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.
Last week featured summaries of several briefs arguing against the releases. This week’s post features the summaries of the arguments included in the briefs from debtor Purdue Pharma, the Ad Hoc Committee of Governmental and Other Contingent Litigation Claimants, and an amicus brief from a group of law professors, all arguing in favor of the releases. Links are also provided to the full briefs on the Supreme Court docket.
Next week the Harvard Law School Bankruptcy Roundtable will return to regular weekly posts.
Summary of Argument from Brief for Respondents Purdue Pharma L.P. et al.:
The Second Circuit correctly held that the Bankruptcy Code authorizes nonconsensual third-party releases in appropriate circumstances.
I. Since its beginnings, the core function of bankruptcy has been to safeguard the bankruptcy estate—or res—and ensure its equitable distribution to all creditors. Bankruptcy law has always granted courts the authority and flexibility needed to achieve this objective. Section 1123(b)(6) reflects this tradition. After § 1123(b) identifies certain specific provisions a plan may include, paragraph (b)(6) states that a plan may include “any other appropriate provision not inconsistent with the applicable provisions of this title.” This catchall unambiguously covers third-party releases, as long as they are “appropriate” in the circumstances and “not inconsistent with” other provisions of the Code. The Trustee does not even try to challenge the Second Circuit’s careful determination that the releases at issue are appropriate in the circumstances here. And the Trustee’s attempt to generate a conflict with other provisions of Title 11 fails.
This commonsense reading of § 1123(b)(6) aligns with Energy Resources, in which this Court rejected the same flawed reading of § 1123(b)(6) the Trustee advances here. It is supported by the context of § 1123(b)(6), which follows a series of provisions that, among other things, authorize the “impair[ment]” of claims and the settlement of estate claims. § 1123(b)(1), (3)(A). It advances the purposes of the Code in protecting the estate and modifying creditor-debtor relationships. And it is grounded in historical practice showing that courts of equity have long exercised broad power to protect the estate, including by enjoining third parties. These considerations all support the conclusion that any reasonable person would reach if she were given § 1123(b)(6): Congress has authorized a court to approve a third-party release, among other plan provisions, where it determines the release is appropriate in the circumstances.
At the same time, there are important limits on when such releases are available. Under § 1123(b)(6), any plan provision—including third-party releases—must be appropriate in the circumstances. And as Energy Resources establishes, that means the provision must at least be necessary to the success of the reorganization. As with other plan provisions, releases also must be considered “against a backdrop of equity,” JA890, keeping all relevant circumstances in mind. That includes whether the releases are necessary to protect the res and are supported by creditors, the group with the most acute interest in maximizing recovery. And releases meeting these criteria must be approved not only by a bankruptcy court, but by an Article III court as well. These limitations sharply curtail the availability of such releases.
II. The Trustee’s counterarguments fail. First, the Trustee mistakes § 1123(b)(6)’s unambiguous breadth for silence. But the whole point of a catchall like § 1123(b)(6) is to sweep in matters Congress did not specify. Second, there is no conflict with any applicable provision of the Code. Section 524(e) concerns only co-liability for a debtor’s debts and the releases here do not provide anything close to the “full repose” of a discharge. Unable to claim a conflict, the Trustee attempts to draw a negative inference from § 524(g), but Congress forbade that very inference when it passed § 524(g). And 28 U.S.C. § 1411 is not an applicable provision of Title 11, and poses no conflict anyway. Third, the constitutional-avoidance canon does not apply because § 1123(b)(6) is unambiguous and there is no constitutional problem to avoid. The releases were approved only after unprecedented notice and process. And fourth, the Trustee’s policy arguments are belied by the bankruptcy court’s uncontested findings and must be directed to Congress.
III. Finally, the Trustee’s position ultimately fails for an even more basic reason: Neither § 307 nor Article III confers standing on him to appeal the Second Circuit’s decision to this Court, and none of the other respondents who have filed briefs can cure that fatal defect. The Trustee here is an interloper who has no standing—and no right—to destroy a plan that the actual victims crafted and overwhelmingly support. Given this standing defect, the Court should dismiss the writ of certiorari as improvidently granted. But, if the Court reaches the merits, it should affirm.
This case is governed by 11 U.S.C. § 1123(b)(6), which states that a Chapter 11 plan of reorganization may include “any other appropriate provision not inconsistent with the applicable provisions of this title.” (Emphasis added). A settlement and release of direct claims held by creditors against a third party falls within “any other . . . provision,” and the courts below determined that it is “appropriate” in this case. The remaining question is whether the release is
“inconsistent with the applicable provisions of this title.”
It is not. Comparison of Section 1123(b)(6) with other Code provisions shows that, to fail under that section, a provision must be incompatible with Code provisions directly implicated by the debtor’s reorganization. It is not enough that the provision be (supposedly) in tension with a purported “bankruptcy quid pro quo.” It is not enough that the provision be (supposedly) in tension with what would or would not be allowed in a hypothetical bankruptcy of the limited number of released Sackler parties that would be eligible for individual bankruptcy. A hypothetical Sackler bankruptcy is not relevant to the provisions “applicable” to Purdue’s bankruptcy.
The Trustee tries to graft an atextual restriction onto Section 1123(b)(6) – specifically, that discretionary plan provisions may modify only creditor-debtor relationships. No such restriction exists, as we show in this brief, but it would be satisfied here in any event, as the briefs of other respondents demonstrate. As the record below proved, Purdue could not adjust its relationship with its own creditors without addressing the direct creditor claims that are the subject of the third-party release.
Nor does any applicable provision of the Code forbid nonconsensual third-party releases. Section 524(e) states that “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” This section merely limits the effect of the debtor’s own discharge – it doesn’t bar other appropriate terms from being included in a plan. Moreover, a settlement that includes a release (granted in exchange for substantial consideration) is not a “discharge.”
Arguments drawing a negative inference from Section 524(g), which authorizes nonconsensual third-party releases in cases involving asbestos, collide with Congress’s explicit command not to construe that section to modify any preexisting authority. 11 U.S.C. § 524 note. And Section 523(a), limiting the discharge of fraud claims, applies only to “individual debtor[s],” not corporations like Purdue, and thus is not an “applicable” Code provision. Moreover, Section 523(a) is not a blanket prohibition on discharge of fraud claims.
The plan’s third-party release is in the public interest. It enjoys overwhelming creditor support. It incorporates monetary and non-monetary benefits – not least its devotion of billions of dollars to abatement of the opioid crisis – that would not have been achievable without the release. The litigation alternative advocated by the Trustee would be far worse: As the bankruptcy court found, creditors would receive “materially less” from both Purdue and the Sacklers if the plan were to fail. 1JA406, 408; see also 1JA365.
Furthermore, the parties with the strongest claims against the Sacklers – including the States, and the Purdue bankruptcy estate, which controls the valuable fraudulent transfer claims against the Sacklers – are consensually releasing those claims. The opponents of the plan have yet to identify any actual third-party direct claims that are released without consent – much less show that any such claims would increase a creditor’s total recovery beyond what the plan will pay.
Approval of the third-party release here poses no risk of abuse in future cases. The court of appeals’ test requires a substantial showing, including, among other things, overwhelming creditor support. The settlement with the Nine does not show that creditors are better off in a world without releases. That settlement was conditioned on approval of a plan containing a third-party release, without which the entire deal would have collapsed. There is no moral hazard associated with the approval of such releases in appropriate circumstances – indeed, the court of appeals noted that releases would not be appropriate if they were the product of abusive conduct taken in contemplation of bankruptcy.
The third-party release comports with due process, which, in the case of a “special remedial scheme” such as bankruptcy, does not require that claimants be given the right to opt out. Due process protections were ample here, given the bankruptcy court’s findings regarding the extensive discovery process in the case, the lengthy and arm’s-length negotiations and mediations that led to the formulation of the plan, the participation of a dozen or more well-represented creditor groups representing every conceivable interest, the unprecedently broad noticing program, and the similarly unprecedented level of creditor support for the plan. And, again, no creditor has been identified that is harmed by the third-party release.
The amicus briefs change nothing. Other than due process, any constitutional arguments they make are not properly before the Court, and all are in any event meritless. Amici’s public-policy arguments likewise are wrong for the reasons stated in this brief. And their statutory arguments suffer from the same flaw as the Trustee’s: incompatibility with the text of Section 1123(b)(6).
Summary of Argument from Brief of Casey et al. Amici Law Professors for Respondents:
Nonconsensual third-party releases have played a part in bankruptcy proceedings since at least the year 1619. See Tiffin v. Hart (1618-19), in John Ritchie, Reports of Cases Decided by Francis Bacon 161 (London 1932). Today—as then—these releases are essential bankruptcy tools available to courts and debtors seeking global resolution of complex cases. And, contrary to Petitioner’s claims, these foundational tools are directly authorized under the plain text of chapter 11 of the Bankruptcy Code.
And for good reason: Over the last three decades, nonconsensual third-party releases have provided the means for successful resolution of several mass tort and other complex bankruptcies. In cases where these re-leases were appropriate, they have unlocked value from third parties to maximize recoveries and provide a fair, ratable distribution to victims and other claimants. Re-versing course now and imposing a blanket prohibition on this long accepted and statutorily authorized tool would have devastating effects for mass tort restructurings and the collective victims of mass torts, as well as for other complex restructuring cases. Claimants and debtors would be forced to undergo expensive, piecemeal litigation outside of the bankruptcy arena that would take years to resolve. Assets would be depleted, and victims would be in competition with one another for recoveries, resulting in inconsistent compensation.
The structure of chapter 11, with its deliberate flexibility and extensive safeguards, is designed to avoid such value destruction and inequitable recovery by solving the collective action problems and facilitating global resolution in a single forum. Thus, nonconsensual third-party releases are not the product of judicial overreach, as Petitioner suggests; rather, they are an important part of the chapter 11 structure that is supported by statute, legislative history, and a long historical practice. They are also supported by United States v. Energy Re-sources Co., 495 U.S. 545, 549 (1990) where this Court construed Section 1123(b)(6) as requiring appropriate plan provisions to be “necessary to the success of a reorganization.” To be sure, nonconsensual third-party re-leases require rigorous judicial oversight. But to strip them from the bankruptcy system will greatly reduce the usefulness of bankruptcy for some of the most challenging situations which may not be solvable, or solvable on equivalent terms and with equivalent speed, else-where in the court system. Accordingly, this Court should affirm the continued availability of nonconsensual releases as permissible chapter 11 plan provisions, in accordance with Bankruptcy Code Section 1123(b)(6), when such releases are fair, equitable, and necessary for the overall restructuring.
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