The US Supreme Court has recently issued a pivotal decision that has significant implications across various sectors, including legal, corporate, and public health. The decision settles a significant legal dispute that has been highlighted in some of the largest bankruptcy cases filed over the last several years—nonconsensual third-party releases in plans of reorganization.
In the Purdue Pharma case, the Court grappled with the bankruptcy proceedings of the pharmaceutical giant responsible for the opioid crisis and the permissibility of the nonconsensual releases granted to Purdue’s non-debtor owners, the Sackler family, in Purdue’s confirmed Chapter 11 plan of reorganization. In a 5-4 decision, the Court held that the Bankruptcy Code does not authorize the broad release and injunction provisions of a Chapter 11 plan that seeks to effectively discharge claims against a non-debtor without the consent of affected claimants.
This ruling has far-reaching implications – reshaping the contours of liability, compensation, and the reorganization process as a whole. Below, we explore this decision in more detail.
William K. Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P., et al.,
No. 23-124 (June 27, 2024)
As noted above, the US Supreme Court’s decision in Purdue Pharma settled the dispute among various circuits regarding the permissibility of nonconsensual third-party releases in plans of reorganization. Nonconsensual third-party releases have long been a contentious and debated aspect of bankruptcy law. These releases, often included in plans of reorganization, discharge certain non-debtor third parties from liabilities to creditors without the creditors’ consent. Historically, courts have been divided on the permissibility and scope of such releases, balancing the equitable goals of bankruptcy against the rights of creditors.
The use of nonconsensual third-party releases typically arises in complex bankruptcy cases where multiple parties, including corporate officers, directors, and related entities, seek protection from litigation as part of a debtor’s plan of reorganization. Proponents argue that these releases facilitate the restructuring process by encouraging settlements and contributions from third parties that might otherwise face protracted litigation or shelter assets that could be used to compensate bankruptcy claimants. By resolving potential claims against these non-debtor parties, the debtor can more effectively reorganize and emerge from bankruptcy.
However, opponents of nonconsensual third-party releases contend that they infringe on the rights of creditors and other stakeholders that are deprived of their ability to pursue legitimate claims. Critics argue that such releases can be overbroad, shielding parties from accountability and undermining the principles of fairness and justice that underpin bankruptcy law. The conflicting views on this issue have led to divergent approaches in various judicial circuits, creating a patchwork of legal standards and contributing to the uncertainty that stakeholders face in bankruptcy cases.
This debate has been settled by the US Supreme Court’s decision of William K. Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P., et al. This case arose from Purdue Pharma’s bankruptcy proceeding, which was precipitated by extensive litigation related to the company’s role in the opioid crisis. Purdue Pharma, owned by the Sackler family, proposed a plan of reorganization that released the Sackler family from future opioid-related lawsuits in exchange for the Sacklers pledging $6 billion to Purdue’s bankruptcy estate. The plan was broadly supported, with more than 95% of voting victims and creditors approving of the plan.
On appeal, the Supreme Court undertook a comprehensive examination of the legal framework governing nonconsensual third-party releases, scrutinizing their compatibility with the Bankruptcy Code and the principles of due process. Writing for the 5-4 majority, Justice Neil Gorsuch examined the text of the Bankruptcy Code and, applying the rules of statutory construction, determined that provisions of the Bankruptcy Code used by bankruptcy practitioners to justify nonconsensual third-party releases, like section 1123(b)(6), could not be read to permit the discharge of debts of a non-debtor without the consent of the affected claimants. Justice Gorsuch also found that providing the Sacklers with a discharge defied the Bankruptcy Code’s limitations on discharge for claims involving fraud and willful and malicious injury. The Court noted that bankruptcy benefits, including discharge, are reserved for those who actually file bankruptcy and disclose all assets and “put them on the table,” which the Sacklers had not done. At bottom, the Sacklers could not be permitted to give up less than what the Bankruptcy Code usually requires while receiving more than it normally permits.
Writing for the dissent, Justice Brett Kavanaugh chose to focus on public policy rather than statutory interpretation, arguing that the majority’s ruling was legally flawed and harmful to opioid victims who supported the plan.
Importantly, the majority expressly stated that its holding was a narrow one applicable only to nonconsensual third-party releases, that consensual third-party releases were appropriate, and that it was not addressing whether its ruling justifies unwinding bankruptcy plans with nonconsensual third-party releases that have already been confirmed, become effective and are substantially consummated.
Thus, the Court’s decision in Purdue Pharma—on its face—only affects nonconsensual third-party releases in cases where a plan has not yet been confirmed and substantially consummated, at least for now.
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