Approximately four months after it was issued, the highly anticipated U.S. Supreme Court decision in Harrington v. Purdue Pharma LP is already having a significant impact on bankruptcies around the country.

As explained below, Purdue Pharma has affected decisions on whether to file for bankruptcy; what venue to select, both foreign and domestic; and strategies during bankruptcy, including the opt-out versus opt-in mechanisms.

In September 2019, Purdue Pharma LP and 23 affiliated debtors filed for Chapter 11 bankruptcy to provide a breathing spell from the mounting pressure of opioid litigation. The Purdue Pharma debtors were facing a growing number of class actions stemming from Purdue Pharma's marketing and sale of its drug, OxyContin.

As part of the Chapter 11 case, the Purdue Pharma debtors, its owners, and certain other parties entered into a settlement agreement under which the owners would contribute $4.325 billion — increased to $6 billion — to fund the Purdue Pharma debtors' plan of reorganization to repay creditors, including the opioid claimants.

In exchange for settlement funds, the plan provided that the Purdue Pharma owners would be released from all claims from both the Purdue Pharma debtors and any third party that could bring a claim against them. The release by third parties would enjoin all claims regardless of whether the third-party claimant voted to approve the plan or consented to the releases.

While more than 95% of voting victims and creditors voted in support of the plan, the U.S. Trustee's Office, certain governmental entities and thousands of opioid plaintiffs opposed the nonconsensual releases afforded the Purdue Pharma owners. The U.S. Trustee's Office and these other parties alleged that the release would shield the Purdue Pharma owners from opioid-related liability claims, even though the owners did not personally declare bankruptcy.

The U.S. Bankruptcy Court for the Southern District of New York overruled the objections to the plan and confirmed it with the third-party releases for the benefit of the Purdue Pharma owners.

The U.S. District Court for the Southern District of New York reversed the bankruptcy court's decision. However, the U.S. Court of Appeals for the Second Circuit reinstated the bankruptcy court's confirmation order, reasoning that Second Circuit precedent allows for nonconsensual third-party releases in certain circumstances. The U.S. Trustee's Office appealed to the Supreme Court.

In a 5-4 decision, the Supreme Court reversed the Second Circuit, noting that the only provision of Section 1123(b) of the U.S. Bankruptcy Code that could authorize the inclusion of a nonconsensual third-party release in a plan is Subsection 6, i.e., the "catchall" provision, which provides: "include any other appropriate provision not inconsistent with the applicable provisions of this title."

The Supreme Court found that the catchall provision, which affords bankruptcy courts broad discretion to approve any other appropriate provision consistent with the Bankruptcy Code, does not authorize a third-party release in a Chapter 11 plan that seeks to discharge claims against a nondebtor without the consent of affected claimants.

Specifically, the Supreme Court, relying on Section 524(e) of the Bankruptcy Code, noted that "a discharge operates only for the benefit of the debtor against its creditors and 'does not affect the liability of any other entity.'" Accordingly, the Supreme Court ruled that the Bankruptcy Code prohibits third-party releases without the consent of the affected claimants.

Despite the major implications in the Purdue Pharma case, the Supreme Court's decision was fairly limited as its ruling solely addressed whether nonconsensual third-party releases could be included in a Chapter 11 plan. The Supreme Court made it clear that its opinion does not call into question the propriety of consensual third-party releases or whether consensual third-party releases can be included in the Chapter 11 plan.

Nor did the Supreme Court address what constitutes a consensual third-party release; whether a different rule applies when a Chapter 11 plan provides for the full satisfaction of claims against the third-party nondebtors; and what happens to confirmed plans that contain nonconsensual third-party releases.[1]

Prior to the Supreme Court's decision, there was a split among the federal circuits, whereby six circuits, including the U.S. Courts of Appeals for the Second and Third Circuits, allowed third-party releases upon a showing of special circumstances; three circuits, including the U.S. Courts of Appeals for the Fifth, Ninth and Tenth Circuits, did not allow third-party releases; and the U.S. Courts of Appeals for the First and Eighth Circuits were undecided on the issue.

Since the Supreme Court's Purdue Pharma decision, the U.S. Trustee's Office continues to oppose the opt-out provision for nondebtor releases in Chapter 11 plans, maintaining that such opt-out releases are nonconsensual. Instead, opt-in mechanisms should be required to show a claimant's consent to granting a release to a nondebtor.

Recent cases post-Purdue Pharma have addressed nonconsensual third-party releases and the opt-out mechanism.

In In re: 2u Inc. in September, the Southern District of New York's bankruptcy court directed the debtors to replace the opt-out procedures with an opt-in release mechanism. The court also instructed the debtors to remove the "deemed to reject" classes from parties granting a nondebtor release.

In In re: Acorda Therapeutics, also in the Southern District of New York, the court confirmed the plan in August and overruled the U.S. Trustee's Office objections relating to the opt-out release, finding that "recipients of ballots were told that voting yes meant consenting to releases" and "if they voted yes it is fair to them to [bind them] to the release."

In In re: Bird Global Inc. in the U.S. Bankruptcy Court for the Southern District of Florida in July, the court overruled arguments by the tort claimants that the opt-out release was a nonconsensual discharge in violation of the Supreme Court's decision in Purdue Pharma. In distinguishing Purdue Pharma, the court reasoned that the debtors' plan provides for "full satisfaction" of all tort claims, and the channeling injunction and bar order are part of a settlement with the insurers and a Section 363 sale of the insurance policies.

In In re: BowFlex Inc. in the U.S. Bankruptcy Court for the District of New Jersey in August, the court overruled the U.S. Trustee's Office third-party release objection, reasoning that the Supreme Court did not opine on what constitutes consent and found that merely voting in favor of a plan was insufficient to establish consent.

The court held that the releasing parties received notice consistent with due process and the opt-out process and consequences were "clear and conspicuous" in the notice, and therefore, the opt-out mechanism is appropriate to demonstrate consent to nondebtor plan releases.

Aside from the opt-in mechanism or a consensual third-party release, there are other potential strategies to address the Purdue Pharma decision, including a gatekeeping injunction, exculpation provisions, or using Chapter 15 of the Bankruptcy Code.

If the debtor is unable to obtain a release, it can include a "gatekeeping" injunction in the Chapter 11 plan, whereby claims must seek the bankruptcy court's approval before pursuing claims against third parties. The Bankruptcy Code does not explicitly provide statutory authority for the gatekeeping injunction, thus making the injunctions susceptible to challenge on the same basis as Purdue Pharma.

This may be an impractical solution for Chapter 11 cases involving mass torts. Additionally, the debtor can use exculpation provisions in a Chapter 11 plan to shield parties in the bankruptcy from claims arising from conduct in the bankruptcy case.[2]

A company could also consider filing a bankruptcy outside of the U.S. Multinational entities may consider filing their main bankruptcy proceeding abroad in a jurisdiction — e.g., the United Kingdom — that still allows for nonconsensual third-party releases and seek recognition of the foreign bankruptcy in the U.S. via Chapter 15 of the Bankruptcy Code.

Additionally, the Purdue Pharma decision may dissuade a company from filing for bankruptcy protection at all, and instead, the company may opt to face the mass tort litigation in federal/state court. For example, owners of a distressed company may be reluctant to subject their company to Chapter 11 if they know they will not be able to obtain a release of their personal liability.

Finally, it is yet to be seen whether Congress will seek to amend the Bankruptcy Code to expressly permit nonconsensual third-party releases — as permitted in asbestos cases under Section 524(g) — or permanently bar them.

In 2021, proposed legislation, referred to as the Sackler Act, was introduced in Congress and sought to restrict individuals who have not personally declared bankruptcy from being exempt in legal cases initiated by the government.

While this bill would have closed the proverbial loophole for nondebtor releases, the bill did not receive a vote. The Sackler Act was reintroduced in the Senate in 2023, but it has not been enacted.

The Purdue Pharma decision will have a lasting effect on bankruptcies filed around the country, potentially the world. However, there are creative strategies that can be employed that do not run afoul of the Supreme Court's decision.

Brett Axelrod is a partner and Agostino Zammiello is an associate at Fox Rothschild LLP.

Disclosure: Fox Rothschild represents creditors in In re: 2u and In re: Acorda Therapeutics. In In re: Bird Global, the firm previously represented the unsecured creditors committee and now represents the liquidating trustee. In In re: BowFlex, the firm co-represented the debtors.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The reorganized Fairmont San Jose debtors in In re: SC SJ Holdings LLC, Case No. 21-10549 (JTD) (Bankr. D. Del. July 31, 2024) filed a petition for a writ of certiorari in the Supreme Court to resolve (1) whether nonconsensual third-party releases that are not objected to and become part of a confirmed and substantially consummated plan are "nevertheless invalid and unenforceable" following the Purdue Pharma decision; and (2) whether courts can review these releases after a plan's confirmation and substantial consummation. On October 7, 2024, the Supreme Court denied the petition for certiorari.

[2] On July 2, 2024, the Supreme Court denied petitions for certiorari that were based on the exculpation clause in the Highland Capital Management plan (In re Highland Capital Management LP , Case No. 19-34054-sgj11 (Bankr. N.D.Tex.)).

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