In 2024, in a 5-4 decision, the Supreme Court rejected the notion that bankruptcy courts may confirm a plan of reorganization that discharges claims against third parties — without the consent of affected claimants.
A Review of Harrington v. Purdue Pharma L.P.
The Purdue Pharma OxyContin bankruptcy included a combative fight over settlements wherein the company’s owners, the Sackler family, initially withdrew almost $11 billion from the company prior to its 2019 bankruptcy. Next, they offered close to $6 billion as payment in exchange for legal immunity from opiod claims – via a nonconsensual release. The bankruptcy court confirmed a plan discharging certain members of the Sackler family from third-party claims a) in connection with claims asserted by third parties against the Sacklers related to the sale of OxyContin, and b) the pre-bankruptcy withdrawal of (approximately) $11 billion that drove the company into bankruptcy.
Proponents of the plan argued that because the Bankrutpcy Code did not prohibit such third-party releases and in view of the broad language contained in Section 1123(b)(6) of the Code, such third-party releases were permitted. Section 1123(b)(6) provides in pertinent part that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.” 11 U.S.C §1123(b)(6). Writing for the majority, Justice Gorsuch disagreed, noting that Section 1123(b)(6) is “not necessarily” given the broadest possible construction, but “must be interpreted in light of its surrounding context.” He went on to state that “the catchall cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a non-debtor without the consent of affected non-debtor claimants.”
Justice Gorsuch further emphasized that the Bankruptcy Code provides substantial benefits to debtors — most notably a discharge — but only if they file for bankruptcy and put all of their assets on the table. Here, the Sacklers had not done so, and thus could not effectively obtain a discharge.
Purdue Pharma and Impact on Mass Tort Liabilities
What is the net effect of this decision? It does not affect those third-party releases that are consensual. Thus, there is no reason why a debtor facing mass tort liabilities would not file bankruptcy, and for its principals, who seek to avoid liability, to contribute significant sums of money to obtain a release. Further, this decision should affect the ability of the debtor to settle claims for the benefit of the estate, which include claims for fraudulent transfer, breach of fiduciary duties, and veil piercing. In addition, section 524(g) of the Bankruptcy Code continues to permit non-consensual third-party releases in asbestos cases.
For non-asbestos cases, third-party releases will be permitted, but individual creditors will be allowed to opt out no matter how much the non-debtor parties are willing to pay to obtain a release. In the alternative: such third parties may consider filing for bankruptcy and therefore obtain the benefits of a discharge.
