Supreme Court Rejects Nonconsensual Releases of Third-Parties in Bankruptcy Plans
In a 5–4 decision, the Supreme Court held in Harrington v. Purdue Pharma L.P. that the bankruptcy code does not authorize releases and injunctions that discharge claims against nondebtors in a Chapter 11 case without the consent of the affected claimants.
07.01.24
Prior to this decision, courts in some circuits, including the Second and Third Circuits, had permitted third parties such as owners and affiliates of companies in bankruptcy, to obtain releases of potential and future claims of creditors without the consent of those creditors.
Purdue had filed for bankruptcy in 2019, after the Sackler family, who owned and controlled Purdue, “milked” $11 billion out of Purdue following a 2007 felony plea by a Purdue affiliate for misbranding OxyContin as less addictive and less subject to abuse than other medications. In the years following the felony plea, Purdue, as well as the Sacklers, faced an onslaught of lawsuits for damages from individuals, families, tribes and governments in the U.S. and Canada. From 2008 through 2016, the Sacklers drained 75% of Purdue’s assets, leaving it in a weakened financial state.
The Sacklers saw a bankruptcy filing by Purdue and its affiliates as a way to minimize their exposure. To fund a plan by Purdue, the Sacklers offered to return, in payments spread over up to 10 years, less than half of the $11 billion they siphoned from Purdue after the 2007 felony plea for misbranding OxyContin. In exchange, Purdue’s plan granted the Sacklers an injunction against the pending lawsuits without the consent of the other parties to the lawsuits, an injunction against future lawsuits related to opioids and a release of fraudulent transfer claims for the funds siphoned from Purdue. The releases even included claims for willful and malicious injury and fraud against the Sacklers, claims that are generally not dischargeable under the bankruptcy code. In the Supreme Court’s words, without contributing substantially all their assets, “the Sacklers [sought] to pay less than the [bankruptcy] code requires and receive more than it normally permits.”[1]
The bankruptcy court approved Purdue’s plan. The plan provided that individuals harmed by Purdue products would receive a base payment of $3,500 or, with payments spread over as many as ten years, amounts up to a maximum of $48,000 in the most dire cases. Purdue was to reorganize as a public benefit company dedicated to educating the public on opioids. On appeal, the district court held that the bankruptcy code did not authorize the release of claims against the Sacklers without the consent of the opioid victims. Purdue and Sackler family members appealed to the Second Circuit Court of Appeals. While the appeal was pending, the Sacklers increased their contribution by up to $1.675 billion in exchange for eight states and the District of Columbia withdrawing their objections to Purdue’s plan. The Second Circuit reversed the district court, thereby reinstating the bankruptcy court’s confirmation order.
The Supreme Court stayed Purdue’s plan confirmation order on motion by the United States Trustee and agreed to hear the case to resolve a circuit split on whether bankruptcy courts had the authority to confirm a plan which released and enjoined claims against third-parties without the consent of the affected claimants. At issue was 11 U.S.C. § 1123(b)(6), which allows a bankruptcy court to approve plans containing “any other appropriate provision not inconsistent” with the bankruptcy code. Relying on canons of statutory interpretation, the Court held that the statute did not authorize such releases, reasoning that because the other subparagraphs of 1123(b) “authorizes a bankruptcy court to adjust claims without consent only to the extent such claims concern the debtor,” that provision could not be used to approve nonconsensual releases concerning nondebtor third-parties.[2]
The Court emphasized that its ruling was not calling into question bankruptcy courts’ authority to confirm plans containing consensual third-party releases and that its decision did not address what qualifies as a consensual third-party release. The Court also clarified that its decision did not address whether its reading of the bankruptcy code would justify unwinding reorganization plans that had already become effective and been substantially consummated. The Court further stated it was not expressing a view on plans that provide full satisfaction of claims against a third-party nondebtor.
The Purdue decision shifts power to tort claimants in non-asbestos-related bankruptcy cases. No longer can parent entities, affiliates and other nondebtors expect to get broad releases by putting one entity into bankruptcy and making a contribution to fund the bankruptcy plan. Claimants holding tort, fraud and other claims against nondebtor entities may potentially seek to unwind recently confirmed cases that contained nonconsensual releases of the nondebtor entities, even if the plan has been substantially consummated.
Co-authors Dom Pacitti, chair, Carol Slocum, partner, and Benjamin Fischer, associate, are members of the Bankruptcy and Restructuring Department at Klehr Harrison.
[1] Harrington v. Purdue Pharma L.P., 603 U. S. ____, at 15 (2024).
[2] Id. at 11.