by Holding
On June 27, 2024, the Supreme Court in a 5-4 decision in Harrington v Purdue Pharma, Case No. 23-124 (2024) held that the Bankruptcy Code does not authorize a release and injunction that, as part of a Chapter 11 reorganization plan, effectively discharges claims against nondebtors without the consent of affected claimants.
Facts
Purdue Pharma, owned by the Sackler family, faced numerous lawsuits due to its role in the opioid crisis. The Sacklers withdrew approximately $11 billion from Purdue before the company filed for Chapter 11 bankruptcy in 2019. As part of Purdue’s reorganization plan, the Sacklers proposed to return $4.3 billion to the bankruptcy estate in exchange for a judicial order releasing them from all opioid-related claims.
Analysis
The Court’s analysis focused on whether the bankruptcy code allows a court to discharge claims against nondebtors without the consent of the claimants. The Court examined Section 1123(b) of the bankruptcy code, which addresses the contents of a Chapter 11 reorganization plan. The court ruled that Section 1123(b)(6), which allows a chapter 11 plan to “include any other appropriate provision not inconsistent with the applicable provisions of this title” does not allow the plan to discharge the debts of a nondebtor without the consent of the affected nondebtor claimants.
The Court applied the ejusdem generis canon, interpreting the catchall provision in Section 1123(b)(6) in light of its surrounding context. The specific paragraphs of Section 1123(b) allow a plan to include provisions related to the debtor’s claims and property, but they do not extend to discharging claims against third parties without consent. The catchall does not grant bankruptcy courts the authority to discharge nondebtors’ liabilities without affected claimants’ consent.
The Court also noted that the Bankruptcy Code generally reserves discharge benefits for the debtor who places virtually all its assets on the table, and it specifically limits discharge for claims based on fraud or willful and malicious injury. The Sackler discharge sought to extinguish a broad range of claims, including fraud and wrongful death, without the Sacklers placing all their assets on the table, thus exceeding what the code permits for debtor.
Furthermore, the Court emphasized that historical bankruptcy practice has consistently reserved discharge benefits for debtors who fully surrender their property. The Court found no precedent for extending discharge benefits to nondebtors without consent, reinforcing the conclusion that the current bankruptcy code does not authorize such releases.
NCBRC Note: The language in Section 1123(b)(6) is almost identical to the language found in Section 1322(b)(11) (“the plan may – include any other appropriate provision not inconsistent with this title”).
GORSUCH, J., delivered the opinion of the Court, in which THOMAS, ALITO, BARRETT, and JACKSON, JJ., joined. KAVANAUGH, J., filed a dissenting opinion, in which ROBERTS, C. J., and SOTOMAYOR and KAGAN, JJ., joined.
Harrington v Purdue Pharma – SCOTUS June 27 2024
Tips
- Ensure that any proposed release in a bankruptcy reorganization plan aligns strictly with the provisions of the bankruptcy code, particularly focusing on the debtor’s rights and responsibilities.
- Be aware that the bankruptcy code does not support nonconsensual releases for nondebtors, especially for claims involving fraud, willful injury, or wrongful death.
- Consider alternative legal strategies for resolving claims against nondebtors, such as negotiating consensual releases that comply with the requirements and limitations of the Bankruptcy Code.