For the first time in an Article III court after the Supreme Court banned nonconsensual, nondebtor releases in Harrington v. Purdue, a district judge in New York has upheld a preliminary injunction barring suits against nondebtors.

District Judge Colleen McMahon warned the parties in the Purdue case that they must agree on a new chapter 11 plan “pretty soon,” or she would no longer permit preliminary injunctions.

The 40 Preliminary Injunctions

In her November 26 opinion, Judge McMahon recounted the history of the Purdue case and how the bankruptcy court had issued a preliminary injunction soon after the chapter 11 filing in 2019. The preliminary injunction barred everyone from suing nondebtors and even prevented the enforcement of governments’ police and regulatory powers. In 2020, not long after the chapter 11 filing, Judge McMahon said that she had upheld the preliminary injunction.

Judge McMahon recited how she had written the opinion that overturned Purdue’s confirmation. In re Purdue Pharma, L.P., 635 B.R. 26 (S.D.N.Y. 2021). To read ABI’s report, click here. She was reversed when the Second Circuit reinstated confirmation. Purdue Pharma, LP v. City of Grande Prairie (In re Purdue Pharma, LP), 69 F.4th 45 (2d Cir. 2023). To read ABI’s report, click here. The Supreme Court granted certiorari and reversed the Second Circuit at the end of the last term in late June, nixing nonconsensual, nondebtor third-party releases. Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). To read ABI’s report, click here.

When the Purdue case returned to the bankruptcy court, Bankruptcy Judge Sean H. Lane of New York entered preliminary injunctions several more times to facilitate mediation designed for cobbling together a new plan with contributions from the Sackler family. Since the outset of the case, Judge McMahon said that the preliminary injunction has been extended about 40 times.

When Bankruptcy Judge Lane entered a preliminary injunction after the Supreme Court set aside the nonconsensual releases in the Purdue plan, the State of Maryland filed an appeal, professing a desire to pursue unfair and deceptive trade practice claims against nondebtors that had been frozen since the chapter 11 filing in 2019.

On appeal, the state argued that Harrington v. Purdue deprived the bankruptcy court of power to enjoin litigation against nondebtors.

The Standards Are Met for a ‘P.I.’

Before turning to the merits, Judge McMahon considered whether the bankruptcy court had jurisdiction after Harrington v. Purdue to issue preliminary injunctions of the sort.

Judge McMahon said that the Supreme Court’s holding was “narrow” and only banned nonconsensual releases protecting nondebtors, but “otherwise left unchanged the Bankruptcy Court’s power.” In the Second Circuit, she said that a preliminary injunction “would fall within the ‘related to’ jurisdiction of the Bankruptcy Court.”

Judge McMahon cited bankruptcy courts that have recently decided that Harrington v. Purdue does not prohibit the issuance of preliminary injunctions. See, e.g., In re Parlement Techs., Inc., 661 B.R. 722, 724 (Bankr. D. Del. 2024); and In re Diocese of Buffalo, N.Y., 663 B.R. 197, 200 (Bankr. W.D.N.Y.). To read ABI’s reports, click here and here.

Having found jurisdiction and power, Judge McMahon analyzed whether the debtors had satisfied the usual four requirements for issuance of a preliminary injunction.

With regard to the likelihood of a successful reorganization, Judge McMahon said that the mediators and “most of the major stakeholders” were “confident” that “a successful reorganization plan is imminent.” Concerning imminent irreparable harm, she deferred to the bankruptcy court’s finding that “mediation efforts would cease” if war “were to break out.”

In terms of the balance of harm and the public interest, Judge McMahon decided that the “public interest in securing a significant voluntary contribution from the [nondebtors] far outweighs Maryland’s interest in advancing its administrative proceeding today.”

“In light of the progress of mediation to date,” Judge McMahon upheld the latest preliminary injunction,” because “the balance of the hardships and the public interest both favor leaving the injunction in place in order to facilitate the ongoing mediation.”

The ‘Elephant in the Room’

In the last two pages of her opinion, Judge McMahon said, “The ‘elephant in the room’ is that the Preliminary Injunction has been in effect for a very, very long time.” If there is no agreement on a plan over the 2024 holidays, she said “there will no doubt be another ‘modest’ request — and quite possibly another — and yet another . . . . [E]very single time, the parties will tell Judge Lane that they are inching ever closer to an agreement and only need a little more time.”

“But there must be an end to this mediation process,” Judge McMahon said. When there are more extensions, “it becomes less and less convincing that the parties really are on the cusp of a deal, or that the public interest would be better served by prolonging the stay, rather than by ramping up litigation against the (perhaps recalcitrant) Sacklers.”

Judge McMahon said that agreement on a “plan needs to come pretty ‘soon,’ or the preliminary injunction factors will cease to favor further postponement of the ability of parties who have every right to sue the Sacklers to start the war of all against all.”

Observation

Ordinarily, opening the floodgates to litigation is an empty threat. This writer believes the threat is real this time, because it was Judge McMahon who overturned Purdue’s original plan against the weight of Second Circuit authority.