Last week, in a 5-to-4 decision in the case of Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P, et al., the U.S. Supreme Court struck down the ability of bankruptcy courts to order non-consensual third-party releases (i.e., claims held by non-debtors against non-debtor third parties) as part of a Chapter 11 plan. While non-consensual third-party releases can no longer be approved as part of a Chapter 11 plan, the Supreme Court confined the ruling to hold “only 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.” The Supreme Court did not rule on bankruptcy courts’ authority to approve consensual third-party releases, or third-party injunctions in plans that provide for full satisfaction of claims. Additionally, the Supreme Court expressly did not define what qualifies as a “consensual” release, leaving open the question of the viability of “opt-out” third-party releases in Chapter 11 plans. This decision will have significant implications for the viability of mass tort bankruptcies, among other, similar types of filings.

The case arose from Purdue Pharma, L.P.’s role in the opioid epidemic, which led to thousands of lawsuits seeking trillions of dollars in claims against the pharmaceutical company made famous for the production of OxyContin. In 2019, Purdue filed for Chapter 11 bankruptcy. During the bankruptcy proceeding, Purdue and the Sackler family (the equity holders of Purdue) agreed to a settlement wherein the Sackler family would pay approximately $6 billion in exchange for a release and injunction to prevent all pending and future claims against the Sackler family (and all affiliated entities) related to the opioid epidemic, including claims held by third parties who did not consent for their claims to be released. The terms of this settlement agreement were incorporated into Purdue’s Chapter 11 plan of reorganization, which was approved by the bankruptcy court.

Historically, bankruptcy courts have relied on the catchall provision found in Section 1123(b)(6) of the Bankruptcy Code, which provides that a Chapter 11 plan could “include any other appropriate provision not inconsistent with the applicable provisions of this title.” The majority reasoned that this section excluded non-consensual third-party releases pursuant to the canon of ejusdem generis, which holds that a catchall provision in a statute should only be afforded a scope that a reasonable reader would attribute to it. Under this maxim, the majority found that Sections 1123(b)(1) – (5) all concern the “debtor,” its rights and responsibilities, and its relations with creditors. Thus, the Section 1123(b)(6) catchall provision could not be read to empower Chapter 11 plans to affect the rights of third parties wholly disconnected from the debtor. The majority found further support for its ruling, as the Bankruptcy Code only provides for the “debtor” to get a discharge, and further prevents claims arising from “fraud” and “willful and malicious injury” from being discharged. Under the Purdue plan, the Sackler family would essentially have received a discharge greater than that provided under the Bankruptcy Code, including protection from claims for “fraud” and “willful and malicious injury,” without having to file bankruptcy and without making their full assets available to creditors.

In a strong dissent, Justice Kavanaugh argued that the releases where within the scope of the Bankruptcy Code, as they “applied only to claims held by the debtor’s victims and creditors. And the releases protected the debtor from indemnification claims.” The dissent further explained that third-party releases and discharges are substantially different, as releases do not offer the same “umbrella protection” of a discharge and are accompanied by a settlement payment to the estate. Last, Justice Kavanaugh stated that “[a]s a result, opioid victims are now deprived of the substantial monetary recovery that they long fought for and finally secured after years of litigation” and implored Congress to amend the Bankruptcy Code to “fix the chaos that will now ensue” from the Court’s ruling.