On June 27, 2024, in a 5-4 decision, the United States Supreme Court held that the Bankruptcy Code does not authorize nonconsensual third-party releases. A nonconsensual third-party release is a release and injunction that, as part of a Chapter 11 Plan, effectively seeks to discharge claims against a non-debtor, a third-party who has not filed for bankruptcy, without the consent of the affected claimants. Such nonconsensual third-party releases have become more common in recent years, especially in bankruptcies involving mass torts.
In Harrington, United States Trustee, Region 2 v. Purdue Pharma, L.P., Purdue's Chapter 11 Plan was confirmed over the objections of a number of parties, including the United States Trustee. The Plan included a nonconsensual third-party release that would have barred opioid-related claims against certain third-parties, members of the Sackler family who had not filed for bankruptcy, in exchange for a $6 billion contribution from the Sacklers to the bankruptcy estate. If permitted, the nonconsensual third-party release would have released these third-parties from claims against them for their potential liability. The US Trustee appealed the approval of the Plan.
The Supreme Court held that a Bankruptcy Court's order confirming a reorganization plan discharges the debtor of certain pre-petition debts. However, no provision of the Bankruptcy Code authorizes courts to provide what is effectively a discharge to a third-party that has not filed for bankruptcy or placed virtually all of its assets on the table for distribution to creditors. Discharge is reserved for the debtor and "does not affect the liability of any other entity." Therefore, the Bankruptcy Code does not authorize releases of non-debtors that are equivalent to a discharge. The Bankruptcy Code does not authorize courts to enjoin or release claims against third-parties without the consent of the creditor.
The majority further noted that the Bankruptcy Code contains only one exception to the general rule that a discharge is limited to the debtor and that exception, contained in section 524(g), applies only in asbestos-related bankruptcies by channeling all such claims to a trust. The Court reasoned that expressly permitting Bankruptcy Courts to enjoin claims against third parties "in only one context" was unlikely to provide a basis to read the Bankruptcy Code "to afford that same authority in every context."
In so ruling, the majority expressly noted that its decision does not address or call into question consensual third-party releases (or what qualifies as a consensual third-party release) that might be offered in a Chapter 11 Plan. A consensual third-party release is one that becomes binding only on creditors that "opt in" to the release by giving their affirmative consent. Nor does the decision pass upon a plan that provides for full satisfaction of claims against third-party nondebtors. Finally, the majority did not address what impact this ruling will have on reorganization plans that have already become effective and substantially consummated.
Key takeaways from the ruling include:
- Nonconsensual third-party releases of claims are not permitted under the Bankruptcy Code.
- Consensual third-party releases remain a valid option.
- What, if any, remedies are available to creditors in cases where a bankruptcy plan containing a nonconsensual third-party release has already become effective and substantially consummated, remains an open issue for lower courts to decide.
The Court's ruling will prevent future nonconsensual third-party releases. Consensual third-party releases will continue to be presented and may appear in more cases moving forward. Creditors in bankruptcy proceedings may desire to seek reconsideration or other alternative remedies in bankruptcy proceedings where nonconsensual third-party releases were recently approved. Congress may ultimately need to weigh in on these issues with changes to the Bankruptcy Code—perhaps by extending § 524(g) to other cases—if it desires to allow third-party nonconsensual releases outside of asbestos cases.
For more information about the Purdue ruling and its potential implications for pending bankruptcy cases and those where a plan was already confirmed, please contact Jeffrey Reisner.
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