Shock rejection of Purdue Pharma opioid deal draws scrutiny from bankruptcy system

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The surprise rejection Purdue Pharma LP’s sweeping opioid settlement is already rippling through the rest of the bankruptcy system.

Ascena Retail Group, the former owner of women’s fashion brands including Ann Taylor and Lane Bryant, is the latest company to see a bankruptcy deal fall apart over its use of so-called third-party releases. The federal judge who struck down the deal last week recalled Purdue in his decision, citing U.S. District Judge Colleen McMahon’s rejection of the opioid maker’s proposed settlement.

The latest decision shows how third-party releases, a long-controversial legal tool that can protect the executives and owners of a bankrupt company from lawsuits, are coming under intense scrutiny. Federal courts are split on whether the releases are legal, and now once-permissive jurisdictions are increasingly questioning the maneuvers. Other big companies, including opioid maker Mallinckrodt Plc, are also seeing their use of releases fall. Fire.

“Judges have had their noses on this issue for a while,” David Skeel, a law professor at the University of Pennsylvania, said in an interview. “It seems the Purdue decision, at least in the short term, has opened the floodgates – the courts feel like they’ve been asked to be skeptical.”

The new scrutiny of discharges, which are part of virtually every major insolvency case, threatens to change the way large corporate bankruptcies work in the United States and could strengthen the position of individual investors by protecting their right to sue insiders and other responsible persons. for business failure.

Question from Ascène

Ascena’s bankruptcy was essentially complete. The company, which was among the biggest to seek court protection in 2020, sold its trademarks for about $650 million and won approval for a plan to split the proceeds among creditors in early 2021. .

The agreement contained liability waivers for nearly everyone involved in the business, including consultants and low-level employees, and was approved over objections from the US Department of Justice and the Securities Exchange Commission. It was a mistake, according to U.S. District Judge David Novak, who handled an appeal of the plan.

“The sheer scale of the releases can only be described as shocking,” Novak wrote in a ruling last week that overturned the plan. “They release the claims of at least hundreds of thousands of potential plaintiffs uninvolved in the bankruptcy, protecting countless individuals associated with debtors in one form or another, from every claim imaginable – both federal and state. – for an indefinite period stretching back to time immemorial.

Attorneys for Ascena, now called Mahwah Bergen Retail Group, did not immediately respond to a request for comment Wednesday.

Novak sent the plan back to the bankruptcy court for review. Like Judge McMahon of Purdue, he also ruled that bankruptcy judges lacked the power to impose certain types of discharges on reluctant parties.

“There are non-silly arguments that judges don’t have the power to grant these releases,” Skeel said. If third-party releases become unacceptable or are significantly reduced, it could make it harder for some companies to reorganize, he said. They may need to tailor releases more closely to bankruptcy-related parties or find a workaround.

The attention of the bankruptcy world is now on Mallinckrodt, who has seen the legality of the releases in his Chapter 11 exit plan openly questioned by his bankruptcy judge. After a lengthy trial, he has yet to rule on whether to approve the deal.

Purdue on fire

Releases, a typically esoteric aspect of bankruptcy law, came under intense scrutiny last year when it became clear that members of the billionaire Sackler family, owners of Purdue Pharma, would enjoy protections extensive legal claims under the company’s opioid policy.

After the deal was approved, a handful of states and a branch of the Justice Department appealed the decision. The states wanted to continue pursuing civil lawsuits against the Sacklers, with or without a bankruptcy plan.

McMahon, an outsider relating to bankruptcy law, wondered if the owners of Purdue abused the legal protection system and whether the company’s bankruptcy judge had the power to grant discharges. While finding no, she warned that the conflict was far from over.

“This question has hung over bankruptcy law for thirty-five years,” McMahon said in his ruling. “This opinion will not be the last word on the subject, nor should it be.”

–With help from Eliza Ronalds-Hannon and Steven Church.

Photo: Ann Taylor store on Madison Avenue in New York. Photographer: Ron Antonelli/Bloomberg

Copyright 2022 Bloomberg.

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