By Michelle Saney (Squire Patton Boggs)
On June 27, 2024, the Supreme Court issued its long-awaited ruling regarding an increasingly heated debate—whether the United States Bankruptcy Code permits nonconsensual, third-party releases. In Harrington v. Purdue Pharma L.P., 144 S.Ct. 2071 (2024) (“Purdue Pharma”), the Supreme Court ruled that the Bankruptcy Code does not permit non-consensual third-party releases in a debtor’s plan of reorganization or liquidation. Such plan provisions release affiliated non-debtor individuals and/or entities from liability owed to the debtor’s creditors. However, the Supreme Court highlighted the limitations of its decision, noting that “[a]s important as the question we decide today are ones we do not.”
One of the questions that remain unanswered after the Purdue Pharma decision is whether a creditor can consent to a third-party release if the creditor fails to affirmatively opt-out of the release in a plan ballot. Last year, Judge Goldblatt in the Delaware bankruptcy court issued an instructive opinion in In re Smallhold, Inc., No. 24-10267, 2024 WL 4296938 (Bankr. D. Del. Sept. 25, 2024) explaining what constitutes creditor “consent” of a third-party release.
Smallhold concerned the use of an “opt-out” ballot, which provided that any creditor who was deemed to have accepted the plan and was not provided a ballot, or who voted but did not affirmatively mark the box on the ballot to opt-out of granting the third-party release would be deemed to have consented to the release. Judge Goldblatt held that consent cannot be gleaned from inaction or default—rather, following a contract model, consent is evidenced when there is an agreement by the creditor to grant the release. Although numerous bankruptcy courts have since ruled that opt-out ballots constitute consensual releases by creditors (and therefore do not implicate the Purdue Pharma decision), Smallhold represents a minority approach that may gain traction as this issue continues to evolve.
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