In a split opinion today, the U.S. Supreme Court ruled that a bankruptcy court cannot grant a third party release in a plan absent claimants’ consent. In Harrington v. Purdue Pharma L.P., Case No. 23-124, in a 5-4 holding, the majority opinion, written by Justice Gorsuch, paints a picture of nefarious actions by the Sackler family – “milking” Purdue of $11 billion of extra cash over the course of 10 years in order to reduce the funds available for the anticipated lawsuits, to the point where Purdue was left financially vulnerable and forced into bankruptcy, where the Sacker’s then agreed to return a portion of the funds it withdrew from the company in order to buy a release and injunction against further lawsuits against the family.
At issue was the bankruptcy court’s authority under 11 U.S.C. sec. 1123(b)(6) – a catchall provision in the code related to bankruptcy plans that allows the court to approve inclusion in a bankruptcy plan “any other provision not inconsistent with the applicable provision of this title.” The majority here held that nothing in sec. 1123 or the Bankruptcy Code permits the court to allow a non-sensual release of third parties (like the Sacklers) who do not submit themselves and, importantly, their financial disclosures, to effectively secure a discharge of liability. Indeed, the entire premise of the Bankruptcy Code’s equitable powers is centered on full disclosure first before the relief of discharge can be given.
The Sacklers’ actions are egregious, for sure. But in a nod toward recognizing that their holding could be misconstrued as bad facts making bad law, the Court attempts to limit its holding:
“Nothing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan; those sorts of releases pose different questions and may rest on different legal grounds. … Nor do we have occasion today to express a view on what qualifies as a consensual release or pass upon a plan that provides for the full satisfaction of claims against a third-party non-debtor. Additionally, because the case involves only a stayed reorganization plan, we do not address whether our reading of the bankruptcy code would justify unwinding reorganization plans that have already become effective and been substantially consummated.”
This leaves open important questions of whether consummated plans could be unwound or at what point and under what facts consent could be found.
In the dissent, penned by Justice Kavanaugh, the other half of the Court rightfully frets about the future of mass tort cases where the only source of meaningful recovery for victims is a plan funded voluntarily by third parties in exchange for an injunction and release. The dissenters called the Purdue plan in which the $6 billion contributed would provide much-needed relief to the victims of the opioid crises, a “shining example of the bankruptcy system at work.” Notably, all of the states that originally objected to the settlement ultimately withdrew their objections to the plan and release, and the appeal heard by the Supreme Court was spearheaded by the U.S. Trustee alone. The dissent also worries that the “narrow holding” the majority espouses is not narrow enough because the consensus built around this settlement was unprecedented, and what remained of the dissenters by the time it reached the Supreme Court was a small group of Canadian creditors and a single individual dissenter. Given the magnitude of the claimants here, it would be incredibly difficult to dream up a scenario with a better possible definition of “consensual.”
Justices Gorsuch, Thomas, Alito, Barrett, and Jackson were in the majority; and Justices Kavanaugh, Roberts, Sotomayor, and Kagan were in the dissent.