Following the Purdue decision from the Supreme Court last year, three bankruptcy courts have permitted sales of estate property to bar suits against nondebtor purchasers of estate assets.

The third decision came on January 24 from Bankruptcy Judge Keith L. Phillips of Richmond, Va., in a case involving insurance policies covering asbestos claims.

The debtor was a shipyard that went out of business in the 1980s but was saddled with 126,000 lawsuits for exposure to asbestos. By the time the debtor filed a chapter 11 petition last year, only 2,700 claims remained.

The debtor had several insurance policies that had not been exhausted. Apparently, there were disputed coverage questions. The debtor and the insurers entered into a settlement agreement where the insurers bought back the policies with effect as though “the policies had never been issued,” Judge Phillips said.

The settlement agreement contained an injunction that would bar anyone with a claim against the debtor from suing the settling insurers. Over objection from the U.S. Trustee and another shipyard that was a co-defendant alongside the debtor in some lawsuits, Judge Phillips had approved the settlement providing for a sale of the policies under Section 363.

The other shipyard filed a notice of appeal together with a motion for a stay pending appeal, which Judge Phillips denied in his January 24 opinion.

Purdue Doesn’t Apply to 363 Sales

In the Fourth Circuit on a motion for a stay pending appeal, Judge Phillips said that the appellant must show (1) a likelihood of success on the merits, (2) irreparable harm if the stay is denied, (3) that the other party will not be substantially harmed by the stay, and (4) that the public interest will be served by a stay.

First, Judge Phillips addressed the likelihood of success on appeal. He characterized the other shipyard as contending that Purdue’s limitation on nondebtor injunctions also applies to Section 363 sales. See Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). To read ABI’s report, click here.

Judge Phillips began by citing authorities for the principle that bankruptcy courts may sell estate property “free and clear” by enjoining creditors from suing the purchaser. In bankruptcy cases, he said that “[i]nsurers and their insureds who have filed chapter 11 cases because of mass tort claims often enter into settlement agreements characterized as ‘buyback’ transactions to obtain funds to pay claimants.” Buybacks, he said, are “entered into to facilitate an orderly distribution of funds to asbestos-related claimants while avoiding extensive litigation costs associated with resolving disputes over coverage issues.”

Judge Phillips cited a decision by Bankruptcy Judge Corali Lopez-Castro of Miami, who, he said, “acknowledged that Purdue did not call into question negotiated settlements governed by Bankruptcy Rule 9019 or the sale of the Debtors’ insurance policies under § 363.” In re Bird Global, Inc., 23-20514 (Bankr. S.D. Fla.).

Judge Phillips sided with Judge Lopez-Castro. He said that allowing “a creditor to independently pursue its claim against property of the debtor after it been sold in bankruptcy would have a chilling effect on the sale of assets in bankruptcy. Purdue was not intended to thwart that process.”

Judge Phillips found “noting” in Purdue to suggest “that the protections afforded a buyer pursuant to § 363, including the ability of the purchaser to obtain the asset free of the claims of the debtor’s creditors, were intended to be abrogated.”

Next, Judge Phillips cited a decision by Bankruptcy Judge Martin Glenn of New York who, he said, approved “a settlement agreement containing releases and injunctions.” Judge Glenn “was not persuaded by the argument urged by the United States Trustee that Purdue is applicable in the context of a § 363 sale in addition to the context of plan confirmation.”

Finding no likelihood of success on appeal, Judge Phillips went on to find no irreparable harm besetting the other shipyard while finding “substantial” harm to the debtor were there a stay pending appeal. In terms of public policy, he decided that “public policy is best served by preserving the finality of sales in bankruptcy.”

Judge Phillips denied the motion for a stay pending appeal.