On consent of the Purdue debtor, Bankruptcy Judge Sean H. Lane of New York gave derivative standing for the official creditors’ committee to bring claims against Purdue’s owners, officers and directors.

In his November 18 opinion, Judge Lane agreed with Bankruptcy Judge Craig T. Goldblatt in Delaware and Bankruptcy Judge Michael E. Wiles of New York, who both held contrary to Delaware corporate law that creditors can be given standing to pursue claims belonging to a Delaware LLC.

Note: Judge Lane is handling the newly filed chapter 11 reorganization of Spirit Airlines Inc.

The Motion for Standing

Readers know the history of Purdue, the opioid manufacturer. The company filed a chapter 11 petition in September 2019 and confirmed a plan two years later with nonconsensual releases for the nonbankrupt Sackler family for their contribution of up to $6 billion.

The district court reversed the confirmation order. In re Purdue Pharma, L.P., 635 B.R. 26 (S.D.N.Y. 2021). To read ABI’s report, click here. The Second Circuit reversed the district court and 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.

Notably, the Purdue creditors’ committee had supported confirmation of the plan containing nonconsensual releases outlawed by the Supreme Court. The committee believed that taking the Sacklers’ money and giving them releases was preferable to years of litigation with doubtful outcomes and a possibly smaller recovery for opioid victims.

On remand from the Supreme Court, the chapter 11 case fell into Judge Lane’s lap, because Bankruptcy Judge Robert Drain, the author of Purdue’s confirmation opinion, had retired. After remand, Judge Lane approved another round of mediation and extended a preliminary injunction barring lawsuits by creditors against the Sacklers. Currently, the mediation window closes on December 2, unless extended.

With the debtor’s consent, the committee filed a motion seeking derivative standing to pursue estate claims against the Sacklers and others. An objection to the motion came from the Canadian Municipal and First Nations Creditors, who were among the creditors winning reversal in the district court.

Committees Can Have Derivative Standing

Judge Lane said it has been “well established” for more than 40 years that committees can be given derivative standing based, in part, on Section 1103(c)(5). The subsection grants committees authority “to perform other services as are in the interest of those represented.”

These days, Judge Lane said that the Second Circuit has “expanded on these standing principles . . . which recognized committee standing to pursue estate claims in situations where the debtor — while not prosecuting the litigation — consented to their prosecution by a committee.” When the debtor consents, the test in the circuit is whether conferring derivative standing is in the best interest of the estate and whether giving authority to the committee is “necessary and beneficial” to the “fair and efficient” resolution of the bankruptcy.

Contrary to the objectors’ contention, Judge Lane said that the committee would not obtain ownership of the claims. He said it would be “illogical” to require that the debtor unjustifiably refuse to sue when the debtor consents to the motion.

Having found that conferring standing was in the best interests of the estate, Judge Lane turned to the question of “necessary and beneficial.”

Judge Lane “strongly” rejected the objectors’ argument that giving standing to the committee would result in a “quick and dirty” settlement with the Sacklers. Similarly, he rejected the objectors’ “outlandish contention” that a grant of standing was tantamount to a sub rosa plan. Any settlement, he said, would be subject to court approval.

Judge Lane also decided that giving standing to the committee was preferable to appointing a chapter 11 trustee, because “the Committee has already put in the work and is ready to prosecute the claims immediately.”

Based on the draft complaint that accompanied the committee’s standing motion, Judge Lane easily found that the claims were “colorable.”

Delaware Law

Under Delaware corporate law governing LLCs, derivative standing cannot be given to a creditor. Indeed, three bankruptcy courts in Delaware as recently as 2019 had refused to give derivative standing to an LLC’s creditors.

This year, however, Bankruptcy Judge Goldblatt in Delaware took counsel from the Third Circuit’s en banc decision in Official Comm. of Unsecured Creditors of Cybergenics Corp. ex rel. Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir. 2003), to hold that “the restrictions on derivative actions imposed by the [Delaware LLC law] . . . have no bearing on a bankruptcy court’s ability to authorize a committee to bring an estate cause of action.” In re Pack Liquidating, 658 B.R. 305, 324 (Bankr. D. Del. 2024). To read ABI’s report, click here.

Judge Lane also followed Bankruptcy Judge Wiles of New York, who rejected “the argument that the Delaware Limited Liability Company Act precluded him from authorizing a committee to pursue an estate cause of action.” See In re McClatchy Co., 20-10418 (Bankr. S.D.N.Y. July 6, 2020), Hr’g Tr. at 30.

Judge Lane followed Judges Wiles and Goldblatt, holding that Delaware law “would be preempted by the Bankruptcy Code.” He granted the standing motion.