Mike Spector, Dan Levine

(Reuters) – The decision of a federal judge to end a settlement protecting members of the Sackler families from any future opioid litigation may upend a controversial corner U.S. bankruptcy law. It protects third parties, who haven’t filed Chapter 11.

U.S. district judge Colleen McMahon wrote late Thursday that federal law didn’t authorize so-called “nondebtor” releases, which were granted in September to Sackler families members as part of the court restructuring their company, OxyContin manufacturer Purdue Pharma LP.

McMahon stated that the question of whether such releases can be allowed was the “great unsolved problem” in the case. This had divided federal appeals courts for many decades.

When filing for bankruptcy, individuals and businesses are protected from being sued by creditors.

Over the years, judges have increased the protection of nondebtors by issuing releases whenever they approve a restructuring plan. This applies especially to third-party contributors.

The Sacklers had threatened to pull their $4.5 Billion contribution to Purdue’s restructuring — an agreement that was meant to settle thousands of lawsuits over opioids, and to redirect funds to U.S. communities suffering from the epidemic.

Lindsey Simon said that Chapter 11 will be completely rewritten if this is accepted. Simon is an assistant law professor at Georgia’s University of Georgia law school. “It effectively eliminates the nondebtor release from the table.”

Bob Ferguson from Washington, the Attorney General of Washington, was among those who objected at Purdue’s reorganization. He said that he is ready to present his case to the U.S. Supreme Court.

Purdue announced late Thursday that it was appealing McMahon’s ruling. According to Purdue, nondebtor release has been permitted under most laws since they played an important role in the success of US mass tort bankruptcies.

Sackler reps declined to comment, or failed to respond immediately to requests.

These releases or their potential use have been controversial not just in the Purdue Case but also in bankruptcy proceedings that arose from litigation over sexual abuse of Boy Scouts and ex-USA Gymnastics doctor Larry Nassar.

Supporters of releases by members of the bankruptcy law argue that they enable complex settlements. This encourages reluctant third parties to fund reorganizations that help businesses and resolve large amounts litigation.

Critics say the releases permit directors and executives of wealthy companies and investors to latch on to a bankruptcy case without exposing themselves to Chapter 11 filings.

According to legal experts, Congress created bankruptcy filings only for those with severe debts, and not defendants looking for a way around the trial courts or juries.

In October, Johnson & Johnson (NYSE:) Inc created a company to shoulder liabilities from 38,000 lawsuits alleging talc in its iconic Baby Powder contained asbestos and caused cancer. After the bankruptcy filings, the subsidiary was declared bankrupt.

In what is often a precursor to third parties obtaining nondebtor releases, a judge granted an injunction halting litigation not only against the company under bankruptcy protection but also J&J, which did not file for Chapter 11.

J&J maintains its consumer talc products are safe and confirmed through thousands of tests to be asbestos-free.

Over the years, Federal Appeal Courts have made conflicting rulings on whether these releases can be granted. Particular attention has been paid to whether creditors are not able to consent.

McMahon lamented the 2005 U.S. 2nd Amendment in her decision to overturn Purdue’s bankruptcy plan. Circuit Court of Appeals opinion urging that nondebtor release be limited in rare cases as they can easily be abused.

McMahon stated, noting that the appeals court had questioned whether bankruptcy law permits the release. McMahon stated, “Either the statutory authority exists” or it doesn’t. In cases of asbestos exposure, the Bankruptcy Code does not allow nondebtor release.

Congress granted nondebtor relief to companies with massive asbestos liabilities in 1994. The law required that insurers contribute to a trust for the payment of claims by people who have died from mesothelioma or other asbestos-related diseases.

The trust granted these insurers nondebtor waivers to keep asbestos victims’ rights from being violated.

McMahon stated in her decision that Congress had never approved the release mechanism for any other circumstances.

According to Purdue, more than 95% (plus 120,000) of its voting creditors approved Purdue’s reorganization. This includes 43 US and Territories.

McMahon indicated that Purdue’s plans were opposed by eight states as well as more than 2,600 personal-injury claimants. McMahon said that the U.S. Justice Department’s bankruptcy watchdog as well as Manhattan’s U.S attorney also opposed Purdue’s plan.

Democratic legislators have proposed legislation to ban the release of nondebtors and limit third party lawsuits against debtors while bankruptcy proceedings are pending.

“The Sacklers cannot be allowed to avoid accountability by abusing bankruptcy system, and i applaud the District Court that recognized what I have long believed — nonconsensual Third-Party Releases are not just immoral, unjust, or illegal,” House Oversight Chairwoman Caroyln Maloney said late Thursday in a statement.

Merrick Garland of the United States Attorney General applauded McMahon’s late Thursday decision to repeal Purdue’s plans.