Editor’s Note: On December 4, 2023, the Supreme Court is scheduled to hear oral argument in the bankruptcy case of Purdue Pharma (captioned Harrington v. Purdue Pharma L.P.). In this case, the Supreme Court will decide whether to permit the bankruptcy plan presented by Purdue Pharma, which releases the controlling Sackler family from opioid-related liability in exchange for a financial contribution of at least $5.5 billion. This is seen by some as controversial because the Sacklers did not file for bankruptcy themselves and they will retain many billions of dollars in wealth. In deciding this case, the Court will also determine “[w]hether the Bankruptcy Code authorizes a court to approve, as part of a plan of reorganization under Chapter 11 of the Bankruptcy Code, a release that extinguishes claims held by nondebtors against nondebtor third parties, without the claimants’ consent.”
The Harvard Law School Bankruptcy Roundtable will feature several of the more than thirty briefs filed in this case, giving readers the opportunity to examine the legal and policy arguments for and against third party releases generally and the releases in this particular case.
This week’s post features the summaries of the arguments included in the briefs from petitioner United States Trustee William K. Harrington, as well as two amici briefs from two separate sets of law professors, all arguing against the releases. Links are also provided to the full briefs on the Supreme Court docket. Please return next week for another post featuring briefs from respondent Purdue Pharma L.P. and other parties supporting the releases.
At the stay stage before this Court, some respondents challenged the U.S. Trustee’s standing to seek vacatur of the confirmation order. The Court need not consider the U.S. Trustee’s standing because at least one other party with standing is seeking the same relief as the U.S. Trustee as a respondent in support of petitioner. But if the Court wishes to address the question, the U.S. Trustee plainly has both statutory and Article III standing to pursue this appeal. As six courts of appeals have held, the U.S. Trustee’s statutory authority to “raise” and “be heard” on any issue, 11 U.S.C. 307, gives him the right to appeal. And this Court’s cases establish that Congress may confer standing upon the United States—acting, as here, through a federal officer—to pursue the United States’ sovereign interests in vindicating federal law.
A. On the merits, the Sackler release, which extinguishes nondebtors’ claims against other nondebtors without the claimants’ consent, is not authorized by the Bankruptcy Code.
1. The Code grants courts unusual powers to modify relations between debtors and their creditors; those powers are specifically authorized by the Constitution for addressing a debtor’s true financial distress. A debtor undergoing bankruptcy must shoulder a host of obligations and must generally apply all its assets to the satisfaction of its creditors’ claims. In exchange, the debtor may receive a discharge of its debts, except for those that Congress has deemed nondischargeable, such as an individual’s debts for money obtained by fraud. But the Code grants the benefits of a discharge only to the debtor who went through bankruptcy. With the exception of a narrow provision involving asbestos liability that is undisputedly inapplicable here, the Code provides no express authority to release nondebtors from personal liability to other nondebtors.
2. In the absence of an express authorization, plan proponents have relied on catchall provisions preserving the bankruptcy court’s residual equitable authority, 11 U.S.C. 105(a) and 1123(b)(6). But there is no basis to infer a vast power, greater in many ways than the powers specifically authorized by the Code, from those residual provisions. Doing so violates two basic principles of statutory interpretation. First, plan proponents read a general authorization to approve “appropriate provision[s],” 11 U.S.C. 1123(b)(6), to swallow the Code’s “more limited, specific authorization[s].” RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012). Second, plan proponents treat a catchall provision as granting a power of a fundamentally different character from the preceding, enumerated examples of what is authorized.
3. Those problems only multiply when considering the broader statutory context. The Sackler release conflicts with several other express limitations on courts’ authority under the Code. It grants the functional equivalent of a discharge to a nondebtor, despite the Code’s clear provisions limiting a discharge to the debtor, who undertook the many duties and obligations imposed by the Code to obtain a fresh start. It also provides full repose to the Sacklers without requiring them to commit substantially all their assets to compensating their creditors; in that way, it allows the Sacklers to shield billions of dollars of their fortune while extinguishing, without payment, claims alleging trillions of dollars in damages. Equally troubling, it releases the Sacklers from claims based on fraud and other forms of willful misconduct that could not be discharged if the Sacklers themselves had filed for bankruptcy. And, while the plan appropriately preserves the jury trial right for claims against the debtor, the release extinguishes claimants’ jury rights against the Sacklers. A long line of this Court’s cases has rejected similar efforts to read general grants of authority to reach outcomes incompatible with the structure and purposes of the Code.
The history of bankruptcy law further confirms the lack of authority for the release because this Court specifically held under the Bankruptcy Act of 1898 that courts lack power to enjoin nondebtors from pursuing state-law claims against other nondebtors.
4. Congress’s narrow allowance for asbestos trusts in 11 U.S.C. 524(g)—which is the only provision of the Code specifically authorizing an injunction of claims between nondebtors—also illustrates the impermissible breadth of the release approved by the court of appeals. Unlike the Sackler release, Section 524(g) provides substantive protection for the value of released claims as well as procedural protections.
B. The court of appeals based its decision approving the release on Section 105(a) and Section 1123(b)(6), but it did not engage in a textual analysis, resting almost exclusively on this Court’s prior characterization of Section 1123(b)(6) as codifying a residual authority to modify creditor-debtor relationships. The residual authority to modify creditor-debtor relationships, however, provides no license to transform the relations between nondebtors.
The court of appeals also disregarded the limits on equity courts’ traditional authority, which did not include the power to enjoin nonparties or “to craft a ‘nuclear weapon’ of the law.” Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 332 (1999).
C. At a minimum, the court of appeals’ interpretation raises serious constitutional questions. The release allows federal courts to wield great power over state-law causes of action, a form of private property, and it extinguishes nonparties’ causes of action, with res judicata effect, without providing the claimants an opportunity to affirmatively consent or even to opt out. In each of those ways, the legality of the release, if statutorily authorized, would raise difficult and sensitive constitutional questions. Neither Section 105(a) nor Section 1123(b)(6) contains the exceedingly clear language necessary to overcome the canon of constitutional avoidance.
D. Finally, plan proponents have made various policy arguments in support of the release. Appeals to policy cannot replace statutory authorization. Moreover, the public interest strongly supports holding third-party releases unlawful. Nonconsensual releases enable tortfeasors to obtain legal immunity from the claims of their victims without taking on the obligations required by the Code. And they deprive tort victims of their day in court without consent. Nor is forcing claimants to release claims in conjunction with a bankruptcy proceeding the only way to resolve sprawling tort liability. As recent examples illustrate, mass-tort cases can be resolved within the tort system or by providing compensation to claimants to obtain their consensual release.
This case presents what the district court below aptly called “the great unsettled question” of whether a bankruptcy court can approve so-called nonconsensual nondebtor (or third-party) release provisions. In re Purdue Pharma, L.P., 635 B.R. 26, 37 (S.D.N.Y. 2021). Nonconsensual nondebtor releases extinguish creditors’ direct claims of liability against a nondebtor without the consent (and even over the objection) of creditors in precisely the same way that a bankruptcy discharge extinguishes a bankruptcy debtor’s debts. See 11 U.S.C. §1141(d)(1)(A). As in this case, such provisions frequently appear in a Chapter 11 debtor’s proposed plan of reorganization. And in confirming a plan containing such a nondebtor-discharge provision, the court will typically enter an order permanently enjoining assertion of the released claims (now commonly known as a “channeling” injunction), which replicates the effect of the Bankruptcy Code’s statutory discharge injunction (which is, of course, by its terms applicable to only the debtor’s discharged debts). See id. §524(a).
Courts have no power to approve such nondebtor discharge provisions. Indeed, from the very inception of the device, authority therefor was “manufactured out of whole cloth, and in disregard of Supreme Court precedent prohibiting” it, and the practice of approving nondebtor discharge has always been “an abusive one, with no redeeming theoretical merit.” Brubaker, 1997 U. Ill. L. Rev. at 1080.
Courts’ approval of nondebtor discharge contravenes the separation-of-powers limitation embedded in the Constitution’s Bankruptcy Clause, which gives Congress the exclusive power to authorize discharge of indebtedness and to prescribe the circumstances under which such a discharge is appropriate. The nonconsensual nondebtor release jurisprudence of those courts permitting the practice is also an unconstitutional exercise of substantive federal common lawmaking, in violation of the federalism and separation-of-powers constraints established by Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). Moreover, the Court’s jurisprudence for interpreting the Bankruptcy Code directly incorporates those constitutional limitations, cogently elucidating why nothing in the Bankruptcy Code can plausibly be read to authorize nondebtor discharge. In particular, the Court’s decision in United States v. Energy Resources Co., 495 U.S. 545 (1990), indicates that nondebtor discharge is not an appropriate exercise of a bankruptcy court’s traditional equitable authority.
The process by which nonconsensual nondebtor releases are negotiated, proposed, and approved also violates nonconsenting claimants’ constitutional due-process rights, denying them both an adequate, unconflicted litigation representative, and any opportunity to exclude themselves from a mandatory no-opt-outs settlement process involuntarily imposed upon them. Additionally, nondebtor discharge unconstitutionally abrogates nonconsenting claimants’ Seventh Amendment jury-trial rights, extinguishing traditional private-rights damages actions against nondebtors for which claimants have constitutional rights to both jury trial and final judgment from an Article III judge. Repudiating nondebtor discharge will not impair bankruptcy courts’ traditional in rem injunctive powers, necessary to prevent actions against property of the debtor’s bankruptcy estate. It will simply put an end to the abusive “bankruptcy grifting” that this case vividly illustrates.
Petitioner argues that the decision of the Second Circuit Court of Appeals in this case should be reversed because the United States Bankruptcy Code does not permit the nonconsensual nondebtor release (“NDR”) of the Debtors’ owners (the Sackler family) and hundreds of others (the “Sackler Release”). Petitioner is correct for the reasons asserted in its brief. In addition, Amici here argue that the Court of Appeals should be reversed for four related reasons:
1. A nonconsensual “release” is functionally a discharge of debt.
Congress created two basic pathways to eliminate debt through bankruptcy: (i) forcibly, through the discharge; or (ii) consensually, through contract. A nonconsensual nondebtor release “operate[s] as a bankruptcy discharge arranged without a filing and without the safeguards of the Bankruptcy Code.” Deutsche Bank A.G. v. Metromedia Fiber Network, Inc., (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142 (2d Cir. 2005).
The Second Circuit here permitted the Sackler Release because it viewed it as part of a “settlement.” But because a settlement is a contract, this Court has long recognized that “[a] voluntary settlement . . . cannot possibly ‘settle,’ voluntarily or otherwise, the conflicting claims of [those] who do not join in the agreement.” Martin v. Wilks, 490 U.S. 755, 768 (1989).
While the Debtors’ plan of reorganization (“Plan”) could settle the estate’s claims, the forced “settlement” of third party claims is simply a discharge by another name. Unless this Court wishes to recognize an uncodified exception to this general rule, the opinion below must be reversed.
2. The discharge cannot be granted for abusive debts or debtors.
Courts below have long worried that the discharge-like effect of an NDR “lends itself to abuse.” See, e.g., Metromedia Fiber Network, 416 F.3d at 142. With the exception of asbestos debts, the discharge is available only to debtors, and only for debts and debtors not considered “abusive.” Congress carefully enumerated in 11 U.S.C. §§ 523 & 727 the types of debts and debtors excluded from discharge on grounds of abuse. These include debts arising from fraud, willful and malicious injury, and fraudulent transfer.
The beneficiaries of the Sackler Release stand credibly accused of these and related forms of misconduct. The Sackler Release therefore discharges debts and debtors considered abusive by Congress. As Judge Wesley said bluntly in his separate opinion below: the Sackler Release “enjoins a broader swath of claims than a debtor himself could seek to discharge under the Bankruptcy Code, and it does so without providing any compensation to the claimholders, who must abide by its terms whether they like it or not.” Purdue Pharma, 69 F.4th at 88 (Wesley, J., concurring).
Concerns about the abuse inherent in the Sackler Release were dismissed by the bankruptcy judge, who “was handpicked by Purdue to serve as the judge for the case, possibly because of his past rulings on nonconsensual third-party releases.” Adam J. Levitin, Purdue’s Poison Pill: The Breakdown of Chapter 11’s Checks and Balances, 100 Tex. L. Rev. 1079, 1082 (2022)). See also Jonathan C. Lipson, The Rule of the Deal: Bankruptcy Bargains and Other Misnomers, 97 Am. Bankr. L.J. 41, 67 (2023) (“it appears that the Sacklers, acting as shareholders of Purdue Pharma’s New York general partner, authorized the company to change its registered corporate agent to White Plains, New York” to enable selection of the bankruptcy judge) [hereinafter, “Lipson, Rule of the Deal”].
The abusive nature of the underlying allegations requires reversal of the Second Circuit’s decision.
3. The amorphous standards created by the opinion below invite further abuse.
The Second Circuit insisted that it was not creating a “blueprint” to immunize misconduct. In re Purdue Pharma L.P., 69 F.4th 45, 80 (2d Cir. 2023). It asserted that the new, seven-factor test it announced would limit NDRs to “rare” cases, where the releases were “fair,” “equitable” and “necessary.” Id. at 77, 79-82.
But the lower court was wrong. Virtually any corporate debtor could satisfy those tests if, like the Debtors and the Sacklers, they handpicked a judge inclined to grant such releases.
This Court has warned that vague, judge-made standards created by bankruptcy courts “threaten to turn a ‘rare case’ exception into a more general rule.” Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 469 (2017). That is exactly what has happened with nonconsensual nondebtor releases. While Purdue Pharma is an extraordinary case in many ways, and the liabilities in question unusually troubling, NDRs have become endemic in the system, appearing in “[a]lmost every proposed Chapter 11 Plan that I receive,” one bankruptcy judge recently reported. In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 726 (Bankr. S.D.N.Y. 2019) (Wiles, B.J.).
The amorphous standards articulated by the Second Circuit will invite more litigation to forcibly eliminate abusive debt through assertions that doing so is “fair,” “equitable,” and “necessary.”
4. The Sackler Release easily could have been made consensual, preserving individuals’ right to a ‘day in court’ on the merits of allegations of serious misconduct while maximizing creditor recoveries.
The Sackler Release easily could have been made consensual, and thus non-abusive, simply by allowing individual creditors to elect whether to grant the release on the ballot they used to vote on the Plan. Bankruptcy courts often condition nondebtor releases on such evidence of assent.
If, as the court below insisted, there was “overwhelming” support for the Plan, Purdue Pharma, 69 F.4th at 82, the vast majority of creditors should have been willing to release their direct claims against the Debtors’ insiders contractually. Allowing some claimants the opportunity to litigate elsewhere would preserve an aggregate solution to mass harm while also safeguarding individuals’ rights’ to a “day in court” to determine the merits of allegations of serious misconduct.
To uphold the court below is not merely to approve an uncodified effort to discharge abusive debt; unchecked, it will invite more mass tortfeasors to use the chapter 11 process to “silence victims.” Pamela Foohey & Christopher K. Odinet, Silencing Litigation Through Bankruptcy, 109 Va. L. Rev. (forthcoming 2023), at 9, https://ssrn.com/abstract=4365005. This would be an abuse of bankruptcy, and would threaten fundamental protections in our system.
The decision below must be reversed.