It was not surprising when Chief District Judge Colleen McMahon of New York City upheld the bankruptcy court’s preliminary injunction barring private litigants and government officials from suing nondebtor officers of opioid manufacturer Purdue Pharmaceuticals LP.
However, it may come as a surprise to learn that Judge McMahon ruled that the bankruptcy court did not have “arising in” jurisdiction to form the basis for the preliminary injunction. Instead, she held that the bankruptcy court had only non-core, “related to” jurisdiction to underpin the injunction.
The August 11 opinion seems to say that the bankruptcy court may only issue a report and recommendation if the debtor’s chapter 11 plan includes a permanent injunction protecting nondebtors. In other words, a non-consensual third-party release in a plan may be subject to de novo review in district court. Consequently, the debtor might be unable to consummate a confirmed plan, even in the absence of an appeal, until the district court has reviewed aspects of the plan where jurisdiction was only “related to.”
By finding that the bankruptcy court lacked core jurisdiction, Judge McMahon’s decision seems to part company with a recent decision by the Third Circuit in Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 945 F.3d 126 (3d Cir. Dec. 19, 2019). In Millennium, the Third Circuit found constitutional authority in the bankruptcy court to grant nondebtor, third-party releases.
Curiously, Judge McMahon’s decision is arguably at odds with the broader language in her own opinion from October 2018 in Lynch v. Lapidem Ltd. (In re Kirwan Offices SARL), 592 B.R. 489 (S.D.N.Y. Oct. 10, 2018), aff’d sub nom. Lynch v. Mascini Holdings Ltd. (In re Kirwan Offices SARL), 792 F. App’x 99 (2d Cir. 2019). To read ABI’s report, click here.
The District Attorneys’ Civil Suits
Six months before Purdue’s bankruptcy, five district attorneys in Tennessee mounted a lawsuit under state law against the opioid maker and its former president and co-chairman. The statute gave the plaintiffs a right of action for damages against those who participated in an illegal drug market in the state.
One month before Purdue’s chapter 11 filing, the district attorneys moved for summary judgment against the co-chairman as to liability. Immediately after bankruptcy, the debtor filed a motion for preliminary injunction to halt 2,600 governmental enforcement and private lawsuits in state and federal courts against the company’s nondebtor owners, officers and directors, including the co-chairman.
The bankruptcy court granted a five-month preliminary injunction followed by a six-month extension. The Tennessee district attorneys appealed both injunctions. Judge McMahon upheld the preliminary injunction, but with significant caveats regarding jurisdiction.
Court Finds “Related To” Jurisdiction
The district attorneys argued that the bankruptcy court lacked jurisdiction to support the injunctions.
Judge McMahon found “related to” jurisdiction, because the suit in state court against the co-chairman might have a “conceivable effect” on the corporate bankruptcy.
From Second Circuit authority stemming from Bernard Madoff’s Ponzi scheme, Judge McMahon said “that when one tortfeasor files for bankruptcy, any action against their co-tortfeasors for the same conduct falls within the bankruptcy court’s ‘related to’ jurisdiction, since a finding of joint and several liability against the whole group could impact the res of the insolvent party’s estate.” See SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 342 (2d Cir. 2018). In other words, she said, there was a conceivable effect because “the individual case is likely to raise the issue of the corporate entity’s liability, even if only indirectly.”
There was also a conceivable effect, Judge McMahon said, because the co-chairman may have rights of indemnity and contribution from the debtor. Unlike the Third Circuit, she said that the Second Circuit does not require “the intervention of another lawsuit” before there is “related to” jurisdiction in those circumstances. Cf. In re Combustion Engineering Inc., 391 F.3d 190, 227 (3d Cir. 2004).
Therefore, the bankruptcy court had “related to” jurisdiction to underpin the injunction. As a preliminary injunction lacking finality, there was no question about the effectiveness of the bankruptcy court’s order without district court review.
But There Was No “Arising In” Jurisdiction
The bankruptcy court had also found “arising in” jurisdiction to support the injunction. The bankruptcy court reasoned that the injunction arose in bankruptcy to enable sufficient time to foster negotiation of a settlement and plan. Judge McMahon disagreed.
Judge McMahon said that the state law claims against the co-chairman were “entirely independent of the bankruptcy proceeding; they arise under a state statute and they were filed months before there was any bankruptcy. Neither the [state statute] nor the lawsuit references or depends on any order of the Bankruptcy Court for their existence.”
Because “arising in” proceedings are “core,” but because the claims against the co-chairman did not “arise in” the bankruptcy case, Judge McMahon said that the bankruptcy court did not have authority to characterize the injunction against the co-chairman under Section 105(a) as a “core” proceeding.
Judge McMahon was not finished. She made several assumptions affecting the bankruptcy court’s final adjudicatory authority as the chapter 11 case unfolds.
If there were a final, enforceable settlement agreement, if it were incorporated into a confirmable chapter 11 plan, and if an “arising in” jurisdictional argument were to arise “in the context of a confirmation fight,” Judge McMahon said that “the Bankruptcy Court would still not be exercising core jurisdiction over the [state law] claims by confirming the plan.”
There was more. Judge McMahon said that the “Bankruptcy Court cannot now, nor will it ever be able to, adjudicate the [state law] claims against [the co-chairman] without first being permitted to do so by this court, reviewing an order of the Bankruptcy Judge de novo.”
Although there was no “arising in” jurisdiction, Judge McMahon upheld issuance of the preliminary injunction given “related to” jurisdiction. She found no abuse of discretion under the traditional standards for a preliminary injunction.
However, Judge McMahon vacated portions of the preliminary injunction that referred to the suits as “core” proceedings. She remanded “for further proceedings with respect to the other [lawsuits against officers, directors and owners] that are not the subject of this appeal.”
Observations
Finding no core jurisdiction for injunctions protecting nondebtors, Judge McMahon’s opinion seems at odds with the Third Circuit’s recent decision in Millennium. To read ABI’s report, click here.
In Millennium, the Third Circuit found constitutional power for the bankruptcy court to enter a final order granting releases to company insiders who posted $325 million to fund a reorganization plan. The appeals court said the releases were constitutionally appropriate because there would have been no reorganization and no plan confirmation absent the $325 million contributed by the shareholders in return for releases.
In Purdue’s reorganization, insiders might end up posting several billion dollars to fund a chapter 11 plan, in return for which they would be granted releases and injunctions barring creditors from suing them. Contrary to Judge McMahon’s holding, it seems as though the Purdue bankruptcy judge would have final adjudicatory power to grant releases were the case in the Third Circuit.
In Kirwan in 2018, Judge McMahon appeared to hold that bankruptcy courts possess core jurisdiction and constitutional power to enter chapter 11 confirmation orders, including so-called nondebtor, third-party releases of non-bankruptcy claims. It is possible that Judge McMahon would find core jurisdiction for third-party releases as part of confirmation, but not at the stage of a preliminary injunction.
In her Perdue opinion, Judge McMahon said the bankruptcy court would not have core jurisdiction to “adjudicate the [state law] claims against [the co-chairman].” [Emphasis added.] However, the bankruptcy court at confirmation would not be adjudicating the state law claims. It would be entering an injunction in aid of confirmation.
The Second and Third Circuits have generally been on the same page when it comes to authorizing third-party, nondebtor injunctions in chapter 11 plans. However, the Second Circuit has not pinned down the bankruptcy court’s constitutional power as succinctly as the Third Circuit.
It was not surprising when Chief District Judge Colleen McMahon of New York City upheld the bankruptcy court’s preliminary injunction barring private litigants and government officials from suing nondebtor officers of opioid manufacturer Purdue Pharmaceuticals LP.
However, it may come as a surprise to learn that Judge McMahon ruled that the bankruptcy court did not have “arising in” jurisdiction to form the basis for the preliminary injunction. Instead, she held that the bankruptcy court had only non-core, “related to” jurisdiction to underpin the injunction.
The August 11 opinion seems to say that the bankruptcy court may only issue a report and recommendation if the debtor’s chapter 11 plan includes a permanent injunction protecting nondebtors. In other words, a non-consensual third-party release in a plan may be subject to de novo review in district court. Consequently, the debtor might be unable to consummate a confirmed plan, even in the absence of an appeal, until the district court has reviewed aspects of the plan where jurisdiction was only “related to.”
By finding that the bankruptcy court lacked core jurisdiction, Judge McMahon’s decision seems to part company with a recent decision by the Third Circuit in Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 945 F.3d 126 (3d Cir. Dec. 19, 2019). In Millennium, the Third Circuit found constitutional authority in the bankruptcy court to grant nondebtor, third-party releases.
Curiously, Judge McMahon’s decision is arguably at odds with the broader language in her own opinion from October 2018 in Lynch v. Lapidem Ltd. (In re Kirwan Offices SARL), 592 B.R. 489 (S.D.N.Y. Oct. 10, 2018), aff’d sub nom. Lynch v. Mascini Holdings Ltd. (In re Kirwan Offices SARL), 792 F. App’x 99 (2d Cir. 2019).