Non-consensual releases of creditors’ direct claims against a debtor are not permitted by the Bankruptcy Code, according to District Judge Colleen McMahon of Manhattan, who vacated the bankruptcy court’s confirmation of the controversial Purdue Pharma LP chapter 11 plan, according to today's Rochelle's Daily Wire column. Had the reorganization plan been upheld (or if it is upheld after appeal to the Second Circuit), the controlling Sackler family’s $4.325 billion contribution to the reorganization plan would have absolved them from all liability stemming from the opioid crisis, even if creditors with direct claims did not consent. Judge McMahon’s 142-page decision on December 16 is perhaps the most outstanding and remarkable bankruptcy opinion of the decade. Unless reversed on appeal, she will have barred debtors from confirming chapter 11 plans in the Second Circuit with non-consensual releases of creditors’ direct claims against non-debtor third parties. Contrary to what may have been reported in the press, Judge McMahon did not prohibit all non-debtor releases, nor did she bar members of the Sackler family from obtaining releases from perhaps the majority of opioid claims. Judge McMahon’s opinion is narrow. She only barred non-consensual releases where creditors have direct claims against the Sacklers that are not derivative of claims that the company has against family members.
