On June 27, 2024, the Supreme Court released its highly anticipated opinion in Harrington v. Purdue Pharma L.P., Case No. 23-124. The question before the Court was whether the bankruptcy code authorizes a court to approve, as part of a chapter 11 plan, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.
The Court in a 5-4 decision concluded they were not authorized and reversed the Second Circuit, which had affirmed confirmation of Purdue’s chapter 11 plan. The Court remanded the case to the bankruptcy court, where the debtors now seek a public status conference in July and want to resume mediation on a new plan.
What You Need to Know:
- The Supreme Court, with Justice Gorsuch writing for the majority, “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.”
- This outcome upends decades of chapter 11 practice in many circuits, including the Second and Third Circuits, though other circuits such as the Fifth and Ninth Circuits had banned the practice. The decision resolves that circuit split and applies a uniform law across the country prohibiting nonconsensual nondebtor releases and injunctions in chapter 11 plans.
- Purdue is a mass tort bankruptcy case where the debtor leveraged the collective process of bankruptcy to corral thousands of torts claims into bankruptcy to resolve all tort liabilities through a chapter 11 plan. The Court has put into question this strategy because nonconsensual nondebtor releases were an essential part of the intended chapter 11 plan.
- Many mass tort cases have involved asbestos liabilities for which bankruptcy code section 524(g) permits injunctions protecting nondebtors. Following that model, cases like Purdue have extended that practice to non-asbestos mass tort liabilities. The Court has rejected this evolution as being without legal basis under the bankruptcy code. The Court’s decision does not affect the injunctions permissible under section 524(g) of the bankruptcy code.
- The bar on nonconsensual nondebtor releases will change how companies and their stakeholders and professionals approach chapter 11 plans where nonconsensual nondebtor releases have proliferated beyond the mass tort context.
Selected Key Takeaways for Chapter 11 Practice:
- Chapter 11 plans with releases and injunctions that protect nondebtors from direct claims held by other nondebtors require the consent of the affected nondebtors.
- The Court declined to address consensual nondebtor releases and what constitutes consent, leaving both issues unresolved.
- Plans that allow creditors to opt-out of nondebtor releases seem unaffected by the opinion though we expect future disputes around consent, e.g., how it is given or considered to occur.
- Opt-in plans that require affirmative creditor consent remain valid. The Court approves of plans based on consensual nondebtor releases.
- The Court declined to consider nonconsensual nondebtor releases in plans that provide for the full satisfaction of claims against the released nondebtor, leaving open a question about what full satisfaction is.
- The Court does not address plans with nonconsensual nondebtor releases that have gone effective and been substantially consummated.
- Bankruptcy code section 524(g) asbestos-liability cases remain in good standing, though injunctions that protect third parties under that provision seem limited to the express statutory authority granted for section 524(g) trust-related injunctions.
- Releases by the debtor remain valid and are unaffected by the decision.
- Any future authority for nonconsensual nondebtor releases beyond the section 524(g) asbestos case provisions must come from Congress and not the courts.
If you are contemplating chapter 11 or have claims affected by a bankruptcy or restructuring and have questions about the implications of this opinion, our bankruptcy and restructuring team stands ready to assist.
