Supreme Court’s Purdue Decision Requires Nationwide Adoption of 5th Circuit Bankruptcy Practice on Third-Party Releases

On June 27, 2024, the Supreme Court issued its opinion in Harrington v. Purdue Pharma L.P., 603 U.S. ____ (2024) holding that the Bankruptcy Code does not allow for the inclusion of non-consensual third-party releases in chapter 11 plans. This decision settles a long-standing circuit split on the propriety of such releases and clarifies that a plan may not provide for the release of claims against non-debtors without the consent of the claimants. By ruling that non-consensual releases of claims against non-debtors are not permitted, the Supreme Court has ended the common practice of providing for such releases in bankruptcy cases pending in bankruptcy courts within the Second, Third and Fourth Circuits, among others. The Court made clear, however, that it was not calling into question the propriety of consensual third-party releases. As the Fifth Circuit has long prohibited non-consensual third-party releases (see, e.g., In re Pacific Lumber Co., 584 F.3d 229, 251-53 (5th Cir. 2009)), this decision is unlikely to have much, if any, effect on bankruptcy practice in the Fifth Circuit. However, plan proponents in bankruptcy courts within other federal judicial circuits, including those in the Second, Third and Fourth Circuits, which include New York, New Jersey, Delaware and Virginia, will now be required to obtain consent for third-party releases. 

The Supreme Court has left open the question of what constitutes consent for a consensual release, leaving unaddressed disputes that have arisen as to the propriety of so-called "opt-out” releases whereby third parties that take no action may be deemed to have consented to releases of non-debtors.

Facts of the Case

The Purdue Pharma case stems from the widespread opioid epidemic, specifically, Purdue’s blockbuster drug OxyContin. While marketed as being less addictive and safe for more general use, those claims turned out to be false, leading to federal criminal charges, a felony guilty plea and a tsunami of litigation against Purdue and its owners, the Sackler family. In anticipation of this litigation, the Sacklers began extracting money from Purdue, ultimately distributing $11 billion among themselves before putting the company and several affiliates into bankruptcy in 2019 in the Southern District of New York.

Once in bankruptcy, the Purdue debtors, the Sacklers, and certain other parties reached a settlement under which the Sacklers would contribute $4.325 billion (later increased to up to $6 billion) to fund recoveries to creditors, including opioid claimants. Substantially all of such payments would be made over time to state agencies. Individual claimants would receive payments from a base amount of $3,000 up to a ceiling of $48,000, before deductions for attorney’s fees. In return, the Sacklers demanded, and received, releases of all claims the Purdue debtors might have against them, as well as provisions in the plan that would release and forever enjoin any claims that could be brought by third parties against the Sacklers and any entities under their control. Importantly, the claims held by third parties would be released and enjoined regardless of whether the claimants approved of the plan, consented to the releases, or even participated in the bankruptcy case. Fewer than 20% of eligible creditors participated in the plan voting process.

Several parties, including the United States Trustee (the petitioner in this case), objected to the plan and the third-party releases. The Bankruptcy Court overruled the objections and approved the plan along with the third-party releases for the Sacklers. The US Trustee and others appealed the decision to the District Court, which reversed the Bankruptcy Court holding that "[n]othing in the law . . . authorized the bankruptcy court to extinguish claims against the Sacklers without the consent of the opioid victims who brought them.” Harrington v. Purdue Pharma L.P., 603 U.S. ____, 5 (2024). The plan proponents, including the Purdue debtors, the Sacklers, and other creditors who supported the plan, then appealed to the Second Circuit. The Second Circuit reversed the District Court and reinstated the Bankruptcy Court’s confirmation order. The Second Circuit noted the existing split among the circuit courts of appeal, including the Fifth, Ninth and Tenth Circuit precedent that prohibited non-consensual third-party releases. Second Circuit precedent did allow for non-consensual third party releases in appropriate circumstances, however, and the Second Circuit held that the relevant standards were satisfied under Purdue’s plan. The US Trustee then appealed to the Supreme Court, which first stayed the confirmation order and ultimately reversed the Second Circuit.

Analysis

The Supreme Court’s analysis focused on section 1123(b) of the Bankruptcy Code. That section lists certain things that a chapter 11 plan may do. Specifically, it provides that "a plan may–

(1) impair or leave unimpaired any class of claims, secured or unsecured, or of interests;

(2) subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section;

(3) provide for—

(A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or

(B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest;

(4) provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests;

(5) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; and

(6) include any other appropriate provision not inconsistent with the applicable provisions of this title.”

11 U.S.C. § 1123(b). As the Supreme Court noted, the only provision of this section that could possibly authorize the inclusion of a non-consensual third-party release is subsection 6, the catchall provision. Purdue and the other plan proponents argued that this subsection permits a plan to include any term not expressly forbidden under the Bankruptcy Code. And since nothing in the Bankruptcy Code specifically prohibits non-consensual third-party releases, such releases are therefore permitted under section 1123(b)(6).

The Supreme Court rejected this argument holding that the phrase "any other appropriate provision” had to be read in concert with the other five subsections of section 1123(b). And since all five of those subsections address rights and claims either belonging to or held against the debtor, the sixth subsection "cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a nondebtor without the consent of affected nondebtor claimants.” Purdue Pharma, 603 U.S. at 11.

The Court additionally noted that the Bankruptcy Code’s discharge provisions typically apply only to the debtor and not to third parties. Indeed, section 524(e) of the Bankruptcy Code specifically states that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” 11 U.S.C. § 524(e). (It is this provision of the Bankruptcy Code that the Fifth Circuit focused on in concluding that non-consensual third-party releases were not allowed. See In re Pacific Lumber, 584 F.3d at 251-53.) The Court also noted that Congress had specifically allowed for asbestos claims against third parties to be discharged under section 524(g). The inclusion of this specific provision suggests that Congress did not intend to allow other types of claims against third parties to be discharged.

Both sides also asserted policy arguments in favor of their respective interpretations of the Bankruptcy Code. The plan proponents argued that non-consensual third-party releases are an important tool to achieve consensual resolutions in bankruptcy that would otherwise be impossible. In this case, the Sacklers made it clear that they would not contribute any funds for creditor recoveries without getting full releases. Without that settlement, argued the plan proponents, individual creditors would be forced to engage in costly and uncertain litigation, with no guarantee of recovery. On the other hand, the settlement under the plan would guarantee recoveries to all creditors, including opioid claimants. The US Trustee, however, argued that allowing non-consensual third-party releases would allow tortfeasors to win immunity from claims they otherwise couldn’t discharge in bankruptcy and without having to file for bankruptcy themselves. This would allow wealthy individuals and corporations to abuse bankruptcy as a way to avoid liability for mass torts. While the Court recognized the merits of both sides’ policy arguments, it refused the invitation to decide between them noting that such policy decisions are for Congress to debate and decide.

Importantly, the Court made clear that nothing in its opinion should be construed as calling into question the propriety of consensual third-party releases, nor did the Court offer any opinion on what constitutes a consensual third-party release. Throughout the opinion, the Court repeatedly emphasized that it was ruling solely on whether non-consensual third-party releases could be included in a plan. The Court further noted that the case before it featured a stayed and unconsummated plan, and that it was not opining upon whether a fully consummated plan that featured non-consensual third-party releases could be unwound. This essentially preserves any arguments regarding equitable mootness for substantially consummated plans.

Bottom Line

Bankruptcy courts and practitioners in the Fifth Circuit should not see much, if any, effect from this ruling. The Fifth Circuit has long prohibited non-consensual third-party releases in chapter 11 plans. Plans proposed in courts in the Fifth Circuit routinely feature third-party releases, but provide every party the opportunity to opt-out of such releases. Solicitation materials provided in such cases make clear that the plan contains such provisions and highlight the recipient’s ability to opt out of the releases. Such procedures have so far been treated as consensual releases and are routinely approved. 

The Supreme Court made quite clear in its opinion that the Bankruptcy Code prohibited third-party releases without the consent of the affected claimants. It further highlighted that it was not opining on the appropriateness of consensual releases or the procedures behind them. In light of these clear statements, it is unlikely that courts in the Fifth Circuit will deviate from established practices regarding third-party releases. Instead, courts in the Fifth Circuit will likely continue the practice of providing notice and an opportunity to opt out as a procedure for seeking approval of consensual third-party releases in chapter 11 plans.

However, plan proponents in other jurisdictions, including those within the Second, Third and Fourth Circuits, now will need to show consent from affected claimants as a condition to approval of third-party releases contained in chapter 11 plans. Courts in these Circuits have taken different positions regarding whether notice and an opportunity to opt out represents adequate consent to be bound by third-party releases in chapter 11 plans, or whether an affirmative opt in is required to manifest consent. As non-consensual releases are no longer permitted, courts may consider issues concerning consensual non-debtor releases with more frequency in the aftermath of the Purdue Pharma decision.

https://www.huntonak.com/insights/legal/supreme-courts-purdue-decision-requires-nationwide-adoption-of-5th-circuit-bankruptcy-practice-on-third-party-releases