A sharply divided U.S. Supreme Court has barred the issuance of non-consensual third-party releases in Chapter 11 Plans. In a 5-4 decision, the court held that “the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a non-debtor without the consent of affected claimants.”
Purdue Pharma L.P. was a manufacturer of the opioid OxyContin. Purdue was a “family company” owned and controlled by the Sacklers. Sales of OxyContin soared as it became the most prescribed brand name narcotic medication. However, Purdue ultimately became a defendant in thousands of lawsuits claiming injuries resulting from deceptive marking practices. During this time, the Sacklers received distributions from the company of approximately $11 billion.
Faced with mounting liabilities related to litigation claims, Purdue filed for relief under Chapter 11 of the United States Bankruptcy Code. It proposed a Chapter 11 plan that included payment by the Sacklers in the amount of $4.325 billion in return for a release of all claims of the debtors and from third parties. Specifically, the Sacklers sought to “end the growing number of lawsuits brought against them by opioid victims. The proposed plan would have provided recoveries for the individuals harmed by the company’s products ranging from $3,500 to $48,000, depending upon the severity of the injuries.
The United States Trustee opposed the plan as did certain governmental entities. The bankruptcy court overruled these objections and confirmed the plan. On appeal, the district court vacated confirmation. It held that the bankruptcy code did not allow the release of third-party claims without consent. Thereafter, the plan proponents (i) appealed the decision to the Second Circuit and (ii) increased the proposed Sackler payment in exchange for the withdrawal of certain objections. While the additional payment was sufficient to cause certain states to withdraw their objection, the U.S. Trustee, Canadian creditors, and individuals continued their opposition.
A divided panel of the Second Circuit reversed the district court and approved the plan as modified by the additional proposed payment. The U.S. Trustee sought a stay of confirmation, which was granted by the Supreme Court and treated as a petition for writ of certiorari to address the issue of whether the bankruptcy code authorized non-consensual releases of third-party claims.
Writing for the majority, Justice Gorsuch focused on Section 1123(b) of the bankruptcy code, which addresses permissible components of a Chapter 11 plan. Among these provisions, the only one that could allow for third-party releases was Section 1123(b)(6), which authorizes a plan to “include any other appropriate provision not inconsistent with this title.” Gorsuch first rejected the argument that paragraph 6 authorizes any provision not expressly prohibited as long as the judge deems it appropriate. Rather, the court interpreted this catchall paragraph in light of its surrounding context so as to “embrace only objects similar in nature to the specific examples preceding it.”
Finding that all the preceding provisions concern the debtor and its relationship with creditors, the court concluded that the paragraph “cannot be fairly read to endow a bankruptcy court with the radically different power to discharge the debts of a non-debtor without the consent of affected non-debtor claimants.” In doing so, the court noted that the text could have permitted anything not expressly prohibited, but it does not.
It next addressed the purpose of bankruptcy plans. While acknowledging that bankruptcy law serves to address some collective-action problems, it rejected the argument that this would allow a bankruptcy court to resolve all such problems to extinguish claims of third parties without consent. The court then looked at other provisions of the bankruptcy code, including the discharge which apply only to debtors and found no other provision of the code which would allow for the third-party releases.
Finally, the court looked to the history of bankruptcy law and concluded that such history provided no support for third-party releases. The court also declined to address the policy and ramifications of unwinding the plan, including the possibilities that the opioid victims in this case may have no viable path to recovery anytime soon. However, according to the court, Congress is the appropriate forum to address those concerns.
The decision is framed as narrow. It specifically does not address or call into question consensual third-party releases or what would qualify as consent to a third-party release under a plan. It also does not address the impact this decision will have on plans that include such releases that have already been consummated.
The court’s decision resolves an issue that has split circuit, district, and bankruptcy courts for many years. Even in circuits where non-consensual third-party releases have been prohibited, debtors have often attempted to obtain consent through opt-out and similar processes. It is likely that the Supreme Court will be called upon to opine on exactly what constitutes consent in a future case.
