On June 27, 2024, the U.S. Supreme Court rendered its opinion in Harrington v. Purdue Pharma L.P., U.S., (2024), blocking Purdue Pharma’s $6 billion plan settlement of opioid claims against the Sackler family and holding that the Bankruptcy Code does not authorize non-consensual third-party releases in Chapter 11 plans. This opinion has massive implications for mass-tort cases, such as the recent case of the Boy Scouts and many Catholic Dioceses, that rely upon non-consensual third-party releases to resolve mass tort liabilities. 

The Supreme Court’s decision comes after years of negotiations and court battles involving victims of the opioid epidemic, the Sackler family, Purdue Pharma, and the Office of the U.S. Trustee, the government office tasked with overseeing the administration of bankruptcy cases. 

The Bankruptcy Court Case 

Purdue Pharma filed its Chapter 11 bankruptcy petition in September 2019 in the Bankruptcy Court for the Southern District of New York to halt years of mass tort litigation brought by victims of the opioid epidemic, amid claims that Purdue Pharma fueled the opioid epidemic to profit the Sackler family. 

After two years of prolonged litigation, the Bankruptcy Court confirmed Purdue Pharma’s Chapter 11 plan of reorganization that, among other things, contained third-party releases in favor of the Sackler family over the objections of certain creditors. The Bankruptcy Court reasoned that the third-party releases were appropriate under existing Second Circuit precedent given, among other things, the Sackler’s agreement to contribute $4.325 billion toward the claims of victims.

The Bankruptcy Court’s confirmation order was initially overturned by the United States District Court for the Southern District of New York, setting up review by the Second Circuit Court of Appeals. Following the District Court reversal, the Sacklers agreed to increase their plan contribution to $6 billion. As a result, Purdue Pharma was able to obtain the approval of most—but not all—of the remaining objecting creditors.

Second Circuit Court of Appeals Decision 

On May 30, 2023, the Second Circuit Court of Appeals reversed the District Court and affirmed the Bankruptcy Court’s opinion, holding that non-consensual third-party releases are permitted under the Bankruptcy Code and may be properly included in Chapter 11 plans under certain circumstances, relying primarily upon Section 1123(b)(6) of the Bankruptcy Code.

Having found statutory authority for the imposition of non-consensual third-party releases, the Second Circuit identified the following factors in its opinion that must be present to support such a release:

1.  The identity of interests between the debtors and released third parties, including     any indemnification obligations of the debtors to the third parties; 
2.  Whether claims against the debtor and non-debtor are factually intertwined;
3.  Whether the scope of the releases is appropriate;
4.  Whether the releases are essential to the reorganization;
5.  Whether the non-debtor contributed substantial assets to the reorganization;
6.  Whether the impacted class of creditors “overwhelmingly” voted in support of the plan with the   releases; and
7.  Whether the plan provides for fair payment of the enjoined claims.

The Second Circuit analyzed these factors, found that the Bankruptcy Court made adequate factual findings to support the presence of each of the necessary factors, and affirmed the Bankruptcy Court’s confirmation order.

The Supreme Court granted certiorari to review the Second Circuit’s opinion. 

The Supreme Court Decision 

The Supreme Court, in a 5-4 majority opinion by Justice Gorsuch, rejected the Second Circuit’s conclusion that the Bankruptcy Code authorizes the inclusion of non-consensual third-party releases in Chapter 11 plans. 

Specifically, the majority rejected the Second Circuit’s contention that section 1123(b)(6) of the Bankruptcy Code authorizes the inclusion of non-consensual third-party releases in Chapter 11 plans. Section 1123 sets forth what a Chapter 11 plan must include (under subsection (a)) and what it may include (under subsection (b)). Section 1123(b)(1) through (5) allows a debtor to, among other things, impair classes of claims, provide for the assumption or rejection of executory contracts, settle claims belonging to the debtor or the estate, provide for the sale of property of the estate, and modify the rights of secured creditors. Section 1123(b)(6) provides that a Chapter 11 plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.” 

The Second Circuit interpreted paragraph (6)’s catch-all provision broadly to authorize third-party releases. The Supreme Court majority disagreed, holding that because paragraphs (1)-(5) are all limited to addressing claims and property belonging to a debtor or its estate, paragraph (6) is necessarily similarly limited, and non-consensual third-party releases exceed that limitation.

The Supreme Court specifically noted that it was not calling into question consensual third-party releases, which “pose different questions and may rest on different legal grounds” than non-consensual releases. The Court also noted that it was offering no opinion on what qualifies as a consensual release or a plan that provides full satisfaction of claims against a third-party non-debtor. Finally, the Court offered no opinion on whether reorganization plans that have already become effective and are substantially consummated should be unwound.

Takeaways

What happens next is an open question. As the “emphatic” dissent from Justice Kavanaugh recognizes, non-consensual releases have been “absolutely critical to achieving the goal of bankruptcy—fair and equitable recovery for victims and creditors.” Dissent at 5. Congress can act to authorize the inclusion of third-party releases in Chapter 11 plans—perhaps by incorporating the Second Circuit’s seven factor test. Alternatively, consensual third-party releases may become the new normal, and the next major point of contention is likely to be what constitutes “consent” to a third-party release. 

If you have any questions regarding the Purdue Pharma decision and its impact on you, your client, or your business, please reach out to Ice Miller’s Bankruptcy and Restructuring Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.