Supreme Court: No Nonconsensual Nondebtor Releases in Bankruptcy

Introduction

The U.S. Supreme Court’s resolution of the longstanding circuit split in the highly publicized Purdue Pharma L.P. (Purdue) bankruptcy case will have significant implications for complex bankruptcies and the resolution of mass tort litigation. In Harrington v. Purdue Pharma L.P. et al., the Supreme Court held that nonconsensual releases of third-party claims against nondebtors are not authorized under the Bankruptcy Code. 

Such nonconsensual releases had been increasingly employed by mass tort debtors looking to address both present and future claims against parties who may have indemnification claims against the mass tort debtor. The five-four decision, which was along non-ideological lines, demonstrates courts’ difficulty grappling with this issue. The Supreme Court reversed the Second Circuit’s decision, which in turn had reversed the district court and reinstated the bankruptcy court’s decision to approve releases in Purdue. The releases at issue in Purdue were nonconsensual releases in favor of the Sackler family, who had owned and controlled Purdue, but who were not debtors in the bankruptcy. While it is clear that nonconsensual third-party releases of nondebtor parties are no longer authorized in virtually all instances, the decision leaves the door open to the use of consensual nondebtor releases in future bankruptcies.

Background

Purdue sold OxyContin, an opioid prescription pain reliever, which it marketed as a less-addictive pain medication. Between 1996 and 2019, Purdue generated $34 billion in revenue, largely due to OxyContin sales. During a similar time period—1999 to 2019—approximately 247,000 people died in the United States from prescription-opioid overdoses. In 2007, a Purdue affiliate pled guilty to a federal felony for mismarketing OxyContin. Following this guilty plea and amidst the wave of thousands of civil lawsuits against Purdue and the Sacklers brought by individuals and governments that followed, the Sackler family began to extract funds from Purdue. Between 2008 and 2016, the Sacklers received approximately $11 billion from Purdue, which the Sacklers placed in overseas trusts and family-owned companies.

On September 15, 2019, having been left financially weakened after the Sacklers’ economic extractions and the onslaught of opioid litigation, Purdue filed for bankruptcy in the Southern District of New York. Under the plan initially proposed by Purdue in the bankruptcy, the Sackler family received releases from all current and future opioid-related claims in exchange for the Sacklers contributing $4.325 billion to the estate over 10 years. Critically, the releases the Sackler family were to receive under the plan were nonconsensual, meaning that they would bind anyone with claims against the Sackler family for opioid-related claims in the future, not just claimants who participated in the bankruptcy and consented to the release.

On September 17, 2021, over the objections of the U.S. Trustee, eight states, and others, Purdue’s initial plan was confirmed by the bankruptcy court. The objecting parties appealed the order confirming the plan. On December 16, 2021, the district court vacated the bankruptcy court’s confirmation order and held that the nonconsensual releases for claims against nondebtors, here the Sacklers, were not permitted under the Bankruptcy Code. Shortly after the district court issued this decision finding their releases were not permitted under the Bankruptcy Code, the Sacklers provided an additional $1.675 billion to the plan. This additional monetary contribution and negotiations between the parties prompted the objecting states to support the plan and its releases for the Sacklers. On May 30, 2023, the Second Circuit reversed the district court’s decision and reinstated the modified plan. The U.S. Trustee filed an application with the Supreme Court to stay the Second Circuit’s decision, which the Supreme Court granted and treated as a writ of certiorari.

The Decision

On June 27, 2024, Justice Gorsuch, writing for the majority, reversed the decision of the Second Circuit. The Supreme Court framed the question presented as “whether a court in bankruptcy may effectively extend to nondebtors the benefits of a Chapter 11 discharge usually reserved for debtors.” The majority held that a bankruptcy court cannot extend such benefits to a nondebtor if the claimholders have not consented. The opinion was based on a reading of Section 1123(b)(6) of the Bankruptcy Code, which provides that a chapter 11 plan may include “any other appropriate provision not inconsistent with the applicable provisions of this title.” The majority explained that since nonconsensual nondebtor releases are not expressly allowed under the Bankruptcy Code, Section 1123(b)(6)’s catchall language was the most likely foothold for such relief. However, the majority reasoned that under the ejusdem generis canon, which interprets a catchall phrase in light of its surrounding context, Section 1123(b)(6) of the Bankruptcy Code did not allow for the releases at issue here. Specifically, the majority held that Section 1123(b)(6) must be read in connection with paragraphs (1) through (5) of Section 1123 that only authorize a bankruptcy court to deal with claims without the claimholder’s consent when those claims concern the debtor and not third parties. 

The Court also based its opinion on its interpretation of the other sections of the Bankruptcy Code that allow a debtor to receive a discharge from claims, which require a debtor to file for bankruptcy and subject itself to the bankruptcy court before receiving a discharge. The majority emphasized that the Bankruptcy Code requires a debtor to place virtually all of its assets on the table, whereas the Sacklers were offering only $6 billion out of the $11 billion and related interest they had received from Purdue during that time.

Even when a debtor receives a discharge under the Bankruptcy Code, the Court explained that the discharge a debtor receives is limited and does not include all claims. For instance, claims for fraud and willful injury are generally not dischargeable; however, the release of the Sacklers improperly would include such claims even though they would not be able to receive such releases if they filed bankruptcies themselves.

Further, the Court examined Section 524(g) of the Bankruptcy Code that provides for injunctions against third parties in asbestos-related bankruptcies and determined that if Congress wanted this section of the Bankruptcy Code to apply in all mass tort scenarios it could have explicitly provided such language. The Court also reviewed practice prior to the enactment of the Bankruptcy Code, which it concluded did not support the argument for nonconsensual third-party releases.

The Court was not swayed by a policy argument that absent this settlement with the Sacklers there would be no viable path forward for victims to meaningfully recover from Purdue or the Sacklers. The Court explained that the Sacklers still have the ability to negotiate consensual releases with the claimants that are parties to the bankruptcy. The Court found that it was not empowered to allow nonconsensual third-party releases since, they are not authorized under the Bankruptcy Code, and that this power belongs to Congress, which could revise the Bankruptcy Code to provide for such releases, if that was their intent.

The Court explicitly noted that it was not addressing several issues, including:

• the legality of consensual third-party releases;
• what qualifies as a consensual release; and
• whether plans with nonconsensual third-party releases that are effective and consummated should be unwound.

The Court confined itself to the question presented and held “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 nondebtor without the consent of affected claimants.”

The Dissent

The dissent, written by Justice Kavanaugh, noted that nondebtor releases have been an appropriate and essential tool in bankruptcies for years, especially mass-tort bankruptcies. Specifically, the dissent argued that the plan that was previously confirmed in the Purdue bankruptcy “was a shining example of the bankruptcy system at work.” The dissent disagreed with the majority’s “dead wrong” application of the ejusdem generis canon and reading of the Bankruptcy Code. The dissent clarified that the releases for the Sacklers contained in the plan were not a discharge, and instead were only an appropriate release as the claims that were being released related to Purdue, and may have resulted in recoveries against the bankruptcy estate for indemnification. The dissent also stressed the practical implications that this decision would have for solving mass tort problems and ensuring victim recovery in the future.

Conclusion

The Court’s decision will change the landscape for using releases in mass tort bankruptcy cases. Debtors who have already filed bankruptcies or plans with nonconsensual third-party releases will be the first barometer for how debtors will adapt to this ruling.

Going forward, debtors in bankruptcy will need to rely on consensual third-party releases, at least in cases where the third parties are not offering to contribute virtually all of their assets to the estate. Some courts have authorized such consensual releases with “opt-out” provisions such that the releases are granted unless a claimant affirmatively opts out by submitting a form or ballot. This process, in conjunction with meaningful contributions from third parties, may result in near unanimous releases. As the Purdue case demonstrates however, there will likely be hold-out claimants even where the third parties (such as the Sacklers) offer significant assets (such as $6 billion). Third parties seeking releases in bankruptcy will need to factor this into their valuation of the releases. Mass tort debtors will also need to consider non-bankruptcy tools to deal with non-consenting creditors (such as, multidistrict litigation).

It also remains to be seen whether Congress will act to amend the Bankruptcy Code to allow releases of nondebtors, as it did in the asbestos context, to a broader range of mass tort cases. While there is certainly gridlock in Congress on many issues, the non-ideological split in the Supreme Court’s decision in Purdue demonstrates that this is not a purely partisan issue.

Ballard Spahr’s Bankruptcy and Restructuring and Product Liability and Mass Tort groups will continue to monitor these developments to help clients navigate these complex issues.

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