In Harrington v. Purdue Pharma, L.P.,[1] the Supreme Court ruled that a Chapter 11 plan may not impose a non-consensual release of claims against non-debtor third parties pursuant to 11 U.S.C. § 1123(b)(6).
The most significant result of the Court’s decision is the effect on negotiations in future Chapter 11 bankruptcies between creditors and affiliates of debtors. In Purdue’s bankruptcy case, the Sackler family and the majority of creditors reached a settlement in which the Sackler family agreed to pay $4.235 billion to a trust for the benefit of Purdue’s creditors.[2] The quid pro quo for the Sackler’s contribution was a provision in the plan of reorganization that released and enjoined all direct claims against the Sacklers held by Purdue’s creditors, including all opioid victims. The majority of creditors voted in favor of the plan, but thousands of opioid victims and various governmental bodies voted against the plan. The bankruptcy court confirmed the plan, and numerous non-consenting creditors appealed. The district court reversed the bankruptcy court and held that Purdue’s plan of reorganization could not impose nonconsensual releases of direct claims against the Sacklers. Purdue and the Sacklers appealed this decision to the Second Circuit. While the appeal was pending, the Sacklers renewed negotiations with creditors, and agreed to increase their payment from $4.325 billion to at least $5.41 billion.[3]
In short, when the Sacklers and the creditors initially assessed the probability that non-consensual third-party releases would be approved by a court, the Sacklers and the majority of the creditors arrived at a $4.235 billion settlement. When the Sacklers and the creditors revised their probability assessments in light of the district court’s decision, they arrived at a $5.41 billion settlement, more than 25% higher than the initial settlement number.
In future bankruptcy cases, creditors will enjoy a significantly enhanced bargaining position when negotiating with non-debtor affiliates seeking to obtain third party releases in exchange for payments to support a debtor’s plan of reorganization. Non-debtor affiliates will be forced to offer higher proportions of their net assets to begin negotiations with creditors. It remains to be seen whether non-debtor affiliates will be willing to make significant contributions in exchange for “97.5 percent peace”[4] if a small minority of hold-out creditors refuse a proposal accepted by an overwhelming majority of creditors, or if the new equilibrium leads to more bankruptcy filings by affiliates who would otherwise have remained non-debtors.
The Purdue case will provide one of the first examples of negotiations in the new equilibrium. On July 8, 2024, the Official Committee of Unsecured Creditors (the “Committee”) filed a motion to obtain sole standing to pursue the claims held by Purdue’s bankruptcy estate against the Sackler family.[5] The Committee, other creditor groups, Purdue and the Sackler family also requested and obtained an order appointing mediators to oversee renewed settlement negotiations between the parties.[6] The negotiations will likely require the Sackler family to decide whether they are willing to make a substantial settlement payment in exchange for “97.5% peace.”
The legal analysis in the Supreme Court’s opinion is also instructive. The Second Circuit and the bankruptcy court held that 11 U.S.C. § 1123(b)(6) provides authority for the nonconsensual release in favor of the Sacklers. 11 U.S.C. § 1123(b) enumerates certain provisions a plan “may” include, and subsection (6) provides that a plan may include “any other appropriate provision not inconsistent with the applicable provisions of this title.” Overruling the Second Circuit, the Court held that because subsection (6) “is a catchall phrase tacked on at the end of a long and detailed list of specific directions,” subsection (6) “must be interpreted in light of its surrounding context and read to ‘embrace only objects similar in nature’ to the specific examples preceding it.”[7] The Court found that the preceding subsections all “concern the debtor – its rights and responsibilities, and its relationship with its creditors.”[8] The Court further noted the preceding subsections authorize “a bankruptcy court to adjust claims without consent only to the extent such claims concern the debtor.”[9] The Court therefore ruled that the concluding catchall provision contained in subsection (6) “cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a nondebtor without the consent of affected nondebtor claimants.”[10]
The Court referred to related sections of the Bankruptcy Code to confirm its analysis. First, the Court observed that the Bankruptcy Code generally restricts the benefit of a bankruptcy discharge to the debtor who files for bankruptcy, citing 11 U.S.C. §§ 1141(d)(1)(A), 524(e) and 727(a)-(b). The Court noted that imposing nonconsensual releases of claims against non-debtor parties “would defy these rules by effectively affording to a nondebtor a discharge usually reserved for the debtor alone.”[11] Second, the Court observed that the Bankruptcy Code requires a debtor to submit virtually all its assets to the bankruptcy process to satisfy creditor claims, and that certain claims such as fraud or willful and malicious injury are excepted from discharge. Because Sacklers had not put all of their assets at the disposal of creditors, and sought a third party release that extinguished claims for fraud and willful injury, the Court found that the third party releases in Purdue’s Chapter 11 plan permitted the Sacklers “to pay less than the code ordinarily requires and receive more than it normally permits.”[12] Third, the Court observed that Congress amended the Bankruptcy Code to add a provision specifically addressing bankruptcy cases filed by asbestos companies which expressly permits the discharge of claims against third parties. “That the code does authorize courts to enjoin claims against third parties without their consent, but does so in only one context, makes it all the more unlikely that §1123(b)(6) is best read to afford courts that same authority in every context.”[13] The Court therefore found no textual support in the Bankruptcy Code for the proposed plan’s non-consensual releases in favor of the Sacklers.
The Court concluded its analysis by highlighting three issues that it did not decide in its opinion: (i) whether consensual releases in favor of non-debtor third parties are permissible under the Bankruptcy Code; (ii) “what qualifies as a consensual release or pass upon a plan that provides for the full satisfaction of claims against a third-party nondebtor”; and (iii) whether the Court’s opinion “would justify unwinding reorganization plans that have already become effective and been substantially consummated.”[14]
[1] Harrington v. Purdue Pharma L.P., 219 L.Ed. 2d 721 (June 27, 2024).
[2] Id. at 730.
[3] Id. at 731.
[4] Id. at 738.
[5] ECF Doc 6523.
[6] ECF Doc 6521.
[7] Id. at 733 (quoting Epic Systems Corp. v. Lewis, 584 U. S. 497, 512, 200 L. Ed. 2d 889 (2018)).
[8] Id. at 734.
[9] Ibid.
[10] Ibid. (quoting Epic Systems, supra, at 513.)
[11] Id. at *736.
[12] Ibid.
[13] Id. at 737.
[14] Id. at 739.
