On June 27, the Supreme Court of the United States issued an opinion in Harrington v. Purdue Pharma, L.P. addressing the issue of whether certain types of releases of nondebtor third parties are permissible in bankruptcy plans of reorganization. Justice Neil Gorsuch, in a decision joined by Justices Clarence Thomas, Samuel Alito, Amy Coney Barrett and Ketanji Brown Jackson, wrote that the Bankruptcy Code does not permit nonconsensual third-party releases. To put it another way, absent a claimant’s consent to release its claim against a nondebtor third party, the protective discharge that a Chapter 11 debtor receives upon plan confirmation cannot be extended to parties other than the debtor.
The case addressed a plan of reorganization in the Purdue Pharma bankruptcy case whereby members of the Sackler family — which owned Purdue Pharma — were slated to receive a global release of liability in exchange for the Sackler family providing billions of dollars that would have flowed to the victims of the opioid crisis. The result of the Court’s 5-4 decision is that the bankruptcy plan will not be confirmed and the deal with the Sacklers — at least as it is currently structured — will not go forward. Justice Brett Kavanaugh, joined by Chief Justice John Roberts and Justices Sonya Sotomayor and Elena Kagan, wrote a strident 54-page dissent lamenting the majority’s decision, describing it as “wrong on the law and devastating for more than 100,000 opioid victims and their families.”
The facts of the Purdue Pharma bankruptcy case are especially egregious and heart-wrenching. The Supreme Court pointed out just a few of the extensive findings of the lower courts, including that the opioid epidemic has cost the country somewhere between $53 and $72 million annually and that approximately 247,000 people died of prescription-opioid overdoes in the years between 1999 and 2019. The Court also noted that the Purdue Pharma engaged in wrongful behavior associated with the production and distribution of the highly addictive prescription opioid called OxyContin and that the Sacklers “milked” the company’s revenue and diverted billions of dollars into overseas trusts.
The Court’s decision will have a direct impact on the victims of Purdue Pharma’s behavior because it will mean that the plan approved by the bankruptcy court will not be funded by the Sacklers. While the ultimate outcome of the Purdue Pharma bankruptcy case is likely to remain uncertain for quite some time, the failure to approve the plan as negotiated by hundreds of creditors, and by dozens of local and state governmental authorities, may ultimately mean that no money at all will flow to these victims of the opioid crisis.
However, the decision also stands to have much broader implications on the use of Chapter 11 to solve complicated problems, especially relating to mass tort cases. Given this potential to alter the landscape of Chapter 11 practice in future cases, the Court’s statutory analysis in the Purdue Pharma decision warrants close scrutiny. In addition, understanding the points raised in the lengthy dissent is important because lower courts are likely to wrestle with the particular details of these issues in the future.
The Majority Opinion and the Ejusdem Generis Canon
Justice Gorsuch started his opinion with a recounting of the opioid crisis’s grim statistics, as well as pointing out the fact that the Sackler family pulled $11 billion out of the company between 2008 and 2016, depleting Purdue Pharma of its total assets by 75 percent and leaving it in “a significantly weakened financial state.” The opinion then turned to describing the deal struck in the Purdue Pharma bankruptcy plan, which required the Sackler family to pay $4.325 billion, paid out over a term of 10 years. In exchange for the payment — which was later negotiated up to approximately $6 billion — the Sackler family would have been granted a bankruptcy court order that would have (1) extinguished any claims the bankruptcy estate would have had against the Sacklers, including fraudulent transfer claims related to the family’s withdrawal of tens of millions of dollars in the period leading up to the bankruptcy filing, and (2) enjoined current and future suits brought against the Sacklers by opioid victims.
The majority opinion also addressed the bankruptcy plan process. Supporters of the deal struck in the plan were quick to point out that creditors who chose to vote “overwhelmingly” voted in favor. Judge Gorsuch’s opinion acknowledged that fact but also noted that fewer than 20 percent of eligible plan voters actually participated in the process and that “thousands of opioid victims voted against the plan … and many pleaded with the bankruptcy court not to wipe out their claims against the Sacklers without their consent.” Ultimately, after some further negotiations, the plan was supported by most of the governmental authorities, including all 50 state attorneys general. The parties who appealed the matter to the Supreme Court included the United States trustee and a handful of other parties.
The bankruptcy court approved the plan in September of 2021 following two years of plan negotiations. In December of 2021, the United States District Court for the Southern District of New York issued a lengthy opinion holding that the Bankruptcy Code did not authorize the nonconsensual releases of the Sacklers. Thereafter, in May of 2023, the Second Circuit overturned the district court, finding that Bankruptcy Code section 1123(b)(6) permitted the releases. The Supreme Court granted a writ of certiorari on Aug. 10, 2023.
Justice Gorsuch discussed both the policies underlying bankruptcy in general and the text of Bankruptcy Code section 1123(b)(6) in particular. The opinion noted that bankruptcy awards a debtor “a discharge of its debts if it proceeds with honesty and places virtually all of its assets on the table for its creditors.” This was contrasted by the fact that Purdue Pharma plan would have provided the Sacklers with a discharge even broader than what is available to a debtor, despite the Sacklers failing to file bankruptcy and failing to place “anything approaching their total assets on the table for their creditors.” The Bankruptcy Code provision purportedly allowing this unusual result was section 1123(a)(6), which is a catch-all provision providing that a plan may “include any other appropriate provision not inconsistent with the applicable provisions” of the Bankruptcy Code.
The Court invoked the statutory interpretation canon of ejusdem generis, which relates to the scope of catch all provisions. That is, such provisions must be interpreted in context of the other more specific provisions and the catch all provision can only reasonably be interpreted to address matters “similar in nature” to the matters addressed by the proceeding provisions. With this guidance, the Court determined that the plan provisions in section 1123(a) each dealt with the rights and responsibilities of the debtor and its relationship to its creditors. The Court therefore concluded that using section 1123(a)(6) to address a nondebtor matter — that is, a release of a third party — would be a “radical departure” from the debtor-specific issues addressed in sections 1123(a)(1) through (a)(5). The Court further noted that Congress could have easily written section (a)(6) to state that everything in a plan not expressly prohibited is permitted, but it did not. Further, the Court looked to Bankruptcy Code section 524(e), which allows for nonconsensual third-party releases in the context of asbestos claims. The Court stated that if Congress had wanted releases to apply to all mass tort cases, it wouldn’t have enacted such a narrow exception.
The majority opinion acknowledged that the Purdue Pharma plan may have resulted in beneficial recovery to address a terrible crisis, but it held that no statute can be permitted to pursue a single policy “at all costs” and that “a bankruptcy court cannot be a roving commission to resolve all such problems that happen its way, blind to the role of other mechanisms (legislation, class actions, muti-district litigation, consensual settlements among others) play in addressing them.” The opinion concluded by stating that the Supreme Court is “the wrong audience” for determining the proper scope for a bankruptcy discharge. Rather, that is a matter for Congress.
The Impassioned Dissent
Justice Kavanaugh’s dissent is notable both for its length and for the unusually strong language. Justice Kavanaugh made his displeasure in the result of the case particularly clear by writing: “I respectfully but emphatically dissent.”
Justice Kavanaugh noted the many mass torts cases that were only possible because of third-party releases, including Dalkon Shield, Down Corning silicone breast implants, the Catholic Church and the Boy Scouts. As to the Purdue Pharma plan, the dissent quoted the plan proponents who asserted that “more people will die” if the plan were not confirmed. The dissent therefore made clear the justices’ viewpoint that the stakes of this case could not be higher and that the majority had chosen the wrong side.
The dissent raised a number of issues of why third-party releases should be permitted. Broadly speaking, the dissent opined that bankruptcy courts are the best venue for resolving mass tort cases, given the limitations of other options, including specifically multidistrict litigation where parties “can opt out of settlements even when super majorities favor them.” Turning to the more specific analysis of section 1123(a)(6), the dissent asserted that the issues at stake clearly involve the debtor and the debtor’s creditors and therefore fits within the ejusdem generis cannon. The dissent further asserted that it appeared undisputed that consensual third-party releases are permitted in bankruptcy plans, but the dissent stated that the only statutory basis for such consensual releases would be section 1123(a)(6). Notably, the dissent rushed past the argument that consensual releases are no different than any other type of agreement governed by contract law. The dissent attempted to raise a distinction between plans of reorganization filed in federal bankruptcy court on the one hand, and on the other hand “contracts [which] are enforceable under state law, ordinarily in state courts.” This statement appeared to ignore the legions of examples in bankruptcy practice where rights and obligations are governed by state law rather than federal law or the Bankruptcy Code. This jarring statement is coupled by the apparent belief by the dissenting justices that nonconsensual third-party releases are a critical tool in almost every complicated Chapter 11 case. The dissent does make mention that, even in jurisdictions where nonconsensual third-party releases were permitted, they are supposed to be in “narrow and relatively rare circumstances where the releases are necessary to help victims and creditors achieve fair and equitable recovery.” Nevertheless, despite this acknowledgement, the entire thrust of the dissent is that such releases are critical to Chapter 11 and that their absence in bankruptcy plans will cause severe disruption leading up to and including causing people to die.
What The Opinion Does Not Hold
The majority opinion at several points specifically addresses some of the assertions made in the dissent. While the back-and-forth analysis among the justices makes for interesting reading, it is the final portion of the majority that is critically important because it is where the Court addresses what the opinion did not decide. The Court states that “nothing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan.” In addition, the Court did not provide any opinion on what exactly qualifies as a consensual release or on the propriety of a plan that provides for full satisfaction of claims against a third-party nondebtor.
Future disputes relating to Chapter 11 third-party releases likely will focus on the particular tactics plan proponents use to obtain approval and whether creditors have truly consented. For example, whether or not it is permissible to include “opt in” or “opt out” release language in plan ballots and related issues on whether creditors truly provided consent. This Supreme Court decision should also be considered in the context of recent Chapter 11 practice across the United States. Specifically, in several different jurisdictions, nonconsensual third-party releases have been illegal for years (in some cases decades). For example, such releases have been contrary to the law in the Fifth Circuit since 2009. It is notable that sophisticated Chapter 11 practice has been alive and well in these jurisdictions, despite the unavailability of nonconsensual third-party releases as a means for confirming a complicated plan. Texas bankruptcy courts in particular have recently been leaders in confirming plans in sophisticated “mega” Chapter 11 cases.
With that context in mind, the Harrington v. Purdue Pharma, L.P. decision might not actually be the negative paradigm shift feared by reorganization professionals who view a bankruptcy court as a critical forum for solving complicated problems. In the near term, the decision is almost certain to result in additional delay and disruption for the victims of Purdue Pharma’s devastating behavior. In the long term, however, the Court’s decision establishing uniformity across the nation on this contentious issue may be considered a positive result by many bankruptcy practitioners.