A vital aspect of chapter 11 is confirmation of the estate’s plan. Section 1123 of the Bankruptcy Code sets forth the components of a chapter 11 plan.^[1] While section 1123(a) provides certain mandatory provisions be included in a chapter 11 plan, section 1123(b) provides a permissible set of additional provisions that may be included in a chapter 11 plan.^[2] While the first five sub-sections of section 1123(b) list out specific provisions that may be included in a plan, sub-section six simply states that a plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.”^[3] Under this subsection, some courts have authorized the use of third party releases as “appropriate and essential in mass-tort litigations[.]”^[4]Other courts have observed that “nothing in the bankruptcy code grants a bankruptcy court the ‘extraordinary’ power to release and enjoin claim against a third party without the consent of the affected claimants.”^[5] The Supreme Court resolved this conflict by finding “that the bankruptcy code does not authorize a release and injunction that… effectively seeks to discharge claims against a nondebtor without the consent of affected claimants.”^[6]

In Harrington v. Purdue Pharma L.P., part of Purdue Pharma L.P.’s (“Purdue”) chapter 11 plan, was a release and injunction for the Sackler family.^[7] The Sacklers owned and operated Purdue while it created, sold and marketed the prescription drug OxyContin.^[8] The Sacklers were extensively involved in the development of the prescription drug, which Purdue marketed to be a “less addictive” alternative to other opioids on the market.^[9] While OxyContin became “the most prescribed brand-name narcotic medication in the United States” between 1996 and 2019, it did so because of the painkiller’s misbranding as “less addictive” than other opioids.^[10] In 2007, an affiliate of Purdue plead guilty to a federal felony relating to the misbranding, and as a result, thousands of civil lawsuits sought damages from Purdue and the Sacklers relating to injuries caused by the deceptive marketing practices.^[11]

Purdue filed for chapter 11 bankruptcy in 2019 after a string of adverse court decisions resulting in damages.^[12] Before Purdue filed for bankruptcy, the Sackler family took assets out of the company, totaling nearly $11 billion dollars, leaving it in a “significantly weakened state.”^[13] As part of Purdue’s chapter 11 plan, the Sacklers proposed to return $4.325 billion (which would later be increased by $1.175-$1.675 billion) of the $11 billion that they withdrew from Purdue.^[14] In exchange, the Sacklers would receive a release and injunction, extinguishing any current and future claims of negligence, fraud or willful misconduct against them for their involvement in Purdue’s sales of OxyContin.^[15] After polling victims and creditors, the bankruptcy court for the Southern District of New York approved the overall plan with the Sackler release.^[16]

Once the plan was confirmed by the bankruptcy court, plan opponents, including five different state attorney generals, appealed to the district court for Southern District of New York.^[17] The district court for the Southern District of New York vacated the decision, holding that nothing in the law would authorize a bankruptcy court judge to confirm a plan with a release from claims provision without consent from victims.^[18] Purdue, the Sacklers and various creditors appealed to the Second Circuit, which  reversed the district court’s order.^[19] The Second Circuit concluded “that a bankruptcy court enjoys broad authority to modify debtor-creditor claims.”^[20] The U.S. Trustee filed an application with the Supreme Court to stay the Second Circuit’s decision, which was treated as a Writ of Certiorari.^[21]

The Supreme Court found that a bankruptcy court may not extend the benefits of a chapter 11 discharge to non-debtors.  The Supreme Court’s decision lists three principal reasons for this decision. First, the language of 11 U.S.C. §1123(b) does not support a bankruptcy judge’s ability to approve a provision in a bankruptcy plan giving relief to non-debtors.^[22] Second, there are no other statutes of title 11 that would support a bankruptcy court having this broad discretion of approving a release provision to a non-debtor.^[23] Third, nowhere in of the legislative history of the Bankruptcy Code is there support for non-debtor discharge in litigation claims.^[24]

Notably, the Supreme Court did not address what constitutes consent for the purpose of granting consensual third party releases.^[25] The court noted that “[consensual releases] pose different questions and may rest on different legal grounds than the non-consensual releases at issue[.]”^[26] The court stated that this was not an “occasion…to express a view on what qualifies as a consensual release”^[27] despite having “95 percent approv[al]” of the plan.^[28] In the court’s view, because they decided to categorize this case as a dispute over a non-consensual release, this still left open the ability for the Sacklers and the victims to negotiate a “consensual release[.]”^[29] However, without any other guiding support from the court over what a consensual release would entail in this context, it was warned that the victims may not be able to obtain a deal similar to the one stated in the chapter 11 plan.^[30]

            While the majority held that the Supreme Court should not subvert Congress’s authority by broadening the power of §1123(b), the dissent favored looking at public policy in their decision.^[31] In the dissent’s view, the Court should have upheld the Sackler family release since it will lead to “substantial and adequate compensation” for victims.^[32] This was forwarded by “fervent[] support” from victims and creditors who approved the bankruptcy plan.^[33] The dissent also disagreed with the majority’s idea that third-party releases should only be granted by Congress.^[34]  Especially since the asbestos bankruptcy cases, including Dalkon Shield, Dow Corning, Catholic Church and Boy Scout have showed that third-party releases have been a vital part of mass-tort litigations.^[35]

The dissent stated that third-party releases have a history of receiving approval from courts and victims alike, especially in the Second Circuit, a “leader on the non-debtor release issue.”^[36] The dissent laid out several factors that the Second Circuit has used in the past to find whether a third-party release is an “appropriate” implementation to a chapter 11 plan.^[37] One fact is whether the plan received overwhelming support from creditors, which   “the Second Circuit defined as 75 percent ‘bare minimum.’”^[38] The dissent explained that this approval measure was greater than what is required for a normal approval of a plan to ensure that the victims are receiving a fair pay-out based on the plan’s terms.^[39] The dissent magnified this approach to advocate for a “holistic inquiry that depends on the precise facts and circumstances of each case.”^[40]

This case ultimately will have a lasting impact over how large-scale corporations and entities approach mass-tort litigations through the United States Bankruptcy system. While the court disallowed “non-consensual” third-party releases, it left open the possibility for future cases to challenge what could be deemed a consensual release in a chapter 11 plan.^[41]