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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Delaware District Court Could Guide Supreme Court Purdue Pharma Decision

By Michael L. Cook
May 01, 2024

A bankruptcy court properly held that derivative claims based on "piercing the corporate veil theory of liability [were] released under" a confirmed reorganization plan, but that direct "claims for negligent undertaking" were not released and "could be asserted" in state court against the debtors' equity sponsors (Sponsors). In re Port Neches Fuels, LLC, 2024 WL 1298590, *1 (D. Del. Mar. 27, 2024). The confirmed plan, affirmed by the district court, had released "any and all claims … (including any derivative claims, asserted or assertable on behalf of the Debtors [and] the Reorganized Debtors … against certain released parties," including the Sponsors. When plaintiffs sued the Sponsors in Texas state court, the defendants asked the bankruptcy court to "enforce the plan, arguing that the plaintiffs' claims were based on piercing the corporate veil theory of liability, that any such claims belonged to the Debtors' estates, and accordingly those claims were released under the plan." Id.

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The U.S. Supreme Court will "soon, likely before its summer break … render an opinion in … [Harrington v. Purdue Pharma L.P., (Case No. 23-124) ((argued Dec. 4, 2023)]." Brian Shaw and David Doyle, "How Purdue Pharma High Court Case May Change Bankruptcy," LAW 360, April 3, 2024. According to Messrs. Shaw and Doyle, the Court's decision "may be the death of most third-party releases in Chapter 11 bankruptcy cases," like the one in Port Neches. Id. As shown below, this fear may be overwrought.

The Port Neches decision, supported by a superb bankruptcy court opinion, In re TPC Group Inc., 2023 WL 2 1 6 8045 (Bankr. D. Del. Feb. 22 2023) (Goldblatt, B.J.), provides a sensible, balanced response and a way to resolve the Purdue issue. The issues here are not about the insiders' conduct and not about third party releases generally. The issue here is about who owns direct, particularized claims. In fact, the district court in the Purdue case, 635 B.R. 26 (S.D.N.Y. 1021), provided an analysis similar to that in Port Neches. The Purdue decision, ostensibly based on statutory construction, could have enabled the reorganization plan to be confirmed without releases of direct claims but with the insiders' increasing their contribution from $4.3 billion to roughly $6 billion, as they actually did after the district court decision was rendered. See, In re Purdue Pharma L.P., 69 F.4th 45, 62 (2d Cir. 2023). Most significant, in the Purdue case no party ultimately challenged the third party releases for the debtor's derivative claims. As the Purdue district court stressed, the bankruptcy court had "undoubted jurisdiction" over derivative claims, 635 B.R. at 37, but lacked "the statutory authority to impose" the release of "particularized or direct claims." Id. at 36. In Port Neches, the analysis was even simpler: the debtors' estate did not own any direct third party claims to the extent they existed. The non-debtor plaintiffs owned those claims.

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