Harrington v. Purdue Pharma L.P. and the Future of Nonconsensual Third-Party Releases in Bankruptcy

I. What You Need to Know

The Supreme Court:

1. held that the Bankruptcy Code does not authorize a release and injunction that, as part of a Chapter 11 plan of reorganization, seeks to discharge claims against a nondebtor without the consent of affected claimants; but
2. declined to decide whether plans that are substantially consummated and include existing nonconsensual third-party releases must be unwound;
3. declined to opine on how a debtor may establish “consent” to third-party releases; and
4. declined to address the impact of full payment of third-party claims through a plan.

II. Factual and Procedural Background

Over the course of roughly 20 years, Purdue Pharma engaged in the marketing and production of OxyContin.¹ After an epidemic of opioid abuse and addiction swept the United States, the public and government authorities grew wary of Purdue’s assurances of OxyContin’s safety, and in 2007 Purdue Pharma pled guilty for their misstatements about the product. Thousands of civil suits followed, thrusting Purdue Pharma into bankruptcy in 2019.

Purdue Pharma had been owned by the same family since the 1950s, the Sacklers. When the Sacklers began to face litigation and investigations regarding Purdue’s opioid products, they began to increase their withdrawal of dividends from Purdue.² Ultimately, these withdrawals totaled approximately US$11 billion.

Recognizing that over US$40 trillion in civil claims existed against Purdue Pharma—several of which named the Sacklers as defendants—the Sacklers decided to strike a deal with the company.³ In this deal, they agreed to return just over US$4 billion to the company. In exchange, Purdue Pharma agreed to include in its plan of reorganization a release for the Sacklers from all current and future claims against them by opioid victims.⁴ Thousands of opioid victims voted to reject the plan, but the bankruptcy court ultimately confirmed it.⁵

On appeal, the district court saw things differently. The district court held that the bankruptcy court did not have the authority to release a claim against the Sacklers without a claimant’s approval, as only Purdue Pharma, not the Sackler family, was the bankrupt party.⁶ As such, only Purdue Pharma could receive a discharge. On subsequent appeal, the Second Circuit sided with the bankruptcy court, holding that the non-consensual third-party releases are permitted by the Bankruptcy Code, and therefore, the plan was permissible.⁷

The Supreme Court, however, reversed, finding that the bankruptcy court lacked the authority to approve involuntary releases of third-party claims, even if essential to the debtors’ reorganization.

III. What are Non-Consensual Third-Party Releases?

To understand this case, it is critical to understand what a “non-consensual third-party release” (or non-consensual nondebtor release) is. These releases often arise in the context of large-scale bankruptcies (such as mass tort bankruptcies) wherein many individuals have claims against a company and its related parties, like corporate affiliates, officers, directors, and insurers. In short, a third-party release allows an individual or company who did not file for bankruptcy to be released from certain claims (for example, claims involving the Sacklers’ role in the opioid crisis). In Purdue Pharma, the Sacklers, though not in bankruptcy, sought a third-party release from the claims of the opioid victims. Critically, the victims were not required to consent to this release—hence, the “non-consensual” aspect.

IV. Supreme Court Prohibits Nonconsensual, Nondebtor Third-Party Releases

A five-justice majority of the Supreme Court overruled the Second Circuit and held that the bankruptcy court did not have the authority to permit the nonconsensual release of the opioid victims’ claims against the Sacklers.⁸ In its decision, the Court looked to a Bankruptcy Code provision that outlines what must, and what may, be included in a chapter 11 plan of reorganization.⁹ Critically, the provision permits the inclusion of “any other appropriate provision not inconsistent with the” Bankruptcy Code.¹⁰ Purdue Pharma argued that this language allowed the nonconsensual third-party release.

Writing for the Court, Justice Gorsuch held that this catchall provision did not necessarily mean that any other provision could be inserted into a plan of reorganization. Instead, the Court noted that the Bankruptcy Code is designed for the benefit and protection of debtors, and even debtors must surmount obstacles to obtain these releases.¹¹ Generally speaking, to earn a release, a debtor must put “virtually all of its assets on the table.”¹² Plainly, the Sacklers did not do this. Not only did they avoid bankruptcy, but they retained billions of dollars that they had accrued from Purdue Pharma in the preceding years. Accordingly, the Court held that the release of the Sackler family was outside the scope of what may be included in a plan of reorganization.

Next, the Court addressed Purdue Pharma’s alternative argument: that a bankruptcy court’s broad equitable powers¹³ permit it to grant the release. The Court rejected this argument by noting that the Bankruptcy Code provision that grants these equitable powers does so under the condition that the actions are “necessary or appropriate to carry out the provisions of” the Bankruptcy Code.¹⁴ And here, as noted above, the Bankruptcy Code does not permit the release. Therefore, the Supreme Court held that the bankruptcy court could not uphold the release through its equitable powers.

Still, the Supreme Court was explicit about several issues that this opinion was not deciding. For one, the Court made clear that this decision does not call into question any of the law surrounding consensual third-party releases, as these releases “may rest on different legal grounds” than nonconsensual releases.¹⁵ Relatedly, the Court did not make any determinations as to what constitutes “consent” in the context of a release or what should happen in the event that a plan provides for the full satisfaction of claims against a third-party nondebtor.¹⁶

Finally, and perhaps most critically, the Court stated that the opinion “does not address whether . . . [their] reading of the bankruptcy code would justify unwinding bankruptcy plans that have already become effective.”¹⁷ The Court does not foreclose the application of a doctrine called “equitable mootness” in instances where a plan has been put into effect. This doctrine permits the dismissal of appeals when a plan of reorganization is already in effect (and accordingly cannot practically be reversed). Likewise, the doctrine of statutory mootness may foreclose appeals or collateral attacks where assets (like insurance policies) have been sold pursuant to a plan that includes associated third-party releases.¹⁸

V. Key Takeaways

• The Court does not answer whether this opinion will require the unwinding of already confirmed plans.

In the wake of Purdue Pharma, many questions are explicitly left unanswered. One of the most critical questions is what happens to those debtors who have confirmed a plan, will soon confirm a plan, or have begun carrying out a plan (subject to appeal) that involves a nonconsensual third-party release.

For those who intend to confirm a plan that includes a nonconsensual third-party release, Purdue Pharma will likely inspire bankruptcy courts across the country to reject such releases. Alternatively, for those who have begun to execute a plan, the doctrine of equitable mootness will likely prevent Purdue Pharma from impacting the plan whatsoever. The same is true for plans that qualify for statutory mootness based upon the sale of assets tied to a third-party release. The middle ground—those who have confirmed a plan but not yet begun to execute it—are in uncertain territory. Since the Court does not answer the question of whether these plans should be unwound, lower courts will be left on their own to make these determinations.

• This decision does not affect: (i) consensual third-party releases; (ii) what constitutes “consent” in the context of releases; or (iii) plans of reorganization that allow for the full satisfaction of claims against third party nondebtors.

Questions about consensual agreements and what constitutes consent will have to wait for another day to be addressed by the Supreme Court. Generally speaking, courts have looked favorably on non-coerced, consensual releases,¹⁹ and this opinion does not seek to disturb that consensus. Additionally, the Court declined to address questions regarding cases where the plan arranges for the full satisfaction of claims against the released third-party nondebtor. These situations, too, may warrant injunctions protecting third parties.

One of the most interesting things to watch in the coming months will be how these issues are litigated in the lower courts. Purdue Pharma will likely inaugurate new battlefields in bankruptcy court. For one, parties now have reason to dispute whether or not a given release was adequately “consensual.” Similarly, contentions over whether claims against third-party nondebtors are “fully satisfied” by a plan of reorganization will likely be far more common.

• “Gatekeeping” provisions in plans of reorganization may become more important.

Gatekeeping provisions act as injunctions against lawsuits against critical nondebtors. The provisions usually require a bankruptcy court to first assess whether there is a colorable claim against the beneficiary of the gatekeeping provision before they can proceed. Other similar forms of the provision have been used to target specific litigants or protect certain released parties.

Even before the Purdue Pharma decision, the Fifth Circuit prohibited broad nonconsensual nondebtor releases but allowed gatekeeping provisions to minimize post-confirmation litigation.²⁰ This approach may become more common now that nonconsensual nondebtor releases are not permitted. Creative approaches to this mechanic may take on additional importance, whether to filter out certain litigants or impose barriers on litigation from hold-outs or creditors deemed to consent to a release by silence. In essence, gatekeeping provisions offer an alternative method to protect essential plan participants from improper lawsuits without granting full releases.

• Purdue Pharma does not affect releases involving mesothelioma caused by asbestos.

As noted by the Court, the Bankruptcy Code explicitly includes a provision that permits releases related to asbestos.²¹ If Congress were to pass a similar law permitting nonconsensual releases in the context of opioids, the Purdue Pharma holding would be abrogated.

¹ Harrington v. Purdue Pharma L.P., No. 23-124, 2024 WL 3187799, at *2 (Sup. Ct., June 27, 2024).

² Id.; In re Purdue Pharma, 69 F.4th 45, 58 (2d Cir. 2023).

³ Purdue Pharma, 69 F.4th at 60; Harrington, 2024 WL 3187799, at *3–4.

⁴ Harrington, 2024 WL 3187799, at *3-4.

⁵ Id. at *5.

⁶ Id.

⁷ Purdue Pharma, 69 F.4th at 69.

⁸ Harrington, 2024 WL 3187799, at *10.

⁹ 11 U.S.C. § 1123.

¹⁰ Id. § 524(b)(6).

¹¹ Harrington, 2024 WL 3187799, at *14.

¹² Id. at *1.

¹³ 11 U.S.C. § 105(a).

¹⁴ Id.

¹⁵ Harrington, 2024 WL 3187799, at *19.

¹⁶ Id.

¹⁷ Id.

¹⁸ 11 U.S.C. § 363(m).

¹⁹ In the Matter of Specialty Equipment Companies, Inc., 3 F.3d 1043, 1047 (“[C]ourts have found releases that are consensual and non-coercive to be in accord with the strictures of the Bankruptcy Code.”).

²⁰ See generally Nexpoint Advisors, L.P. v. Highland Capital Mgmt., L.P. (In re Highland Capital Mgmt., L.P.), 48 F.4th 419 (5th Cir. 2022).

²¹ 11 U.S.C. § 524(g)(2)(B)(i)(I).

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. John J. Rapisardi, an O’Melveny partner licensed to practice law in New York; Evan M. Jones, an O’Melveny partner licensed to practice law in California and the District of Columbia; Gabriel L. Olivera, an O’Melveny counsel licensed to practice law in the District of Columbia, New Jersey, New York, and Puerto Rico; Jordan A. Weber, an O’Melveny counsel licensed to practice law in California and New York; Samantha M. Indelicato, an O’Melveny counsel licensed to practice law in New York; and Gavin R. Barrett, an O'Melveny law clerk, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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