Supreme Court Denies Nonconsensual Third-Party Releases in Purdue

At a Glance

• The Supreme Court’s decision in Purdue effectively ends the debate over the power of bankruptcy courts to confirm plans of reorganization that include nonconsensual third-party releases. Debtors in Chapter 11 cases will no longer be able to release nondebtor affiliates, shareholders, other culpable parties, etc., of direct liability to the debtor’s creditors without their consent. This, in turn, may significantly impact the ability of debtors to resolve their bankruptcy cases on an efficient and value-maximizing basis, as many of the released parties are required to contribute substantial value to the plan in exchange for the release.
• Nonconsensual third-party releases had proven to be an effective tool for debtors to pool additional recoveries from nondebtor sources to amplify distributions to the debtor’s creditors in cases like mass-tort related bankruptcies where complete creditor consent is neither practical nor possible. This decision could impact recoveries of individual claimants in the mass tort or product liability context, among others.
• The Court did not reach the issue of what qualifies as a “consensual release.” By leaving open what constitutes “consent” of applicable nondebtors and creditors, it is unclear what consent and from which party or representative will be appropriate. However, there are various ways to obtain consensual third-party releases that have been used successfully in previous Chapter 11 cases, including opt-out and opt-in forms.
• When a creditor is provided an opt-out or opt-in form but abstains from voting on the plan or does not select either option provided, certain courts have held that the creditor has implicitly agreed to the third-party release. Other courts have found that abstaining from a vote or opt-out/in form does not provide sufficient consent to the third-party release. Opt-in and opt-out forms provide an avenue for debtors to negotiate third-party releases to nondebtor parties on a consensual basis; however, they place an important duty on creditors to review the plan of reorganization of a Chapter 11 debtor and ensure that they have understood the releases detailed in the plan. Deciding to affirmatively opt-out of third-party releases will ensure that creditors protect their rights.

On June 27, 2024, in one of its most high-profile bankruptcy decisions, the U.S. Supreme Court decided Harrington v. Purdue Pharma L.P., et al., No. 23-124, holding that the U.S. Bankruptcy Code does not authorize releases and injunctions for nondebtor parties, without the consent of affected claimants, as part of reorganization plans.

Purdue Pharma L.P., owned and controlled by the Sackler family, commenced these Chapter 11 cases in 2019 as a result of opioid-related claims, culminating in the confirmation by the bankruptcy court of a plan that granted “nonconsensual third-party releases” to the Sackler family in exchange for a settlement contribution of $4.3 billion (later increased to $5.5 to $6 billion). The district court reversed the confirmation order, but the Second Circuit affirmed it on appeal. The circuit courts are split on the issue of nonconsensual third-party releases (or nondebtor releases).

Third-Party Releases

When a debtor files for Chapter 11 protection, it typically receives a discharge of prepetition debts upon the confirmation of its plan of reorganization and emergence from bankruptcy. 11 U.S. 1141(d)(1)(a). However, debtors will often try to extend this discharge or release to nondebtors, such as directors, officers, shareholders and affiliates, whose impact on the Chapter 11 process will affect the debtor’s ability to reorganize or where the nondebtor party is a potential source of funding for the plan of reorganization. “Third-party releases” have been frequently used by debtors over the last few decades in plans of reorganization to release nondebtor parties from liability to other nondebtor parties and litigation claimants that are creditors of the debtors — i.e., bankruptcy courts, in certain jurisdictions, approve the release of nondebtors from direct claims of other nondebtors (the debtor’s creditors).

Third-party releases can be sought (i) on a consensual basis, where creditors are bound to the releases after they have affirmatively consented either through an opt-in or an opt-out ballot (depending on the jurisdiction), or (ii) on a nonconsensual basis, where creditors are bound to the releases despite not agreeing to the release under the plan or even being offered the opportunity to consent.

The Purdue Plan and Path to the Supreme Court

Purdue filed for bankruptcy after facing a growing wave of lawsuits following a 2007 felony guilty plea over the marketing and selling of OxyContin, an opioid prescription painkiller, which was released in the late 1990s. Following this guilty plea and considering the potential impact of the mounting litigation, the Sackler family began a “milking program,” siphoning $11 billion from Purdue over the next decade and moving the assets to offshore accounts and foreign trusts. 

As part of Purdue’s eventual Chapter 11 plan of reorganization (the Plan), the Sackler family, which did not file for bankruptcy themselves, ultimately agreed to fund up to $6 billion into a settlement trust for the benefit of all present and future personal injury claims related to OxyContin. In exchange for this contribution, the Sackler family would receive releases from all opioid-related claims and an injunction barring victims from bringing such claims against them in the future. The releases included in the Plan proposed to end all of the opioid-related lawsuits, both against Purdue and the Sacklers, without the consent of the victims who brought them.

While the Plan was approved by an overwhelming majority of the creditors that voted, a minority of claimants and the U.S. Trustee objected to the Plan, arguing that the bankruptcy court could not release and enjoin the creditors’ direct claims against the Sacklers without their consent. Ultimately, the U.S. Bankruptcy Court for the Southern District of New York approved the Plan, over the objecting parties.

Following appeals at both the district court and circuit court levels, the U.S. Court of Appeals for the Second Circuit agreed with the bankruptcy court’s decision to confirm Purdue’s Plan and rejected the argument that the debtors needed to seek claimant consent for the releases given to the Sackler family. The U.S. Trustee appealed this decision to the Supreme Court.

Justice Neil Gorsuch announced the Court’s 5-4 ruling, and reversed and remanded the Second Circuit’s decision. Citing the Bankruptcy Code’s text, statutory scheme and history, the Court held that the Bankruptcy Code does not authorize releases and injunctions for nondebtor parties, without the consent of affected claimants, as part of plans of reorganization. Thus, the Court rejected the releases in favor of the Sackler family provided under the current Plan.

Justice Brett Kavanaugh filed a dissent and was joined by Chief Justice John Roberts and Justices Sonia Sotomayor and Elena Kagan.

Impact of the Decision

This decision effectively ends the debate over the power of bankruptcy courts to confirm plans of reorganization that include these nonconsensual third-party releases. Essentially, debtors will no longer be able to release nondebtor affiliates, shareholders, other culpable parties, etc., of direct liability to the debtor’s creditors without their consent, which in turn may significantly impact the ability of debtors to resolve their bankruptcy cases on an efficient and value-maximizing basis, as many of the released parties are required to contribute substantial value to the plan in exchange for the release.

Nonconsensual third-party releases have proven to be an effective tool for debtors to pool additional recoveries from nondebtor sources to amplify distributions to the debtor’s creditors in cases like mass-tort related bankruptcies where complete creditor consent is neither practical nor possible. This decision by the Supreme Court will take away this tool from debtors and could impact recoveries of individual claimants in the mass-tort or product liability context, among others.

Importantly, the Court noted that its decision is a narrow one and “does not address whether its reading of the bankruptcy code would justify unwinding reorganization plans that have already become effective and been substantially consummated.” In other words, the applicability of this opinion is limited to plans that have not gone effective or are stayed. Any plan of reorganization that has gone effective and is not stayed pending appeal is likely protected by the doctrines of res judicata, and any attempt to unwind such a plan would likely be barred under the doctrine of equitable mootness.

Additionally, the Court explicitly stated that its opinion should not “be construed to call into question consensual third-party releases offered in connection with a bankruptcy plan of reorganization.” Thus, consensual third-party releases can still be offered under plans of reorganization, subject to the discretion of the relevant bankruptcy court.

Finally, the Court also clarified that its opinion does not “pass upon a plan that provides for the full satisfaction of claims against a third-party non-debtor.” If the third-party nondebtor has agreed to fully satisfy or pay in full the claims of the affected parties, then the release of the third-party nondebtor can be appropriate.

Obtaining Consent to Third-Party Releases Under a Plan

The Court did not reach the issue of what qualifies as a “consensual release.” By leaving open what constitutes “consent” of applicable nondebtors and creditors, it is unclear what consent and from which party or representative will be appropriate. However, there are various ways to obtain consensual third-party releases that have been used successfully in previous Chapter 11 cases.

Debtors will frequently include in their plan solicitation materials an “opt-out” or “opt-in” form. This form allows creditors to select whether they opt-out of the third-party release, meaning the third-party release will not apply to them, or opt-in to the third-party release and agree to release the relevant nondebtor party.

When a creditor is provided an opt-out or opt-in form but abstains from voting on the plan or does not select either option provided, certain courts have held that the creditor has implicitly agreed to the third-party release. Other courts have found that abstaining from a vote or opt-out/in form does not provide sufficient consent to the third-party release. Opt-in and opt-out forms provide an avenue for debtors to negotiate third-party releases to nondebtor parties on a consensual basis; however, they place an important duty on creditors to review the plan of reorganization of a Chapter 11 debtor and ensure that they have understood the releases detailed in the plan. Deciding to affirmatively opt-out of third-party releases will ensure that creditors protect their rights.