The scope of non-debtor third party releases between the U.S. and Canada: A distinction with a difference

February 3, 2022 | Gavin H. Finlayson, Asim Iqbal, Monica Faheim

Introduction

The chapter 11 proceedings of Purdue Pharma (“Purdue”), the pharmaceutical giant responsible for the manufacturing of the powerful narcotic painkiller OxyContin, have been closely followed by insolvency practitioners around the globe, as well as policy makers and members of the general public. OxyContin, Purdue’s flagship product, is one of the drugs responsible for the devastating opioid crisis in the United States. It has taken an extraordinary human toll over the last several years, shattering families and communities. According to the CDC, in the U.S. alone nearly 841,000 people have died since 1999 from a drug overdose. Over 70% of drug overdose deaths in 2019 involved an opioid.[1]

Purdue (and 23 affiliated debtors) filed voluntary petitions for chapter 11 relief in the United States in September of 2019 in order to obtain protection from thousands of lawsuits brought against Purdue (both by claimants in the U.S. and in Canada) based on the company’s alleged misbranding and reckless marketing of OxyContin.

Purdue’s chapter 11 filing is not the first time a corporation has utilized bankruptcy proceedings to ”restructure” present and future liability for mass tort claims. Purdue’s stated goal in filing under chapter 11 was to resolve both existing and future claims against the company and obtain finality with respect to the thousands of lawsuits (including cross-border claims) in one forum. The chapter 11 proceedings became the forum within which all classes of Purdue’s creditors (including individuals, estates of victims of the opioid crisis, government authorities, and many others across borders) negotiated with Purdue to craft a reorganization plan (including a settlement) that would resolve their claims. Unsurprisingly, the result of these negotiations were unsatisfactory to many creditors.

While many aspects of the Purdue chapter 11 filing are noteworthy and contentious, the case is a complex one that has been discussed at length by practitioners, commentators, academics and many others on a global scale. One aspect of the case (and the subject of this article) is of particular importance in the cross-border insolvency space, namely, the rejection by the U.S. Federal Court of the non-debtor third-party releases, which were a key element of the negotiated settlement. These third-party releases had the effect of binding not only tort claimants in the U.S., but also tort claimants beyond borders, including Canadian claims.

Purdue Pharma: Plan of reorganization and non-debtor third party releases

In March of 2021, Purdue filed the first version of its chapter 11 plan of reorganization (the “Plan”). The Plan, after various amendments, incorporated a settlement with the founding family of the company (the “Sackler Family”), pursuant to which the Sackler Family would contribute over $4 billion to the Purdue estate in exchange for the release of third-party claims against them. The Plan would, if confirmed, provide billions of dollars to resolve private and public claims and to fund various other initiatives, including educational programs for opioid relief.

The Plan was approved by a supermajority of votes by each class of creditors. Still, creditors (including eight states and the District of Colombia, certain Canadian municipalities and Canadian indigenous tribes, and various personal injury claimants) voted against the Plan.

On September 1, 2021, Judge Drain of the U.S. Bankruptcy Court, Southern District of New York confirmed the Plan, holding that the settlement with the Sackler Family was necessary to the Plan, and the settlement was fair and reasonable. Judge Drain also held that it was necessary and appropriate to approve the non-consensual releases, even though the Sackler Family (and its affiliates) were not debtors.

Judge Drain’s decision was appealed, with the primary complaint being that the Plan provides the Sackler Family (and its affiliates) with releases that are impermissibly broad, and that the Bankruptcy Court lacked statutory authority to grant the third party release. On December 16, 2021, U.S. District Judge Colleen McMahon of the Southern District of New York overturned the confirmation of Purdue’s Plan, holding that:

…the Bankruptcy Code does not authorize such non-consensual non-debtor releases: not in its express text (which is conceded); not in its silence (which is disputed); and not in any section or sections of the Bankruptcy Code that, read singly or together, purport to confer generalized or “residual” powers on a court sitting in bankruptcy.” [2]

While Purdue has announced its intention to appeal the District Court’s ruling, Judge McMahon’s opinion has made headlines in the United States, particularly due to its direct remarks on U.S. bankruptcy law relating to third party releases.

Non-debtor third party releases: the Canadian position

The Companies’ Creditors Arrangement Act (the “CCAA”) is the Canadian insolvency statute most often used by debtors for complex and cross-border insolvencies. It is broadly analogous to Chapter 11 in many respects, but has important and nuanced differences, including that it is less statutorily constrained and affords supervising judges broad discretion to do what is practical and necessary to promote restructurings that accord with its policy.

By contrast to the result in Purdue, it is well-established law in Canada that insolvency courts have the jurisdiction to approve a plan of compromise or arrangement under the CCAA that includes releases in favour of non-debtor third-parties, including releases that are binding to parties beyond the jurisdiction of the granting court.

In fact such releases are fairly common in Canada, particularly in favour of persons retained as advisors for the restructuring and who make contributions to the successful reorganization of debtor companies. The CCAA provides very broad discretion to a supervising court, including in deciding whether to grant a third-party release. In Target Canada Co[3] the Toronto Commercial List[4] Court set out a series of factors to be considered when seeking a third-party release as part of a plan of compromise and arrangement under the CCAA:

  • whether the parties to be released are necessary and essential to the restructuring;
  • whether the claims to be released are rationally connected to the purpose of the plan;
  • whether the plan can succeed without the releases;
  • whether the parties being released were contributing to the plan;
  • whether the releases benefit the debtors as well as the creditors generally;
  • whether the creditors voting on the plan have knowledge of the nature and the effect of the releases; and
  • whether the releases are fair, reasonable and not overly-broad.

Courts in Canada have consistently recognized that, in appropriate circumstances, third party releases are an important aspect of the restructuring process. Broad releases have been granted in CCAA restructuring plans in favour of a debtor’s former auditors and advisors, former directors and officers, parent companies, and a variety of other parties who may face liability as a result of their past involvement with the debtor. Canadian restructuring plans including such non-debtor third-party releases have then been recognized with cross-border effects by the U.S. court pursuant to Chapter 15.[5]

For instance, in the Canadian CCAA proceedings of Sino-Forest Corporation,[6] the supervising court approved a settlement framework that involved the resolution of class action claims by security holders of the debtor company against the company’s auditor. This settlement gave the auditor a full third-party release and barred opt-outs, which was argued by some class members to be a violation of their opt-out rights under Ontario class proceedings legislation. Importantly, in that case, the funds paid by the auditor (a tangible contribution of $117 million) was the only funding available for distribution to the relevant stakeholders, and without the third-party release, there would be no contribution made to satisfy the claims.[7] On that basis, it was held that the settlement (including the release) was justified because it was  necessary for a “significant aspect” of the plan. The United States Bankruptcy Court in the Southern District of New York recognized the settlement in Sino-Forest under Chapter 15 of the U.S. Bankruptcy Code, including the non-debtor third-party releases, applying the principle of comity.[8]

The availability of third party releases in Canada is not without controversy and is a highly debated topic which raises many public policy arguments. It should be noted that there are limits to a court’s discretion in granting such releases. For instance, claims arising from conduct such as fraud or willful misconduct are generally excluded from these releases.[9] Similarly, claims for misrepresentations to creditors or wrongful or oppressive conduct are also limited where releases are sought in favour of the directors of the debtor company.

The policy rationale behind providing third party releases is that the parties receiving the benefit are often contributing something of value to the restructuring and, in return for that contribution, expect to receive finality with respect to litigation related to the debtor. In addition, it is argued that there is value to the debtor company from obtaining finality with respect to claims involving stakeholders so that the debtor company will not become re-engaged in any such claims that may be brought against those third parties in the future. On the other side of the debate it is often contended that providing non-debtor third party releases for a “contribution” to the restructuring offends public policy by effectively turning restructuring statutes into a regime for “laundering” tort claims, which incentivizes parties to continue bad behaviour and increases moral hazard.

Recognition of foreign proceedings under the CCAA

The recognition provisions in Part IV of the CCAA promote deference to orders issued by foreign courts, provided that those orders are consistent with the purposes of the CCAA and that they are not contrary to public policy. The animating principles of Part IV and the recognition of foreign main proceeds include comity, cooperation between courts, and the fair and efficient administration of cross-border insolvencies.[10]

The CCAA aims to, among other things, facilitate the recognition of foreign insolvency proceedings and accord discretionary powers to the courts to grant any appropriate relief subject to such terms and conditions the court may consider necessary. These purposes are in line with the CCAA’s adoption of the UNCITRAL Model Law. It remains to be seen how the seemingly divergent laws on non-debtor third-party releases in Canada and the U.S. will play out in recognition proceedings going forward, particularly after the seemingly unequivocal decision by Justice McMahon in Purdue.

Conclusion

The Purdue decision brings into focus an important public policy debate about the appropriateness and scope of third party releases that limit the liability of alleged tortfeasors facing class action and mass tort claims. Is it fair and reasonable for courts to provide releases to non-debtor third parties simply because they contribute value to a restructuring and the releases provide finality to the debtor? Conversely, does the availability of such releases allow insolvency restructuring  statutes to be used  to “launder” tort liability for parties who are not rationally part of the restructuring? The Purdue case will continue to be keenly watched and the scope and appropriateness non-debtor third party releases will continue to be debated both in Canada and the U.S. as part of both domestic law and cross-border insolvencies. As noted by Judge McMahon in her decision in Purdue, “this opinion will not be the last word on the subject, nor should it be”.[11]

__________

[1] https://www.cdc.gov/opioids/data/index.html

[2] https://www.restructuring-globalview.com/wp-content/uploads/sites/21/2021/12/Purdue-Appeal-Decision-and-Order.pdf

[3] Target Canada Co, 2016 ONSC 3651, at para 36.

[4] The Commercial List (Toronto) is a specialized Court of the Ontario Superior Court of Justice which is assigned to hear cases involving insolvency, banking and securities, and other commercial matters.

[5] See, for instance, ATB Financial v Metcalfe & Mansfield Alternative Investments II Corp, 2008 ONCA 587.

[6] Labourers’ Pension Fund of Central and Eastern Canada (Trustees of) v Sino-Forest Corp, 2013 ONSC 1078, leave to appeal to CA refused, 2013 ONCA 456, leave to appeal to SCC refused, [2013] SCCA No 395.

[7] This reasoning represents a common theme in the Canadian jurisprudence that where the third party seeking the release is the only source of funding in a settlement, the Court is likely to find that the release is essential to the plan. For example, see Re Muscletech Research and Development Inc,  [2007] OJ No 695.

[8] Re Sino-Forest Corp, 501 BR 655 (Bankr SDNY 2013).

[9] See for example, Re Canwest Global Communications Corp, 2010 ONSC 4209.

[10] CCAA, s. 44.

[11] https://www.restructuring-globalview.com/wp-content/uploads/sites/21/2021/12/Purdue-Appeal-Decision-and-Order.pdf

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

Miller Thomson LLP uses your contact information to send you information electronically on legal topics, seminars, and firm events that may be of interest to you. If you have any questions about our information practices or obligations under Canada's anti-spam laws, please contact us at privacy@millerthomson.com.

© 2022 Miller Thomson LLP. This publication may be reproduced and distributed in its entirety provided no alterations are made to the form or content. Any other form of reproduction or distribution requires the prior written consent of Miller Thomson LLP which may be requested by contacting newsletters@millerthomson.com.