Background

In a highly anticipated decision issued on May 30, 2023, the Second Circuit Court of Appeals rendered its opinion in Purdue Pharma LP v. City of Grand Prairie (In re Purdue Pharma LP)¹ approving a Chapter 11 plan’s inclusion of a nonconsensual release of creditors’ direct claims against non-debtor third parties.

This client alert describes the history of the case, identifies some of the key takeaways from the decision and outlines where other jurisdictions in the country stand on nonconsensual third-party releases.

In the wake of several high-profile collapses of cryptocurrency exchanges, most notably FTX, Celsius, and Voyager, the state of the digital asset landscape is ever-changing, with more questions and landmines than clear paths forward. Among the many issues that arise in these bankruptcy cases is the question of how to treat and classify digital assets, especially cryptocurrencies—e.g., who owns the cryptocurrencies deposited by customers.

In our previous article, we outlined the milestones leading up to this astonishing and unprecedented collapse that has rocked the crypto industry. Since November 11, 2022, the date on which FTX filed for Chapter 11 protection, not a week has gone by without a new twist. If you missed some of the episodes of this complicated process, here is our selection of the most interesting ones.

Summary

When a federal court approves a [bankruptcy] plan allowing someone to put its hands into another person’s pockets, the person with the pockets is entitled to be fully heard and to have legitimate objections addressed.[Fn. 1]

Pop Quiz Question:

Does Insurer, in the following facts, have standing to object to Debtor’s Chapter 11 plan?

Debtor is in bankruptcy because of asbestos lawsuits.

Debtor proposes a Chapter 11 plan that is supported by all constituencies—except one:

On May 30, 2023, the US Court of Appeals for the Second Circuit released its long-awaited opinion addressing Purdue Pharma’s confirmed chapter 11 bankruptcy plan. Although the appeal challenged more than one aspect of the plan, the Court’s decision was highly anticipated for its discussion of one topic in particular: nonconsensual third-party releases.

In Depth

THIRD-PARTY RELEASES

Exculpation clauses limiting the liability of certain entities for actions taken in connection with a bankruptcy case are a common feature of chapter 11 plans. However, courts disagree over the permitted scope of such clauses. They also disagree as to whether an order confirming a chapter 11 plan that includes exculpation and third-party release provisions is insulated from appellate review under the doctrine of "equitable mootness."

To prevent landlords under long-term real property leases from reaping a windfall for future rent claims at the expense of other creditors, the Bankruptcy Code caps the amount of a landlord's claim against a debtor-tenant for damages "resulting from the termination" of a real property lease.

To shield bankruptcy trustees and certain other entities from litigation arising from actions taken in their official capacity, the "Barton doctrine"—now more than a century old—provides that such litigation may be commenced only with the authority of the appointing court. The doctrine has certain exceptions, one of which—the "ultra vires exception"—was recently examined by the U.S. Court of Appeals for the Fifth Circuit as an apparent matter of first impression.