By Thomas Kessler and Emily King (Cleary Gottlieb Steen & Hamilton LLP)
On June 27, 2024, the United States Supreme Court ruled in Harrington v. Purdue Pharma LP that the United States Bankruptcy Code does not authorize non-consensual third-party releases as part of a restructuring plan under Chapter 11. It was unclear immediately following Purdue whether (or how) the decision would impact the ability of foreign debtors to use Chapter 15 to enforce a foreign reorganization plan that contains a non-consensual third-party release.
Chapter 15 of the Bankruptcy Code allows for recognition in the United States of foreign bankruptcy proceedings. Recognition of the proceeding allows a foreign representative of a debtor to seek additional relief from US courts, including to enforce the foreign court’s orders, most notably an order confirming a plan of reorganization, giving the plan the full force and effect of US law.
Prior to the Purdue decision, US courts recognized some circumstances in which non-consensual third-party releases may be enforced. Courts also identified, however, countervailing considerations that weigh against such enforcement. The inquiry emerging from the pre-Purdue caselaw developed into a case-by-case analysis, taking into account holistically the context of the plan to be enforced. Although courts were, in certain circumstances, willing to enforce such releases, uncertainty as to the validity of the releases under US law gave courts pause.
The Purdue decision, while leaving unanswered the question of when non-consensual third-party releases allowed under non-US law may be enforced in the United States, provided a lens through which to analyze such releases. Through focusing on courts’ statutory authority to enforce the kinds of releases at issue, the Court framed the issue as one in which bankruptcy courts may not exceed their statutory authority. Purdue did not discuss any constitutional due process or policy grounds for prohibiting non-consensual third-party releases, declining to address the policy grounds offered by the plan proponents, stating that “this Court is the wrong audience for such policy disputes.” The Court specified that its holding was confined to be “only that the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants.”
Because Chapter 15 provides recognition to foreign restructuring plans meeting the statutory requirements of the Bankruptcy Code, and otherwise declining recognition only where it is ‘manifestly contrary’ to public policy, the Purdue decision does not appear to upend the case-by-case analysis utilized by courts before the decision. Indeed, recent bankruptcy court decisions suggest that the case-by-case analysis courts undertake to consider whether to enforce non-consensual third-party releases in Chapter 15 cases may persist. Soon after the Purdue decision, a bankruptcy court for the first time post-Purdue granted the foreign representative’s motion for recognition, finding that the relief requested was in “the best interest” of all parties involved, and other lower courts in the wake of Purdue appear to have been adhering to this approach. However, only time will tell how courts will continue to assess the effects of Purdue.
Click here to read the full article. This paper was first published by Latin Lawyer in ‘The Guide to Restructuring – Fourth Edition’, (December 2024), available at https://latinlawyer.com/guide/the-guide-restructuring/fourth-edition, reprinted with permission.