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U.S. Supreme Court to Address Permissibility of Non-Consensual Third-Party Releases in Chapter 11 Bankruptcy Plans

October 17, 2023

SCOTUS has granted certiorari in the U.S. Department of Justice’s appeal of the approval of a plan in the Purdue Pharma chapter 11 case that approved non-consensual releases.

Chapter 11 bankruptcy allows a business debtor to propose a plan to restructure its balance sheet and obtain a discharge of its debts. These plans have increasingly contained third-party releases that often release claims against non-debtor third parties, who did not file for bankruptcy, from potential claims that could otherwise be brought against them. In exchange for this protection, these non-debtor parties often contribute payment or other consideration to support debtor’s reorganization plan.

Third-party releases are especially common in chapter 11 cases involving mass tort litigation where co-defendants and other third parties may share liability. The use of third-party releases has resulted in significant controversy, as tort claimant creditors have challenged the authority to grant such releases under the U.S. Bankruptcy Code without the express consent of claimants. This issue has led to circuit splits, creating uncertainty around the authority of bankruptcy courts to approve plans containing such third-party releases.

Purdue Pharma, a company widely associated with the opioid crisis due to its production and marketing of OxyContin, filed for chapter 11 bankruptcy amidst numerous lawsuits. In this case, the Sackler family, owners of Purdue, pledged $6 billion to Purdue Pharma’s reorganization fund on the condition that the Sacklers receive a release from any and all opioid-related civil liability.

The core of the legal debate revolves around the question of whether the Sacklers can obtain a third-party release to extinguish claims held by non-debtors against non-debtor third parties without those claimants’ consent. The Supreme Court’s decision could determine the legality and scope of such releases, casting a spotlight on sections 105(a) and 1123(b)(6) of the U.S. Bankruptcy Code, which have been interpreted by some courts to permit these releases in specific circumstances.

The outcome of the Purdue Pharma case is expected to offer a clear stance on the extent to which bankruptcy courts can release third parties from civil liability unrelated to the bankruptcy case. Looking ahead, businesses, legal practitioners, and creditors should be prepared for potential shifts in the application and acceptance of third-party releases. The Supreme Court’s decision in the Purdue Pharma case could set a precedent that either solidifies or undermines the ability of companies to use these releases in chapter 11 cases.

Oral arguments before SCOTUS are set for December 2023. Kerr Russell attorneys will monitor the case and report on any decision when reached, which will profoundly impact the use of chapter 11 bankruptcy in the future.

In re Purdue Pharma, LP, 635 BR 26 (SDNY, 2021), certificate of appealability gtd No. 21 CV 7532 (CM), 2022 WL 121393 (SDNY, January 7, 2022), and rev’d and remanded sub nom. In Re Purdue Pharma LP, 69 F4th 45 (CA 2, 2023), cert gtd sub nom. Harrington v Purdue Pharma LP, No. (23A87), 2023 WL 5116031 (US, August 10, 2023).

The “Nondebtor Release Prohibition Act,” which is currently pending in Congress, aims to prohibit the discharge of non-debtor third parties’ liabilities to creditors without consent. If enacted, it could significantly limit the scope and utilization of third-party releases in bankruptcy cases.