22 July 2024 • 3 minute read
Limiting chapter 11 as a tool for collective resolution of mass tort liabilities
In Harrington v. Purdue Pharma, the US Supreme Court in a 5-4 decision held that the US Bankruptcy Code does not permit a debtor to confirm a chapter 11 plan that releases non-debtors from similar or related claims the creditors could assert directly against them.
After lengthy negotiations with state governments and certain individuals with claims against the Sackler family, the owners of Purdue Pharma, the Sacklers agreed to contribute about $6 billion to fund a settlement with victims of the opioid epidemic. In exchange, Purdue’s chapter 11 plan contained broad releases of the members of the Sackler family and their related businesses and trusts from all claims anyone could bring against them related to the opioid crisis. The bankruptcy court approved this release and imposed an injunction prohibiting any further litigation against the Sacklers.
The Office of the United States Trustee, the division of the Department of Justice that serves as a "watchdog" of the bankruptcy process, objected on the grounds that the Bankruptcy Code does not authorize such a release and injunction of the non-debtor Sacklers. This objection was sustained by the District Court on appeal but was reversed by the Second Circuit. The Supreme Court granted certiorari to decide whether these so-called “third-party releases” were permissible under the Bankruptcy Code.
A majority of the Supreme Court reversed the order confirming Purdue’s plan because, under principles of statutory construction, a catch-all phrase in the Bankruptcy Code related to permissible chapter 11 plan provisions did not convey clear authority to permit releases and injunctions outside of asbestos cases (since there is a specific section of the Bankruptcy Code that deals with these asbestos cases). In so holding, the Court suggested that, if a plan pays creditors in full or if those creditors fully consent to a release, then a release and injunction could be permitted.
Since injunctions and releases in a chapter 11 case have become a useful tool for collective resolution of mass tort liabilities, the decision was significant in that it limited this tool to some degree. Litigation over what is required for consent and what is “payment in full” may be likely, as corporate debtors in financial distress will likely continue to pursue collective resolution to mass tort liability.
Thus, while the Supreme Court answered the narrow question before it, the Court left some important questions unanswered and highlighted others. The Court suggested that, absent Congressional action, bankruptcy courts will continue to struggle to balance the rights and remedies of the parties in mass tort cases, including the companies alleged to have committed torts, the victims of those torts, and insurers of claims arising from any alleged mass torts.
For more information, please contact the authors.
After lengthy negotiations with state governments and certain individuals with claims against the Sackler family, the owners of Purdue Pharma, the Sacklers agreed to contribute about $6 billion to fund a settlement with victims of the opioid epidemic. In exchange, Purdue’s chapter 11 plan contained broad releases of the members of the Sackler family and their related businesses and trusts from all claims anyone could bring against them related to the opioid crisis. The bankruptcy court approved this release and imposed an injunction prohibiting any further litigation against the Sacklers.
The Office of the United States Trustee, the division of the Department of Justice that serves as a "watchdog" of the bankruptcy process, objected on the grounds that the Bankruptcy Code does not authorize such a release and injunction of the non-debtor Sacklers. This objection was sustained by the District Court on appeal but was reversed by the Second Circuit. The Supreme Court granted certiorari to decide whether these so-called “third-party releases” were permissible under the Bankruptcy Code.
A majority of the Supreme Court reversed the order confirming Purdue’s plan because, under principles of statutory construction, a catch-all phrase in the Bankruptcy Code related to permissible chapter 11 plan provisions did not convey clear authority to permit releases and injunctions outside of asbestos cases (since there is a specific section of the Bankruptcy Code that deals with these asbestos cases). In so holding, the Court suggested that, if a plan pays creditors in full or if those creditors fully consent to a release, then a release and injunction could be permitted.
Since injunctions and releases in a chapter 11 case have become a useful tool for collective resolution of mass tort liabilities, the decision was significant in that it limited this tool to some degree. Litigation over what is required for consent and what is “payment in full” may be likely, as corporate debtors in financial distress will likely continue to pursue collective resolution to mass tort liability.
Thus, while the Supreme Court answered the narrow question before it, the Court left some important questions unanswered and highlighted others. The Court suggested that, absent Congressional action, bankruptcy courts will continue to struggle to balance the rights and remedies of the parties in mass tort cases, including the companies alleged to have committed torts, the victims of those torts, and insurers of claims arising from any alleged mass torts.
For more information, please contact the authors.
