U.S. Supreme Court Rejects Third-Party Releases

Introduction

On June 27, 2024, the U.S. Supreme Court (the “Supreme Court”) held, in an appeal arising out of the Purdue Pharma (“Purdue”) Chapter 11 case, that the U.S. Bankruptcy Code (the “Bankruptcy Code”) does not authorize so-called third-party releases. This decision (click here) reversed a judgment of the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”), which had previously approved such releases for certain members of Sackler family. While we are still digesting the implications of this decision—and what it means for bankruptcy cases going forward—it is clear that itwill impact the way we think about the future of mass tort bankruptcy cases, and perhaps more critically, what can be accomplished within those cases.

For additional context, we published a comprehensive series of reports over the last year that explored the intersection of mass torts and bankruptcy, including our primers entitled Mass Torts and Bankruptcy Part 1: Purdue Pharma and Mass Torts and Bankruptcy Part 2: Other Cases. We have also noted that Johnson & Johnson may commence a third bankruptcy proceeding for its subsidiary, LTL Management (click here), to implement the so-called Texas Two-Step strategy to address its talc liabilities, and Bayer has reportedly considered employing the same strategy to manage its liabilities at Monsanto related to polychlorinated biphenyls (PCBs) and glyphosate (click here). These strategies may now face an uncertain future because third-party releases—which are an essential ingredient for those strategies—are no longer available.

This note discusses the history of Purdue’s bankruptcy cases, what happened in the lower courts, and the Supreme Court’s decision. We also offer a few of our initial thoughts and takeaways.

Brief History of the Purdue Bankruptcy Cases

Purdue was once owned by the descendants of Drs. Mortimer and Raymond Sackler and is best known for developing and marketing OxyContin. Many believe that the marketing and sales tactics used to sell OxyContin contributed significantly to the opioid epidemic in the United States. As a result, both Purdue and the Sackler family have been the subjects of numerous government investigations and have been defendants in a myriad of lawsuits related to OxyContin. Purdue nonetheless distributed approximately $11 billion to the Sacklers and their family trusts over the last 20 years, and many of those family trusts are outside the jurisdictional reach of the U.S. court system.

In late 2019, Purdue filed for bankruptcy to address the morass of litigation and its mounting liabilities. Purdue’s bankruptcy stayed all litigation against it by virtue of the automatic stay, and the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) extended the automatic stay to halt litigation against the Sacklers as well, even though they did not file their own personal bankruptcy cases.

One of the central pillars of the bankruptcy strategy was to obtain court approval of a global settlement between Purdue and the Sacklers. The settlement was to provide that the Sacklers would contribute a significant portion of their wealth to the Purdue bankruptcy estate in exchange for releases of claims that could be asserted against them by both (i) Purdue, on the one hand, and (ii) third parties like opioid victims and government entities, on the other hand (known as “third-party releases”). See generally Mass Torts and Bankruptcy Part 1: Purdue Pharma. The releases that were to be given the Sacklers included both consensual and non-consensual releases, meaning that parties would be forced into giving those releases. The theory behind the settlement was that the Sacklers’ contribution to the Purdue bankruptcy estate would augment the estate’s size so that significant, incremental value could be distributed to victims and for remediation efforts. The Sacklers ultimately agreed to contribute $4.325 billion in exchange for releases of civil liability against them. The settlement did not absolve the Sacklers of criminal liability.

In September 2021, the Bankruptcy Court approved the third-party release in conjunction with confirmation of Purdue’s plan of reorganization. The Bankruptcy Court reasoned that, if the settlement was not approved, creditors would have received little to no consideration from Purdue because (1) certain superpriority claims, which would be waived as part of the global settlement, would have priority of payment over victims, and (2) litigation against the Sacklers would prove to be fruitless because their wealth was beyond the reach of U.S. courts.

Lower Court Appeals

On appeal, the U.S. District Court for the Southern District of New York vacated the Bankruptcy Court’s confirmation order and concluded that third-party releases were not permitted by the Bankruptcy Code. On further appeal, however, a divided panel of the Second Circuit, which has federal appellate court jurisdiction over New York, upheld the Sackler settlement and third-party release (click here).

The Second Circuit reasoned that §§ 105(a) and 1123(b)(6) of the Bankruptcy Code provide a statutory basis for third-party releases: that is, § 105(a) provides that “[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code],” and § 1123(b)(6) provides that “a [reorganization] plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.” The Second Circuit held that § 105(a) (which gives courts broad equitable powers) when coupled with so-called residual powers identified in § 1123(b)(6) gives bankruptcy courts broad “residual authority” to modify credit-debtor relationships generally. The Second Circuit concluded that this residual authority includes the power to approve nonconsensual third-party releases. The Second Circuit also identified a number of factors that bankruptcy courts should consider before approving third-party releases.

Notably, by the time the Second Circuit ruled, the Sacklers had increased the amount of their settlement contribution and, as a result, nearly every constituency in the bankruptcy case—including the debtors, the official committee of unsecured creditors, various ad hoc groups, and most states—supported the plan and third-party release. Few parties remained as objectors, but the release was primarily opposed by the Office of the U.S. Trustee (the “U.S. Trustee”), which is a division of the U.S. Department of Justice, that serves as a government watchdog over bankruptcy cases. The U.S. Trustee has no economic interest in the outcome of the case, yet the U.S. Trustee sought further review from the Supreme Court.

In August 2023, the Supreme Court stayed the implementation of the reorganization plan and agreed to hear the appeal. Oral arguments were held in December 2023. See Supreme Court Grapples with Third-Party Releases.

The Supreme Court’s Decision

On June 27, 2024, the Supreme Court, in a 5-4 decision, held that the Bankruptcy Code does not authorize third-party releases. The majority opinion, which was authored by Justice Neil Gorsuch, concluded that § 1123(b)(6)—which provides that “a [reorganization] plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title”—cannot be read in the broadest sense possible. Instead, § 1123(b)(6) is a “catchall” provision that is tacked on at the “end of a long and detailed list of” paragraphs (namely §§ 1123(b)(1) through (5)), and this paragraph (6) must be read in conjunction with the paragraphs that precede it. Each of those preceding paragraphs all concern the debtor in bankruptcy and its relationship with creditors, and so the scope § 1123(b)(6) must be read with those other paragraphs in mind. The majority ultimately concluded that § 1123(b)(6) cannot be read to allow bankruptcy courts to discharge the claims of a debtor’s creditors against third parties.

The majority also looked at various other provisions of the Bankruptcy Code to buttress its holding. For example, the majority noted that only the debtor in bankruptcy gets a discharge of its debts, § 1141(d)(1)(A), and the Sacklers are not debtors, so approving third-party releases would be akin to giving them the benefits of a bankruptcy discharge. In addition, the majority also highlighted that a debtor must generally turn over all their assets in order to get the discharge, which the Sacklers did not do. Accordingly, approving third-party releases would give the Sacklers the benefits of a discharge without the obligations of a debtor. Finally, the majority noted that only one provision of the Bankruptcy Code authorizes third-party releases, and that provision limited to the context of asbestos bankruptcies. The majority believes this provision makes it even more likely that Congress did not intend for third-party releases to be authorized within the scope of § 1123(b)(6).

In the end, the majority acknowledged that there may be valid policy arguments regarding the propriety of third-party releases. However, the majority emphasized that the authority to make those policy judgment lies with Congress, not with the Supreme Court. It is Congress’s responsibility to decide whether to codify third-party releases into the framework of the Bankruptcy Code.

By contrast, Justice Brett Kavanaugh authored a forceful dissent spanning over 50 pages that highlighted the importance of third-party releases in bankruptcy cases, particularly in the context of mass tort bankruptcies. He outlined the historical reliance on such releases as a cornerstone for resolving some of the most complex mass tort cases, including Dow Corning (involving silicone breast implants) and A.H. Robins (involving the Dalkon Shield), which were also discussed in our primer on mass torts, which is cited above. Indeed, the dissent spent over a dozen pages advocating for the appropriateness and necessity of third-party releases, especially in mass-tort bankruptcies where they serve to unify victims within a single tribunal and mitigate the costly and disparate judgments of individual lawsuits.

The dissent also pointed to the collective-action problem and how non-debtor settlement payments have offered a solution that fosters a more equitable distribution of assets and prevents victims from having to engage in a race to the courthouse to obtain litigation recoveries. Third-party releases, the dissent notes, have often been extended to insurance companies and can bring significant funds into the bankruptcy estate and alleviate the potential for contentious disputes over finite bankruptcy estate assets.

Justice Kavanaugh emphasized the critical nature of the statutory term “appropriate” within § 1123(b)(6) and argued that it gives bankruptcy courts broad authority to exercise discretion in dealing with the intricate challenges posed by mass-tort bankruptcies, and that non-debtor releases are not only appropriate but sometimes indispensable for the resolution of the collective-action problem in large bankruptcy cases.

Thoughts and Takeaways

We are still digesting the Purdue decision and its implications for bankruptcy practice and the resolution of mass torts more generally. We nonetheless offer a few initial thoughts and takeaways.

While the decision is consistent with our prior predictions, it is often the case that Supreme Court rulings raise more questions than they answer. Even the majority opinion recognized as much, stating that it is not answering certain predicable questions like, what qualifies as a consensual third-party release (likely be permitted by the Bankruptcy Code) or whether the Purdue decision should allow for the unwinding of bankruptcy plans that have already gone effective.

But these questions are just the tip of the iceberg, as there are many known unknowns. For example, how will this impact future mass tort bankruptcies? Or, for example, will directors, officers and hired professionals get releases in bankruptcy plans? Will insurance companies refuse to contribute funds in mass tort bankruptcy cases in the absence of third-party releases? Will sponsors think twice before putting portfolio companies into bankruptcy if they cannot receive a third-party release as part of a negotiated global settlement? Only future cases and litigation will answer these questions.

What is a little more certain, though, is that the Purdue decision will create uncertainty for companies that are currently looking to address mass tort exposure through Chapter 11. As noted above, Johnson & Johnson may commence a third bankruptcy proceeding for its subsidiary, LTL Management (click here), to implement the so-called Texas Two-Step strategy to address its talc liabilities. Similarly, Bayer has reportedly considered employing the same strategy to manage its liabilities at Monsanto related to polychlorinated biphenyls (PCBs) and glyphosate (click here). These strategies now face an opaque future because third-party releases—which are an essential ingredient for those strategies—are no longer available.

In the end, Purdue may ultimately prompt debate in Congress, as both the majority and dissent alluded to. Relying on Congress to take action, though, is unreliable at best.

Prior Relevant Research

• Mass Torts and Bankruptcy Part 1: Purdue Pharma
• Mass Torts and Bankruptcy Part 2: Other Cases
• Bayer: Litigation, Preemption & The Texas Two-Step
• Bayer: Considering Dancing The Texas Two-Step
• Bestwall: The Texas Two-Step Gets Political
• JNJ: Third Time’s the Charm?