Delaware Bankruptcy Judge John Dorsey issued a 103 page opinion in In re Mallinckrodt PLC., Case No. 20-12522-JTD (Bankr. D.Del. Feb.3, 2022, Docket #6347) wherein he confirmed a Chapter 11 Plan which included non-consensual third-party releases and applied the Third Circuit position as articulated in Millenium Lab Holding II, LLC, 945 F.3d 126 (3d Cir. 2019).

Mallinckrodt (“Debtor”) filed for Bankruptcy in October 2020 having approximately $5.3 billion in debt in order to settle the multitude of lawsuits brought by local and state governments and private citizens claiming that it had inappropriately and deceptively marketed opioids. Debtor was in the global pharmaceutical industry and manufactured and sold pharmaceutical products including opioids. On February 3, 2022, the Chapter 11 was confirmed over objections of a few creditors. In confirming the Plan, the Court acknowledged that it did not follow the reasoning in recent Second and Fourth Circuit decisions respectively in In re Perdue Pharma, L.P. 2021 WL 5979108 (SDNY De. 16 2021) or Mahwah Bergen Retail Group, Inc.(fka  Ascena Retail Group, Inc). but instead applied the Third Circuit standards.

The Plan provided four different types of releases which included: (a) releases made by the Debtors; (b) releases made by non-debtor third parties where certain claimants were given a chance to “opt out” of third-party releases; (c) non-consensual releases by opioid claimants; and (d) releases by the Debtors and affiliates of the opioid claimants. Although the Plan was (ultimately) overwhelmingly supported by the creditors, the US Trustee, the SEC and Rhode Island were objectors to different releases. The US Trustee and Rhode Island argued that the releases were “vastly overbroad, releasing persons and entities that did not contribute anything of value to the reorganization”. The US Trustee also argued that this Court lacked jurisdiction to approve the releases and that the creditors due process rights would be violated. The Court ultimately overruled the objections holding that it did have the jurisdictional authority to do so as the releases were integral to the success of the Chapter 11 plan and without the releases the Plan would fail. The Court also found that the two standards set forth in the Third Circuit case of In re Continental, 203 F3d 203 (2000) were met and insofar as it was unclear from the evidence produced that there were any material claims for liability against the non-debtors that were being waived, the non-consensual third-party releases were both “necessary to the reorganization” and “fair”.

Concerning the issue of “necessity,” the Court found that the releases were an integral part of the settlements embodying them, and therefore a necessary part of the Plan. Regarding the release to the non-debtors (third parties) they too were necessary because they were involved to such a degree with Debtor’s business that litigation against them would be a drain on the Debtor’s finances. As to the second prong of “fairness” vis-à-vis the opioid claimants, the settlements were negotiated at arms-length with a large group of sophisticated parties representing diverse interests and substantial consideration was provided in exchange for the releases via a well-funded trust to which the opioid claimants could look to for compensation. The Court emphasized the nature of the case as there were more than 3000 lawsuits regarding opioids and the releases would remove the continued issue of litigation and ensure recoveries to the opioid claimants. The Court then noted that since this case is occurring during an “extraordinary” time during the height of the opioid crisis, time was of the essence to resolve these claims.

In this opinion, the Court was clearly looking at the practical side of the Plan—without its confirmation there would be continued and extensive litigation which would not benefit the claimants, thereby increasing the estate’s legal fees and consequently reducing any recovery to the opioid claimants.

Note that the current Bankruptcy Code is basically silent as to whether non-consensual third party releases are permitted. Often, Debtors rely on 11 US.C. §1123(b)(6) to support these releases. With that said, the closest we had to allowance of such releases is in 11 U.S.C. §524(g). In October 1994, Section 524(g) was added to the Bankruptcy Code to “clarify” the ability to use third party releases as a result of the Johns Mansville bankruptcy proceeding, in that instance a release from future holders of future asbestos demands. (Discussion of Section 524(g) is for another day as this section did not clarify all of the nuances and issues which have arisen since then).

Due to the conflict amongst the Circuits regarding non-consensual releases, the issue will have to be addressed with some clarity by the Supreme Court or legislation. The nonconsensual releases have become the cornerstone of some of the biggest Chapter 11 Plans and can play an enormous role in Plan viability.

To discuss the issues raised here or any other issues involving creditors rights and bankruptcy, please contact Leslie Beth Baskin, Esquire at 215-241-8926 or at lbaskin@sgrvlaw.com.