By: Jeffrey C. Toole
August 15, 2023
For years, the federal courts of appeals have been divided regarding whether, in a chapter 11 plan of reorganization, the claims held by non-debtor creditors against non-debtor third parties can be extinguished without those creditors’ consent. On August 10, 2023, the U.S. Supreme Court finally agreed to answer this question.
The issue typically arises with greatest force in mass tort situations. For asbestos-related claims, Congress provided an answer by adding section 524(g) to the Bankruptcy Code. That section permits chapter 11 plans to enjoin existing and future tort claimants from suing certain categories of non-debtor third parties, such as chapter 11 debtors’ insurers, parent companies, officers, directors, and owners, subject to satisfying various prerequisites. But what about other types of mass tort bankruptcies that section 524(g) does not address explicitly? There, courts across the county have been divided. As a result, whether a debtor’s chapter 11 plan can involuntarily release creditors’ claims against third parties related to the debtor – but who are not themselves in bankruptcy – depends upon the view of federal circuit court of appeals in which the debtor’s bankruptcy case is filed. In other words, the answer depends upon geography.
On May 30, 2023, the U.S. Court of Appeals for the Second Circuit chose sides on this issue in a mass tort bankruptcy involving nationwide opioid litigation against Purdue Pharma and others. The Second Circuit reversed an order of a New York federal district court in Purdue Pharma’s bankruptcy case that had upended the bankruptcy court’s approval of Purdue Pharma’s plan of reorganization. The Second Circuit concluded, among other things, that (a) the bankruptcy court had jurisdictional power to approve non-consensual releases of creditors’ claims against non-debtor third parties (e.g., the Sackler family, who are Purdue Pharma’s former owners) by submitting proposed findings of fact and conclusions of law to the district court for its consideration, (b) enough statutory authority existed under the Bankruptcy Code to permit such non-consensual releases in a chapter 11 plan, and (c) the factual record supported the bankruptcy court’s approval of non-consensual releases, based upon a seven-factor test the Second Circuit announced in its decision.
The United States Trustee for Region 2 asked the Supreme Court to weigh-in on this issue and requested the Supreme Court to stay the Second Circuit’s decision in the interim. On August 10, the Supreme Court agreed to do so. It granted a writ of certiorari, stayed the Second Circuit’s decision, and ordered the parties to submit briefs on and to argue the following question:
Whether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.
The Supreme Court also instructed that oral argument on this question will take place during December 2023. Assuming the Supreme Court reaches the merits, we can expect a decision on this divisive chapter 11 bankruptcy issue during the Spring of 2024.
Once the Supreme Court makes its ruling, we will update you.
The case is William K. Harrington, United States Trustee, Region 2 v. Purdue Pharma, L.P., et al., Sup. Ct. Case No. 23-124.