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The Supreme Court Strips Nonconsensual Release Power from Bankruptcy Courts

The Supreme Court Strips Nonconsensual Release Power from Bankruptcy Courts

June 28, 2024

The Supreme Court Strips Nonconsensual Release Power from Bankruptcy Courts

By: George Calhoun

In a divided 5-4 decision, the Supreme Court held yesterday that “the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seek to discharge claims against a non-debtor without the consent of affected claimants.”  Harrington v. Purdue Pharma, L.P., __ U.S. __ (2024). Although there is a long history of nonconsensual third-party releases in mass-tort bankruptcy cases, the Court held that there is no authority for such relief in non-asbestos cases. The decision is sure to send shockwaves through the mass-tort world. Parties in sex abuse and non-asbestos-driven cases, in particular, must consider how the new legal landscape affects the positions of the stakeholders.

Although the Court barred “nonconsensual” third-party releases, it declined to answer what made a release “consensual.”  Purdue at 20. Because the Purdue plan was supported by a super-majority of claimants, the answer to that question cannot be that an overwhelming number of claimants support the plan. Indeed, in his dissent, Justice Kavanaugh declared that “the Court categorically decides that non-debtor releases are never allowed as a matter of law.”  Purdue at 32 (Kavanaugh, dissenting).  Does this mean that a single hold-out creditor can scuttle a deal supported by the stakeholders in a complex bankruptcy case?  Purdue seems to say yes.

If non-consensual third-party releases are never available in mass-tort bankruptcies or are only available in the context of § 524(g) (despite Congress’ indication that it was not attempting to limit the availability of injunctive relief when it enacted that provision), the path towards reorganization for many diocesan other mass-tort targets becomes murky. It’s possible that 100% consensual plans will be negotiated. Doing so will be difficult, especially in larger cases where debtors may be perceived to have little leverage. But claimants are not necessarily the winner here. In the absence of the sort of third-party deals that drive many mass tort recoveries, the race to the courthouse and the expense of litigation likely will prevent most tort claimants from recovering anything at all.

The decision drew a strenuous dissent from Justice Kavanaugh, whose counterarguments were much stronger on policy but certainly debatable on the core legal principles involved. The Court, however, held that the policy debate was Congress’ purview and declined to consider whether policy concerns favored Purdue’s arguments.  Purdue at 18-19 (“Both sides of this policy debate may have their points. But, in the end, we are the wrong audience for them. As the people’s elected representatives, Members of Congress enjoy the power, consistent with the Constitution, to make policy judgments about the proper scope of a bankruptcy discharge.”). There will be pressure on Congress to outline the acceptable role of bankruptcy courts in mass-tort cases (such as through an expansion of 524(g) to other mass torts). But little clarity can be expected from Congress in an election year, if ever.

Ultimately, Purdue is going back to the drawing board. Creditors, insurers, debtors, and other interested parties in dozens of other cases are doing the same. One thing is certain: this decision has kicked over the board, and the players are now playing with an uncertain rule set. There will be chaos and conflicting decisions in the short term as everyone attempts to grasp a new set of rules.

George Calhoun

George Calhoun

George R. Calhoun V is a litigator who knows how to win in a courtroom, at the settlement table, or in arbitration. By putting his clients’ goals and objectives first, he is adept at devising case strategies that achieve his clients’ definition of success. George is chair of Ifrah’s Commercial Litigation practice.

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