Brief of Amicus Curiae in Support of Respondents in William K. Harrington v. Purdue Pharma L.P.

For decades, courts have allowed non-consensual third-party releases in appropriate Chapter 11 plans. Such releases have been approved when they are necessary to the reorganization and fair to the releasing parties as a class and otherwise satisfy specified tests, and have been rejected when they do not.

The Debtors have already explained why third-party releases of the type involved in the Second Circuit’s decision affirming the U.S. Bankruptcy Court for the Southern District of New York’s confirmation of the Purdue Pharma L.P. plan of reorganization are consistent with the statutory and constitutional authority of bankruptcy courts and are thus lawful. This brief explains why third-party releases are justified in appropriate cases, in particular why (i) the use of thirdparty releases in appropriate Chapter 11 plans allows for the highest recovery for the greatest number of claimants, (ii) bankruptcy as a forum for implementing third-party releases enhances fairness through its equal treatment requirements and (iii) this Court should adopt the Second Circuit’s multifactor test as a necessary and appropriate uniform standard by which bankruptcy and district courts should evaluate third-party releases.

In determining whether the Bankruptcy Code permits non-consensual third-party releases, this Court “give[s] effect to the intent of Congress”. United States v. Am. Trucking Ass’ns, 310 U.S. 534, 542 (1940). In evaluating that intent, this Court has interpreted the Bankruptcy Code to embody certain core principles: the maximization of creditor recoveries, Bank of Am. Nat l Tr. & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 453 (1999), fair distribution among creditors, Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651, 655 (2006), and the efficient resolution of complex disputes, Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995). Indeed, a central aim of U.S. bankruptcy law is to preserve the countervailing interests of creditors and other stakeholders by maximizing total creditor return on debts in an orderly and efficient fashion. In other words, bankruptcy law favors the expeditious and fair resolution of complex disputes among disparate parties in a manner that promotes the collective interests of creditors.

The third-party releases at issue in this appeal arise in corporate Chapter 11 bankruptcies. Chapter 11 allows corporate debtors facing crippling debt (or other overwhelming claims such as those faced by Purdue Pharma and other mass tort debtors) to avoid liquidation and reorganize their obligations, while maintaining day-to-day operations. Chapter 11 thus provides a pathway for these companies to return to profitability while maximizing distributions to their creditors. When a business fails, as some inevitably do, the bankruptcy system is designed to spread the impact of that failure evenly across creditors (including victims of a corporate wrong). And while each creditor can fight to maximize her recovery, the system that Congress has designed is founded on the principle that each similarly situated creditor must receive an equal distribution. Congress has determined that this allows for fair recoveries by creditors when a business is unable to satisfy fully its obligations.

Bankruptcy is, and has been, critical to this country s economic growth and development, permitting businesses to take risks to create products for our advancement while also providing a mechanism for creditors to be fairly repaid when those risks result in failure or, as here, where a business’s product causes massive harm. The important role that bankruptcy plays was recognized by the Founding Fathers: of the limited powers expressly granted to the federal government, bankruptcy appears near the top of the list. See U.S. Const., art. I, 8. Thus, when businesses fail, and value and jobs are at risk, Congress has provided Chapter 11 as a path away from liquidation and toward reorganization.

While it is true that in a plan of reorganization containing third-party releases, certain individual rights may be subordinated to the overall interests of the group of creditors, that is the collective nature of bankruptcy proceedings as designed by Congress. In appropriate cases, third-party releases allow for a greater recovery for creditors, and a more uniform and equitable treatment of creditors, than individual litigation. And bankruptcy courts may be the only U.S. legal forum in which these complex, multi-party issues can be resolved on a global basis. That is, Chapter 11 proceedings “mitigate” the problems inherent in individual litigation “and provide an appropriate and often superior forum in which to resolve mass tort claims”. But in cases like the one on appeal, a viable, fair and recovery-maximizing settlement can only be achieved through the use of third-party releases.

In appropriate cases, third-party releases are a critically important tool to implement the U.S. Bankruptcy Code and its underlying policies and principles. Their use promotes the principle of maximizing creditors’ recoveries, particularly in mass-tort cases, by encouraging non-debtor third parties who may have liabilities related to the debtor’s conduct to fund plans of reorganization. Indeed, in cases where the debtor corporation’s assets are insufficient to fund a plan providing for meaningful recoveries – usually the case in mass-tort bankruptcies – third-party releases are the essential tool that allows a reorganization plan to proceed, thereby avoiding liquidation of the debtor with the attendant value destruction and reduced recovery by creditors. The Second Circuit’s test – like those employed by most other courts of appeals – ensures that third-party releases are allowed only when appropriate. First, the affected class of claimants must overwhelmingly support the reorganization plan, which will occur only if the creditors, as a voting class, determine that the plan is in their best interests. Second, the bankruptcy court must independently conclude, based on specific and detailed findings of fact, that a third-party release as part of a reorganization plan is appropriate and equitable. By facilitating reorganization plans that maximize creditor recoveries in this way, third-party releases allow for a more equitable resolution of creditors’ claims than may be obtained through individual (and uncertain) litigation.

The potential for abuse can be adequately addressed by this Court s adopting the limiting principles that have been used by experienced lower courts when approving plans that contain third-party releases. The potential for abuse does not call for a blanket ban on a tool that has so successfully served the fundamental goals of U.S. bankruptcy law. The multifactor test articulated below by the Second Circuit embodies such appropriate limiting principles. This Court should adopt that test as a uniform guide to bankruptcy courts to ensure that they approve third-party releases in Chapter 11 plans only in appropriate cases: when the releases are fair to – and in the best interests of – the releasing parties (as a class), and necessary to the reorganization.