On June 27, 2024, the U.S. Supreme Court issued its much-anticipated decision in Harrington v. Purdue Pharma L.P. The issue before the Court was whether the Bankruptcy Code permits nondebtors to obtain a release of third-party claims through a debtor’s Chapter 11 plan of reorganization. An issue that had divided the Circuit Courts of Appeals. The nondebtors set to receive releases under Purdue’s plan were members of the Sackler family — the owners of Purdue Pharma — and their other entities. 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 nondebtor without the consent of affected claimants.”

Purdue Pharma filed its voluntary bankruptcy petition in 2019 based largely on the thousands of cases being filed against it for its role in the opioid crisis. Purdue’s proposed plan, among other things, settled claims Purdue had against the Sacklers (not at issue in the appeal) and granted the Sacklers a release of all current and future third-party opioid-related claims. Further, the plan enjoined all opioid-related claims against the Sacklers and their other entities going forward. In exchange, the Sacklers would pay $4.325 billion to Purdue’s bankruptcy estate to fund future operations, settlements, and plan distributions, including distributions to victims.¹

The Bankruptcy Court approved Purdue’s plan. The District Court reversed that decision, finding that the Bankruptcy Code did not permit a nonconsensual nondebtor release. The Second Circuit reversed and reinstated the Bankruptcy Court’s confirmation of the plan, as modified on appeal. 

The Supreme Court’s opinion, written by Justice Gorsuch, focused extensively on the Sacklers’ receipt of a discharge through Purdue’s bankruptcy without the Sacklers having to make most of their assets available to creditors. On multiple occasions, the Court noted that the Sacklers received over $11 billion from Purdue from 2008 to 2016, but they were only pledging to pay, at most, $6 billion in installments spread out over many years in exchange for the release and injunction. In overruling the Second Circuit’s decision, the Court focused on three things. 

First, the Court determined that the catchall provision in §1123(b)(6), which permits a plan to contain “any other appropriate provision not inconsistent with the applicable provisions” of the Bankruptcy Code, was not as broad as the plan proponents argued. It must be read in concert with the other subsections of §1123(b), which, the Court determined, were all related to the debtor’s rights and responsibilities and its relation to its creditors. The Court felt that using this provision to grant a nondebtor discharge was “radically different” than the other subsections. 

Next, the Court looked to other constraints on discharge in the Bankruptcy Code. It determined that all such provisions were related to debtors and, even then, did not offer debtors unfettered freedom from liability. The Court also pointed to the one statutory example of Congress permitting nondebtor discharges—asbestos cases—as proof that the Bankruptcy Code was not generally meant to provide for nonconsensual nondebtor discharges like the one in favor of the Sacklers.

Finally, the Court looked to prior iterations of bankruptcy law to determine that the release sought by the Sacklers was not permitted by the Bankruptcy Code. The Court said that all prior bankruptcy laws followed the same precept. Discharge was reserved for debtors who had surrendered their property for the repayment of creditors, not for nondebtors seeking relief from claims brought by third parties. Accordingly, the Court held, the Bankruptcy Code did not permit confirmation of the plan with the release and injunction in favor of the Sacklers.

As important as the Court’s holding is, the Court’s discussion of issues that were not decided were equally significant. The Court explicitly said that it was not deciding (1) what constituted a consensual release, (2) the effect of full satisfaction of claims against third-party nondebtors, or (3) whether confirmed plans with nonconsensual third-party releases could be unwound. Each of these topics will no doubt be explored by multiple courts in the months and years to come. Snell & Wilmer will continue to monitor developments as a result of this decision and will continue to discuss these issues in upcoming articles, including an article on the Purdue Pharma dissent. 

Footnotes

1. This amount was increased by $1.175 billion to $1.675 billion during the appeal to the Second Circuit in a proposal that saw eight objecting States and the District of Columbia withdraw their objections to the plan with this amendment. [Back]