It has been approximately two months since the highly anticipated Supreme Court decision in Harrington v. Purdue Pharma L.P., and it is already making a significant impact in bankruptcies around the country. 

In September 2019, Purdue Pharma L.P. and 23 affiliated debtors filed for chapter 11 bankruptcy to provide a breathing spell from the mounting pressure arising from opioid litigation.  The Purdue Pharma debtors were subjected to a growing number of class action lawsuits stemming from Purdue Pharma’s marketing and sale of its drug, OxyContin. 

As part of the chapter 11 case, the Purdue Pharma debtors, its owners, and certain other parties entered into a settlement agreement under which the owners would contribute $4.325 billion (increased to $6 billion) to fund the Purdue Pharma debtors’ plan of reorganization to repay creditors, including the opioid claimants.  In exchange for settlement funds, the plan provided that the Purdue Pharma owners would receive releases from all claims from both the Purdue Pharma debtors and any third-party that could bring a claim against the Purdue Pharma owners.  The release by third-parties would be enjoin all claims regardless of whether the third-party claimant voted to approve the plan or consented to the releases.  While more than 95% of voting victims and creditors voted in support of the plan, the U.S. Trustee, certain governmental entities, and thousands of opioid plaintiffs opposed the nonconsensual releases afforded to the Purdue Pharma owners.  The U.S. Trustee and these other parties alleged that the release would shield the Purdue Pharma owners from opioid-related liability claims, even though the owners did not personally declare bankruptcy.

The United States Bankruptcy Court for the Southern District of New York overruled the plan objections and confirmed the plan with the third-party releases for the benefit of the Purdue Pharma owners.  The United States District Court for the Southern District of New York reversed the bankruptcy court’s decision; however the Second Circuit reinstated the bankruptcy court’s confirmation order reasoning that Second Circuit precedent allows for nonconsensual third-party releases in certain circumstances.  The U.S. Trustee appealed to the Supreme Court.

In a 5-4 decision, the Supreme Court reversed the Second Circuit, noting that the only provision of section 1123(b) of the Bankruptcy Code that could authorize the inclusion of a nonconsensual third-party release in a plan is subsection 6, i.e., the “catchall” provision, which provides: “include any other appropriate provision not inconsistent with the applicable provisions of this title.”  The Supreme Court found that the catchall provision, which affords bankruptcy courts broad discretion to approve any other appropriate provision not inconsistent with the Bankruptcy Code does not authorize a third-party release in a chapter 11 plan that seeks to discharge claims against a non-debtor without the consent of affected claimants.  Specifically, the Supreme Court, relying on section 524(e) of the Bankruptcy Code, noted that “a discharge operates only for the benefit of the debtor against its creditors and ‘does not affect the liability of any other entity.’”  Accordingly, The Supreme Court ruled that the Bankruptcy Code prohibits third-party releases without the consent of the affected claimants.

Despite the major implications in the Purdue Pharma case, the Supreme Court’s decision was fairly limited as its ruling solely addressed whether nonconsensual third-party releases could be included in a chapter 11 plan.  The Supreme Court made it clear that its opinion does not call into question the propriety of consensual third-party releases or whether consensual third-party releases can be included in the chapter 11 plan.  Nor did the Supreme Court address what constitutes a consensual third-party release; whether a different rule applies when a chapter 11 plan provides for the full satisfaction of claims against the third-party non-debtors; and what happens to confirmed plans that contain nonconsensual third-party releases.[1]

Prior to the Supreme Court’s decision, there was a split amongst the Federal Circuits, whereby six circuits, including the Second and Third Circuits, allowed third-party releases upon a showing of special circumstances, three circuits, including the Fifth, Ninth, and Tenth Circuits, did not allow third-party releases, and the First and Eight Circuits were undecided on the issue.

Since the Supreme Court’s Purdue Pharma decision, the U.S. Trustee continues to oppose the “opt-out” provision for non-debtor releases in chapter 11 plans, maintaining that such “opt-out” releases are nonconsensual.  Instead, “opt-in” mechanisms should be required to show a claimant’s consent to granting a release to a non-debtor.  Recent cases post-Purdue Pharma have addressed nonconsensual third-party releases and the opt-out mechanism:

In re 2u Inc., Case No. 24-11279 (MEW) (Bankr. S.D.N.Y.) – The Court directed the debtors to replace the opt-out procedures with an opt-in release mechanism.  The Court also instructed the debtors to remove the “deemed to reject” classes from parties granting a non-debtor release.

In re Acorda Therapeutics, Case No. 24-22284 (DSJ) (Bankr. S.D.N.Y.) – The Court confirmed the plan and overruled the U.S. Trustee’s objections relating to the opt-out release finding that “recipients of ballots were told that voting yes meant consenting to releases” and “if they voted yes it is fair to them to [bind them] to the release.”

In re Bird Global Inc., Case No. 23-20514 (CLC) (Bankr. S.D.Fla.) – The Court overruled arguments by the tort claimants that the opt-out release was a nonconsensual discharge in violation of the Supreme Court’s decision in Purdue Pharma.  In distinguishing Purdue Pharma, the Court reasoned that the debtors’ plan provides for “full satisfaction” of all tort claims, and the channeling injunction and bar order are part of a settlement with the insurers and a section 363 sale of the insurance policies.

In re BowFlex Inc., Case No. 24-12364 (ABA) (Bankr. D.N.J.) – The Court overruled the U.S. Trustee’s third-party release objection reasoning that the Supreme Court did not opine on what constitutes consent, and found that “merely voting” in favor of a plan was insufficient to establish consent.  The Court held that the releasing parties received notice consistent with due process and the opt-out process and consequences were “clear and conspicuous” in the notice, and therefore, the opt-out mechanism is appropriate to demonstrate consent to non-debtor plan releases. 

In re CalAmp Corp., Case No. 24-11136 (LSS) (Bankr. D.Del.) – After the U.S. Trustee and the SEC objected to the nonconsensual release of the shareholders’ claims based on Purdue Pharma, the debtors removed the shareholder releases from the plan, which was later confirmed.

In re Ebix Inc., Case No. 23-80004 (SWE) (Bankr. N.D.Tex.) – The Court confirmed the plan subject to the removal of the nonconsensual third-party release provision.

In re Invitae Corp., Case No. 24-11362 (MBK) (Bankr. D.N.J.) – The Court confirmed the debtors’ plan, overruling the U.S. Trustee’s objection to the opt-out release for non-debtors.

In re Red Lobster Management LLC, Case No. 6:24-bk-02486-GER (Bankr. M.D.Fla.) – The Court approved the disclosure statement subject to the removal of the non-debtor opt-out release and implementation of an opt-in release.  The amended plan now provides that the third-party release would be granted by creditors that vote to accept the plan, as opposed to those that did not opt out.

In re Rite Aid Corp., Case No. 23-18993 (MBK) (Bankr. D.N.J.) – the Court confirmed the plan after the opt-out release of non-debtors was changed to an opt-in release.

In re Robertshaw, Case No. 23-90052 (CML) (Bankr. S.D.Tex.) – The Court confirmed the plan with an opt-out release holding that the Purdue Pharma decision did not alter pre-Purdue precedent that allowed nonconsensual third-party releases in a plan.

Aside from the opt-in mechanism or a consensual third-party release, there are other potential strategies to address the Purdue Pharma decision:

• Inclusion of a “gatekeeping” injunction in the chapter 11 plan, whereby claims must seek the bankruptcy court’s approval before pursuing claims against third parties.  The Bankruptcy Code does not explicitly provide statutory authority for the “gatekeeping” injunction, thus making the injunctions susceptible to challenge on the same basis as Purdue Pharma.  This may also be an impractical solution for chapter 11 cases involving mass torts.

• Inclusion of exculpation provisions in a chapter 11 plan to shield parties in the bankruptcy from claims arising from conduct in the bankruptcy case.[2]

• Multinational entities may consider filing their main bankruptcy proceeding abroad in a jurisdiction (e.g., the United Kingdom) that still allows for nonconsensual third-party releases, and seek recognition of the foreign bankruptcy in the United States via Chapter 15 of the Bankruptcy Code.

Additionally, the Purdue Pharma decision may impact a company’s decision to even file for bankruptcy protection, and instead, the company may opt to face the mass tort litigation in federal/state court.  For example, owners of a distressed company may be reluctant to subject their company to chapter 11 if they know they will not be able to obtain a release of their personal liability.

Lasty, it is yet to be seen whether Congress will seek to amend the Bankruptcy Code to expressly permit nonconsensual third-party releases (as permitted in asbestos cases under Section 524(g)) or permanently bar them.  In 2021, proposed legislation, referred to as the SACKLER Act, was introduced in Congress and sought to restrict individuals who have not personally declared bankruptcy from being exempt in legal cases initiated by the government.  While this bill would have closed the proverbial loophole for non-debtor releases, the bill did not receive a vote.  The SACKLER Act was re-introduced in the Senate in 2023, and it is yet to be seen whether Congress will enact this bill.

The Purdue Pharma decision will have a lasting impact on bankruptcies filed around the country, potentially the world; however, there are creative strategies that can be employed in a manner that does not run afoul of the Supreme Court’s decision.

[1] The reorganized Fairmont San Jose debtors in In re SC SJ Holdings LLC, Case No. 21-10549 (JTD) (Bankr. D. Del.) filed a petition for a writ of certiorari in the Supreme Court to resolve (1) whether nonconsensual third-party releases that are not objected to and become part of a confirmed and substantially consummated plan are “nevertheless invalid and unenforceable” following the Purdue Pharma decision; and (2) whether courts can review these releases after a plan’s confirmation and substantial consummation.

[2] The Supreme Court denied petitions for certiorari that were based on the exculpation clause in the Highland Capital Management plan (In re Highland Capital Management, L.P., Case No. 19-34054-sgj11 (Bankr. N.D.Tex.)).

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