Mayer Brown partners Tyler R. Ferguson, Aaron Gavant, and Sean T. Scott and associate Samuel R. Rabuck recently published an article for Mayer Brown’s Perspectives & Events portal on the January 13, 2022, decision in which Judge David Novak of the US District Court for the Eastern District of Virginia vacated the bankruptcy court’s order confirming the Chapter 11 plan of the Mahwah Bergen Retail Group (formerly known as Ascena Retail Group), holding that the plan’s non-consensual third-party releases were unenforceable. The ruling arrived shortly after an opinion issued by the US District Court for the Southern District of New York in the Purdue Pharma bankruptcy case, in which the district court there held that the Bankruptcy Code does not authorize non-consensual third-party releases outside of the asbestos context.

The full article is available here.

Mayer Brown partners Adam C. Paul, Sean T. Scott, Louis S. Chiappetta, Aaron Gavant, and Tyler R. Ferguson recently published an article for Mayer Brown’s Perspectives & Events portal on the December 16, 2021, decision in which Judge Colleen McMahon of the US District Court for the Southern District of New York reversed the bankruptcy court order confirming the Chapter 11 plan of Purdue Pharma, L.P. and its affiliated debtors, holding that the Bankruptcy Code did not authorize the plan’s non-consensual third-party releases. Judge McMahon’s decision is now the subject of an expedited appeals process whose outcome has the potential to substantially affect the ability of shareholders and other third parties to obtain releases in a Chapter 11 case.

The full article is available here.

On September 1, 2021, Judge Robert Drain issued a much-anticipated oral ruling approving Purdue Pharma L.P.’s plan of reorganization. The plan, which has garnered significant attention from the media, legislators, academics, and practitioners, releases current and future members of the Sackler family and many of their associates and affiliated companies – none of whom filed for bankruptcy themselves – from liability in connection with any possible harm caused by OxyContin and other opioids that Purdue Pharma manufactured and distributed. In return for the liability releases, the Sacklers will, over a nine-year period, contribute up to $4.325 billion to a settlement fund from which payments will be made primarily to compensate victims and to fund initiatives to abate the opioid epidemic.

Continue Reading SDNY Bankruptcy Court OKs Purdue Pharma’s Plan of Reorganization Featuring Third-Party Releases for Sacklers in Exchange for Contributing $4.325 Billion to Opioid Victim Settlement Fund

On Friday, March 19, 2021, Congressional lawmakers introduced a bill that would amend the U.S. Bankruptcy Code to prohibit bankruptcy judges from permanently enjoining or releasing legal claims of states, tribes, municipalities or the U.S. government against non-debtors.

According to media reports, the bill, which is named the “SACKLER Act,” (i.e., the “Stop Shielding Assets from Corporate Known Liability by Eliminating Non-Debtor Releases Act”) is specifically designed to prevent members of the Sackler family, who own OxyContin-maker Purdue Pharma LP, from using the bankruptcy process to obtain legal releases from government lawsuits.  Purdue Pharma LP filed for bankruptcy in September 2019, but none of the members of the Sackler family have filed for bankruptcy as individuals.  Nevertheless, the Sacklers have offered to contribute roughly $4.28 billion as part of a proposed bankruptcy plan to fund payouts to victims who suffered injuries linked to Purdue Pharma’s opioids over the next decade in exchange for legal releases that would enjoin claims against the Sackler family.  If approved, those legal releases would shield the Sackler family from further liability related to the opioid crisis, something that many state attorneys general have ardently opposed.  Continue Reading Wither Non-Debtor Releases? Purdue Pharma and the Proposed SACKLER Act

Two recent decisions from Delaware illustrate somewhat divergent views from the bankruptcy bench on the proper procedures for obtaining non-debtor releases in confirmed plans of reorganization. In both In re Emerge Energy Services LP, et al.1 and In re Cloud Peak Energy Inc., et al.2 the debtors’ initial, and then certain subsequent, efforts at plan confirmation were stymied by proposed opt-out procedures. Ultimately, both debtors were able to confirm their plans after adjusting the applicable release provisions, as described below. Collectively, these decisions demonstrate how closely many courts will scrutinize non-debtor releases and the importance of designing procedures for obtaining consent to such releases that demonstrate that they are procedurally fair.

Continue Reading Recent Delaware Decisions Show Divergent Views on Third-Party Release Procedures

On December 19, 2019, the US Court of Appeals for the Third Circuit held in In re Millennium Lab Holdings II, LLC1 that bankruptcy courts have the constitutional authority, well within the constraints of Stern v. Marshall,2 to confirm Chapter 11 reorganization plans containing nonconsensual third-party releases. This decision is notable not only because it is the first federal circuit court of appeals decision addressing (and overruling) a Stern challenge to a bankruptcy court’s authority to approve such releases but also because it was issued in a circuit where the ability of a plan to otherwise provide for nonconsensual releases of third-party claims is already generally recognized.3

Continue Reading Third Circuit Holds Bankruptcy Courts May Constitutionally Confirm a Chapter 11 Plan Containing Nonconsensual Third-Party Releases

The question of whether a debtor’s plan of reorganization can include non-consensual releases for non-debtor parties has been hotly contested for several years, with circuit courts oftentimes split.  In his recent decision on the topic in the Aegean case,  New York Southern District Bankruptcy Judge Michael E. Wiles explored the limitations on such releases even in permissive jurisdictions such as the Second Circuit.

Specifically, as discussed further in this article by Mayer Brown attorneys Barbara Goodstein, Joaquin C De Baca, and Anastasia Kaup, Judge Wiles emphasized that such releases “are not a merit badge that someone gets in return for making a positive contribution to a restructuring … not a participation trophy, … not a gold star for doing a good job.”  Instead, permissible non-consensual, third-party releases must among other things, be tailored to particular claims and must be tied to specific actions taken by the third party as part of a debtor’s restructuring.

The Wall Street Journal reports that on November 17, the Biden Administration released new guidelines that may make it easier for student loan borrowers to discharge their debt in bankruptcy. The guidelines from the Justice Department and Education Department delineate specific requirements for borrowers to prove they are experiencing economic distress. The  government will calculate whether a debtor’s expenses equal or exceed a debtor’s income, and if they do, the Justice Department will declare the that the borrower is unable to pay their debts. The guidelines are likely to make it easier for some student loan borrowers to discharge their student loans in bankruptcy (whereas, under the prior system such discharges were virtually impossible).

According to reporting from The Guardian, many top privacy and security executives recently left their positions at Twitter following an all-employee address by new owner Elon Musk in which he suggested that “bankruptcy isn’t out of the question.”  The departures prompted warnings from the Federal Trade Commission, which Twitter previously reached a settlement with in May over privacy issues.

Law360 Reports that NGV Global Group Inc., a Dallas-based company that makes natural-gas run truck engines filed with three affiliates for Chapter 11 in Texas. The debtors claimed more than $50 million in liabilities and $10 million to $50 million in assets.

Bed Bath & Beyond announced a series of measures to address declining sale performance, as announced by press release and reported by Yahoo! Finance. The company has received commitments for $500 million in additional financing. It also plans to sell up to 12 million additional shares of common stock, close 150 underperforming stores and lay off 20% of its corporate and supply chain staff. The company’s stock, which had surged from $4 a share to north of $28 from “meme trading,” sank following the news, trading at $8-9 a share.

Defaults on leveraged loans hit $6 billion in August, the highest monthly total in almost two years, as reported by the Wall Street Journal. Borrowers in the $1.7 trillion market may be facing the “double whammy” of weaker earning and rising interest rates. One-month LIBOR is predicted to reach 4.07% in May 2023, with similar expectations for SOFR. Barclays predicts that loan defaults, which are about 1% now, could rise to 3.25% or more a year from now.

The American Bankruptcy Institute reports that bankruptcy filings across all chapters increased in August 2022, a 10% increase over August 2021 and a month-over-month increase as well. Chapter 11 filings totalled 466 in August 2022 (up from 257 in July 2022) and subchapter V elections within Chapter 11 totalled 140. Although these numbers are still historically low, they indicate that businesses and individuals are increasingly looking to the bankruptcy system for financial relief.

The Wall Street Journal reports that Sears’ Chapter 11 plan, which was approved in October 2019, will finally go effective following the bankruptcy court’s approval of a $180 million settlement reached with former shareholders and executives of Sears. The unsecured creditors committee had alleged that a hedge fund controlled by Edward Lampert and other Sears shareholders illegally transferred assets valued at $2 billion, including Lands’ End Inc. and some of Sears’ best real estate, to the detriment of creditors. The bankruptcy case, which was filed in 2018, should close in 30-60 days.

According to The Wall Street Journal, Teva Pharmaceutical Industries Ltd. has reached a national settlement agreement worth nearly $5 billion, including about $3.7 billion in cash, to resolve thousands of lawsuits over its alleged role in the opioid crisis.  The plaintiffs’ executive committee, which represents local and state governments and Native American tribes, reported that the $3.7 billion includes about $650,000 earmarked in previously settled cases.  The abatement funds will be spread over 13 years, with Teva also carrying the option of donating $1.2 billion worth of a generic version of its overdose drug—Narcan—for the next decade or an agreed upon equivalent in cash.  Once documentation is finalized, a sufficient number of plaintiffs will need to sign on to the deal, which would end the vast majority of opioid litigation.  The proposed settlement is the latest move by a company seeking to resolve the costly litigation.  [WSJ; July 26, 2022]

Bankrupt cryptocurrency platform Voyager Digital has challenged a proposed Chapter 11 plan from and Alameda Ventures Ltd., as reported by Law360, arguing that the AlamedaFTX group’s plan provides a “lowball bid” that seeks to liquidate Voyager’s digital assets.  Specifically, Voyager asserts that the AlamedaFTX proposal would not provide as much value as the stand-alone Chapter 11 plan the debtor filed alongside its bankruptcy petition earlier this month and might serve to chill bidding, as it was made via press release and not through the bidding procedures proposed by Voyager.  It’s a lowball bid dressed up as a white knight rescue,” Voyager said in its response.  Voyager, which purportedly once held more than $5.9 billion in cryptocurrency assets, filed for Chapter 11 protection on July 5th in the face of plummeting crypto values.  Bids made pursuant to Voyager’s bid procedures are due by August 26th, while AlamedaFTX said it would be able to sign a sale agreement by July 30th, with a target close of August 17th.  [Law360; July 25, 2022]

Discount home-goods retailer Tuesday Morning is exploring restructuring options, including its potential second bankruptcy filing in less than two years, according to Bloomberg.  While the company has reportedly agreed to new debt financing deals to provide for much-needed breathing room, restructuring talks are in the early stages and could materially change in the coming months as the company fights against sustained inflationary pressures, inventory surplus, and supply-chain disruptions.  [Bloomberg; July 20, 2022]