a joint Chapter 11 plan of reorganization. This plan provided for payments to secured and unsecured creditors and contained third-party releases to resolve pending lawsuits through the bankruptcy process , including the release of defendants involved in an ongoing class action suit for securities fraud.¹

In his 87-page ruling examining the bankruptcy court’s confirmation of the plan, Judge Novak criticized the third-party releases as a “device that lends itself to abuse” and pointed out that those involved in patterson (which are similar to many third-party versions that appear in Chapter 11 plans of large entities facing insurmountable lawsuits before the petition) “represent the worst of this all-too-common practice, because they have no limits.” patterson2022 WL 135398, at **2, 3.

Justice Novak considered the constitutional implications of these releases, including the essential and non-essential classification set out in Stern vs. Marshall. ² Identifier., at **11-14. He determined that the approval of third-party releases amounted to a determination of the claims for the purposes of Back and concluded that it was improper for a bankruptcy court “to completely extinguish these claims solely on the basis of their inclusion in the plan”.
Identifier., to *16. He further explained that these third-party claims were not of the kind that belonged to the estate or estate property, and more so, had no connection with the bankruptcy case. Identifier., at **16-17. On these bases, Judge Novak found that the bankruptcy court had exceeded its powers. Identifier.

the patterson the debtors argued that the bankruptcy court had the power to issue the discharges because the ability to withdraw from the discharges amounted to consent. Identifier., to *17. Justice Novak disagreed with the bankruptcy court’s finding that failure to opt out signified consent and held that “implied consent” would not suffice.³ Identifier.at **27-28.

Ultimately, Judge Novak overturned the bankruptcy court’s order confirming the plan, set aside the third-party waivers, removed these “unenforceable waivers” from the plan, and returned the case to the bankruptcy court for it proceeds to the confirmation without the renunciations of third parties. .

The future of third-party versions is unclear. District court rulings challenging it will be appealed. In Purduethe Second Circuit was asked to expedite consideration of this issue.

Please note that this is a general overview of developments in the law and does not constitute legal advice. Nothing herein creates an attorney-client relationship between sender and receiver. If you have any questions regarding these provisions or any other aspect of bankruptcy law, please contact Michael Traison at 312.860.4230, Jocelyn Lupetin at 516.296.9109 and/or Amanda Tersigni at 516.357.3738.

Footnotes :

1 Justice Novak found that such releases “closed the doors of the courthouse to an immeasurable number of potential plaintiffs, while protecting corporate insiders who had no role in the corporate reorganization.” 2022 WL 135398, at *3.

2″Back teaches that courts should focus on the content of the proceeding rather than the category of the proceeding when determining whether a bankruptcy court acted within its constitutional authority.. Given Backfocus on the content of the claim rather than its categorization, courts cannot circumvent constitutional limits simply by categorizing a wide range of claims as “essential” and then assuming jurisdiction.” Identifier.to *14;
see also Stern v. Marshall564 US 462 (2011).

3 “Failure to opt out, without more, cannot form the basis of consent to the release of a claim. Whether the Court characterizes these matters as ‘non-consensual’ or ‘implied consent’ does not, for in both case, there is a lack of sufficient affirmation of consent.” Identifier.to *31.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.