The US Supreme Court ruled in a landmark 5-4 decision on June 27, 2024 that nonconsensual third-party releases, as proposed in Purdue Pharma’s bankruptcy plan, were not permissible under the Bankruptcy Code. A nonconsensual third-party release serves to eliminate the direct claims of third parties against nondebtor parties without soliciting the consent of such affected claimants. This contrasts with consensual releases and opt-in or opt-out mechanisms permitted by courts.
Purdue’s bankruptcy plan included nonconsensual releases of claims against the Sackler family in return for their $4.3 billion contribution toward the plan’s recoveries. The U.S. Trustee and several nonsettling parties argued that nothing in the Bankruptcy Code authorizes discharges of liabilities for nondebtors and that such releases violate creditors’ due process rights, denying them their day in court.
On September 17, 2021, the US Bankruptcy Court for the Southern District of New York approved Purdue’s chapter 11 plan, including the nonconsensual releases, but the order was vacated by the US District Court for the Southern District of New York, which held that nonconsensual third-party releases were not authorized by the Bankruptcy Code outside of the asbestos context.
Thereafter, on May 30, 2023, the Second Circuit reversed the District Court’s order and held that sections 105(a) and 1123(b)(6) of the Bankruptcy Code provide the statutory equitable authority for approving a plan that includes nonconsensual third-party releases. This prompted the U.S. Trustee to seek a stay of the Second Circuit’s decision, which the Supreme Court treated as a petition for a writ of certiorari.
The majority opinion, written by Justice Gorsuch, found that section 524(e) of the Bankruptcy Code limits the scope of a bankruptcy discharge to the debtor and does not extend to third parties. Therefore, the Court examined whether any other provisions in the Bankruptcy Code, specifically section 1123, which governs the contents and terms of a chapter 11 plan, permit a bankruptcy court to extend the benefits of the chapter 11 discharge to nondebtors.
Section 1123(a) sets forth certain mandatory plan provisions such as the classification of claims and interests and adequate means for the plan’s implementation, while section 1123(b) lists various discretionary provisions.
Section 1123(b) provides:
Subject to subsection (a) of this section, a plan may—
(1) impair or leave unimpaired any class of claims, secured or unsecured, or of interests;
(2) subject to section 365 of this title, provide for the assumption, rejection, or assignment of any executory contract or unexpired lease of the debtor not previously rejected under such section;
(3) provide for—
(A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or
(B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest;
(4) provide for the sale of all or any part of the property of the estate, either subject to or free of any lien, or the distribution of all or any part of the property of the estate among those having an interest in such property;
(5) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; and
(6) include any other appropriate provision not inconsistent with the applicable provisions of this title.
The Second Circuit had held that the catch-all in section 1123(b)(6), in tandem with the broad equitable grant of power to the bankruptcy courts under section 105(a) of the Bankruptcy Code, confers upon “bankruptcy courts a residual authority . . . to modify creditor-debtor relationships.”
The Supreme Court disagreed. The Court found that a catch-all at the end of a detailed list of specific instructions, such as the one in section 1123(b), should be read as limited to the specific items preceding it. As none of the other items enumerated in section 1123(b) relate to the bankruptcy discharge, the Court concluded that the provision did not confer the right for bankruptcy courts to expand the Bankruptcy Code discharge, which is expressly limited to a debtor.
To support this interpretation, the majority opinion referenced Epic Systems Corp. v. Lewis, 584 U.S. 497 (2018), and RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012), emphasizing the importance of interpreting statutory provisions within the specific context and structure of the Bankruptcy Code.
The Court also stressed that the Bankruptcy Code must be read as a coherent whole, and isolated provisions should not be interpreted in ways that conflict with the overall statutory scheme. The Court found that interpreting section 1123(b)(6) broadly to allow nonconsensual third-party releases would undermine the Bankruptcy Code’s careful balance, which explicitly allows nondebtor releases only in specific instances, such as asbestos cases under section 524(g). The Court noted that it is not the judiciary’s place to rewrite the statutory framework laid out by the US Congress based on policy considerations.
In a dissent more than twice as long as the majority decision, Justice Kavanaugh lamented the loss of an important bankruptcy tool and argued that the third-party releases in Purdue’s plan were essential for a practical, comprehensive, and equitable resolution of the bankruptcy case.
He found the releases consistent with precedential decisions in the Second Circuit, including Metromedia Fiber Network, Inc., 416 F.3d 136 (2d Cir. 2005), and In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992), which permit such releases in carefully circumscribed circumstances, particularly in the context of mass tort bankruptcy. Wrote Justice Kavanaugh, the majority decision “deprives the bankruptcy system of a longstanding and critical tool that has been used repeatedly to ensure fair and sizable recovery for victims—to repeat, recovery for victims—in mass torts ranging from Dalkon Shield to the Boy Scouts.”
The Supreme Court decision did not address consensual third-party releases or determine what constitutes consent in the bankruptcy context. The decision also expressly left open any potential impact on previously consummated chapter 11 plans with nonconsensual third-party releases.
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