Dissenting opinion highlights concerns over Purdue Pharma’s impact on mass tort cases

On June 27, 2024, in a 5-4 opinion decided across ideological lines, the majority of the Supreme Court ruled that plans of reorganization in cases filed under chapter 11 of the Bankruptcy Code may not contain “nonconsensual third-party releases,” or provisions which provide for a nondebtor’s involuntary release of claims against another nondebtor. Harrington v. Purdue Pharma, L.P., 603 U.S. ---, 144 S.Ct. 2071 (2024) (Purdue). In a tightly drafted opinion resolving a decades-long circuit split, Justice Gorsuch, writing on behalf of Justices Thomas, Alito, Barrett and Jackson, reversed the 2nd Circuit, reasoning that the plan’s nonconsensual release of creditor claims against the nondebtor Sackler family inappropriately equated to a discharge of those nondebtors’ personal liability. Such relief is expressly reserved for debtors, only, in the Bankruptcy Code. Purdue, 144 S.Ct. at 2085; see also 11 U.S.C. § 1141(d)(1)(A).

The majority also observed that section 1123(b)(6)’s “catchall” provision allowing chapter 11 plans to include any provision “appropriate [and] not inconsistent” with applicable provisions of the Bankruptcy Code could not be reconciled with sections 1123(b)(1)-(5), all of which provide for nonconsensual releases of claims against debtors, only, not against third-parties. Purdue, 144 S.Ct. at 2082. The Court majority further reasoned that the proposed nonconsensual releases in Purdue impermissibly constituted an “unbounded” discharge, one that would extinguish virtually all claims against the Sackler family for fraud, willful injury, and even wrongful death—debts excepted from discharge in individual chapter 11 cases pursuant to section 523(a)(2), (a)(4) and (a)(6) of the Bankruptcy Code. Id. at 2085. The Court additionally noted that Congress could have expressed its intent to permit third-party nondebtor releases in all chapter 11 cases, as it did in asbestos cases (see 11 U.S.C. § 524(g)(4)(A)(ii)) but elected not to do so. Id. at 2085-86. On these grounds, Justice Gorsuch, writing for the majority, concluded that chapter 11 debtors no longer may utilize nonconsensual third-party releases in their reorganization plans.

In a lengthy (and sharply toned) dissent penned by Justice Kavanaugh on behalf of Chief Justice Roberts and Justices Sotomayor and Kagan, the Court’s minority expressed concern with the “debilitating effects” that the majority opinion will have in chapter 11 cases involving mass tort litigation. As explained in the dissent, nondebtor releases long have been “appropriate and essential” in mass tort cases, such that the majority’s opinion could block bankruptcy courts from providing “substantial and equitable relief” to victims in mass tort cases as varied as those filed by Boy Scouts of America and the Catholic Church (sued by thousands for sexual abuse), to Dow Corning and Dalkon Shield (facing liability for defective silicone breast implants and intrauterine devices). See Purdue, 144 S.Ct. at 2089. As opined by the minority, the majority ultimately ignored that the nondebtor releases proposed under section 1123(b)(6)’s catchall provision had the exact same purpose as the releases against Purdue, proposed pursuant to section 1123(b)(1), and thereby reconciled with applicable provisions in the Bankruptcy Code—to wit, “to prevent a collective-action problem in distributing the debtor’s assets, thereby preserving the estate and ensuring a fair and equitable recovery for victims and creditors.” Id. at 2110-11. Thus, on these and several more grounds, the minority disagreed strongly with the majority opinion.

Notwithstanding the shock waves that Purdue caused within the bankruptcy landscape (many academics and experienced practitioners do not agree on the plan’s outcome), its impact may prove to be limited in many chapter 11 cases. Notably, on the final page of the opinion, Justice Gorsuch clarified that the Purdue majority took no position on several issues of great importance in chapter 11 cases not limited to mass torts: (i) the validity of “consensual” third party releases offered in connection with reorganization plans, (ii) what qualifies as a consensual release, (iii) the propriety of a plan that provides for full satisfaction of claims against a third-party nondebtor, or (iv) whether the majority’s interpretation of the Bankruptcy Code justified unwinding reorganization plans that have been substantially consummated. Purdue, 144 S.Ct. at 2087-88.

Most courts allow consensual third-party releases to be included in a plan. In re Wool Growers Cent. Storage Co., 371 B.R. 768, 775 (Bankr. N.D. Tex. 2007). In fact, many bankruptcy courts have held that a consensual third-party release, agreed upon by the effected creditor, is “no different from any other settlement or contract.” See, e.g., In re Arrowhill Dev. Corp., 211 B.R. 497, 506 (Bankr. D.N.J. 1997) (“In the case of voluntary releases, the nondebtor is released from a debt … because the creditor agrees to do so. Thus the Bankruptcy Code has not altered the contractual obligations of third parties, the parties themselves have so agreed.”); see also In re PG&E Corp., 617 B.R. 671, 683 (Bankr. N.D.Ca. 2020) (PG&E) (consensual nondebtor releases do not run afoul of governing 9th Circuit law such as Resorts Int’l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401-02 (9th Cir. 1995).)

However, courts differ on what constitutes “consent” to a plan’s proposed third-party release. Compare, e.g., PG&E, 617 B.R. at 683 (consensual releases require the affirmative opt-in by the affected creditor); In re Conseco, Inc., 301 B.R. 525, 528 (Bankr. N.D. Ill. 2003) (failure to opt out after receipt of adequate notice constitutes sufficient consent to plan’s third-party release); Matter of Specialty Equip. Cos., Inc., 3 F.3d 1043, 1047 (7th Cir. 1993) (voting to accept a plan containing a third-party release is sufficient to constitute consent); In re Spansion, Inc., 426 B.R. 114, 144 (Bankr. D. Del. 2010) (unimpaired class members paid in full receive adequate consideration for plan’s third-party releases). Purdue offers no guidance on these substantive chapter 11 issues.

Nor does Purdue provide any support for or prohibition against the unwinding of a confirmed plan that has been “substantially consummated”—i.e., where (i) all or substantially all of the property proposed by the plan to be transferred has been transferred; (ii) the debtor or any successor to the debtor under the plan has assumed operation of the debtor’s business or assumed possession of all or substantially all of the property dealt with by the plan; and (3) distributions under the plan have commenced. See 11 U.S.C. § 1101(2).

Thus, while one of the most consequential Supreme Court bankruptcy decisions in decades, Purdue’s reach in chapter 11 reorganization cases not involving mass tort litigation remains to be seen. Bankruptcy practitioners should continue to carefully evaluate all alternatives to nonconsensual third-party releases when proposing, or objecting to, the confirmation of a chapter 11 reorganization plan.