Supreme Court Limits Overly Broad Bankruptcy Reorganization Plan Releases and Injunctions
July 2, 2024
In this edition of the Surety Today: The Blog, we discuss the Supreme Court decision that was just issued on June 27, 2024, limiting the authority of bankruptcy courts to issue broad reorganization plans that release and enjoin claims by third parties against non-debtor third parties. On August 15, 2023, we advised everyone to “stay tuned” for a Supreme Court decision on the issue of overly broad bankruptcy reorganization plan releases and injunctions. Well, that decision has finally been issued in the case of: Harrington v. Purdue Pharma L. P., No. 23-124, 2024 WL 3187799, at *1–12 (U.S. June 27, 2024).
The issue can be significant for sureties because if the release and injunction provision is broad enough it may impact the surety’s subrogation and indemnity rights as well as the ability to pursue salvage against non-debtor entities. The Court’s Opinion is also significant because it resolves a split among the Circuit Courts of Appeal on the issue. Some Circuits, such as the Fifth, Ninth, and Tenth Circuits, have held that third-party releases are categorically beyond the power of a bankruptcy court. See Bank of N.Y. Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 251-53 (5th Cir. 2009); Resorts International, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401 (9th Cir. 1995)(cert. den. 517 U.S. 1243 (1996); Landsing Diversified Properties-II v. The First National Bank and Trust Co. of Tulsa (In re Western Real Estate Fund, Inc.), 922 F.2d 592, 601-02 (10th Cir. 1990). Other Circuits, such as the Sixth, Fourth, Seventh and Eleventh Circuits, have held that such plan releases are permissible under certain circumstances, recognizing that such provisions are only proper in unusual, extraordinary or rare circumstances. See Behrmann v. National Heritage Foundation, 663 F.3d 704, 712 (4th Cir. 2011); Airadigm Comm., Inc. v. Federal Comm. Commission (In re Airadigm Communications, Inc.), 519 F.3d 640 (7th Cir. 2008) (approving nondebtor release when release was necessary for the reorganization and appropriately tailored … affected only claims arising out of or in connection with the reorganization itself, not blanket immunity); SE Prop. Holdings, LLC v. Seaside Eng’g 7 Surveying (In re Seaside Eng’g & Surveying, Inc.), 780 F.3d 1070, 1078 (11th Cir. 2015).
Procedural Background: Purdue Pharma, the debtor, along with its affiliated entities, was a privately-held pharmaceutical company that was involved in the manufacture and promotion of a proprietary prescription opioid pain reliever known as OxyContin, that was the subject of mass tort litigation. In 2019, the debtors filed a chapter 11 bankruptcy and eventually sought confirmation of a proposed plan of reorganization which contained broad releases of civil claims against non-debtor family members of the Sackler family who owned and/or were directors and officers of the debtors. The United States Trustee, numerous states and municipalities, and others objected to the Plan. The United States Bankruptcy Court for the Southern District of New York, entered an order confirming the plan. Appeal was taken from that order to the U.S. District Court for the Southern District of New York, which vacated the bankruptcy court ruling. The Plan proponents appealed and the United States Court of Appeals for the Second Circuit, reversed the District Court and revived the Bankruptcy Court’s order approving the modified plan. The U.S. Trustee and others filed application for stay, which the Supreme Court granted and treated as petition for writ of certiorari.
Factual Background: Between 1999 and 2019, approximately 247,000 people in the United States died from prescription-opioid overdoses. The U. S. Department of Health and Human Services estimated that the opioid epidemic has cost the country between $53 and $72 billion annually. The opioid epidemic represents “one of the largest public health crises in this nation’s history.” Purdue Pharma was at the center of that crisis. Purdue was owned and controlled by the Sackler family and members of the family were heavily involved with the company as officers, members of the board and were involved with the operation of the company and its marketing. After Purdue earned billions of dollars in sales of the OxyContin drug, in 2007, one of its affiliates pleaded guilty to a federal felony for misbranding OxyContin as a less-addictive, less-abusable alternative to other pain medications. Thousands of lawsuits followed. Fearful that the litigation would eventually impact the Sackler family members directly, they initiated a “milking program,” withdrawing from Purdue approximately $11 billion—roughly 75% of the firm’s total assets—over the next decade.
Those withdrawals left Purdue in a significantly weakened financial state. During the reorganization plan negotiation process, the Sacklers proposed to return approximately $4.3 billion to Purdue’s bankruptcy estate. In exchange, the Sacklers sought a judicial order releasing the family from all opioid-related claims and enjoining victims from bringing such claims against them in the future.
Opinion
Justice Gorsuch wrote the 5-4 Opinion for the Court and approached the issue in very simplistic terms. The Opinion states “[t]he bankruptcy code contains hundreds of interlocking rules about ‘the relations between’ a ‘debtor and [its] creditors.’ . . . But beneath that complexity lies a simple bargain: A debtor can win a discharge of its debts if it proceeds with honesty and places virtually all its assets on the table for its creditors.” (citations omitted). The Court likened the proposed broad release of the non-debtor Sackler family members as an attempt to award them a “discharge” without them putting all their assets on the table and without them complying with the rules of bankruptcy. This, the Court was unwilling to allow and could find no authority for in the bankruptcy code.
The Court intimated that the Sackler family members were seeking to use the bankruptcy of the Purdue Pharma company, as a vehicle for their own protection. The Opinion states that Purdue Pharma filed for bankruptcy after facing a wave of litigation for its role in the opioid epidemic. It also noted that Purdue’s long-time owners, the Sackler family, were also confronted with a growing number of lawsuits as well. But, instead of declaring individual bankruptcy to protect them against the litigation and putting all of their assets on the table, they were seeking an order in the bankruptcy extinguishing vast numbers of existing and potential claims against them. The so-called “milking program” shifted the vast majority of the company’s assets into the Sackler family pockets and then by running the company through bankruptcy and getting a broad release for themselves while only paying a small portion of the assets back they were shielding the assets. The Court noted that “[t]hey obtained all this without securing the consent of those affected or placing anything approaching their total assets on the table for their creditors. The question we face is whether the bankruptcy code authorizes a court to issue an order like that.” The Court’s answer was no.
The Sackler discharge sought to void not just current opioid-related claims against the family, but future ones as well. It sought to ban not just claims by creditors participating in the bankruptcy proceeding, but claims by anyone who might otherwise sue Purdue. It sought to extinguish not only claims for negligence, but also claims for fraud and willful misconduct. And it proposed to end all these lawsuits without the consent of the opioid victims who brought them. To enforce this release, the Sacklers sought an injunction “forever stay[ing], restrain[ing,] and enjoin[ing]” claims against them. That injunction would not just prevent suits against the company’s officers and directors but would run in favor of hundreds, if not thousands, of Sackler family members and entities under their control.
The Court noted that a bankruptcy court’s order confirming a plan “discharges the debtor from any debt that arose before the date of such confirmation,” except as provided in the plan, the confirmation order, or the code. That discharge not only releases or “void[s] any past or future judgments on the” discharged debt; it also “operat[es] as an injunction … prohibit[ing] creditors from attempting to collect or to recover the debt.” However, the Court hastened to add that “a discharge operates only for the benefit of the debtor against its creditors and ‘does not affect the liability of any other entity.’”
Section § 1123 of the bankruptcy code addresses the contents or terms of the bankruptcy reorganization plan. Some plan terms are mandatory, § 1123(a); others are optional, § 1123(b). The plan proponents contended that the Sackler release and injunction was a type of provision that a debtor may include and a court may approve in a reorganization plan. Reviewing § 1123(b) the Court observed that the subparagraphs of the section permit a plan to address claims and property belonging to a debtor or its estate or to modify the rights of creditors who hold claims against the debtor or its estate. “But nothing in those paragraphs authorizes a plan to extinguish claims against third parties, like the Sacklers, without the consent of the affected claimants, like the opioid victims.”
The Plan proponents argued that § 1123(b)(6) supported their position for the Plan. They argued that paragraph (6) allows a debtor to include in its plan any term not “expressly forbid[den]” by the bankruptcy code as long as a bankruptcy judge deems it “appropriate” and consistent with the broad “purpose[s]” of bankruptcy. Further, they argue that because the code does not expressly forbid a nonconsensual non-debtor discharge, the bankruptcy court was free to authorize one in this case after finding it an “appropriate” provision.
The Supreme Court rejected this argument noting that subparagraph (6) was a catchall phrase tacked on at the end of a long and detailed list of specific directions. When faced with a catchall phrase like this, the Court noted that “courts do not necessarily afford it the broadest possible construction it can bear. Instead, the catchall must be interpreted in light of its surrounding context and read to ‘embrace only objects similar in nature’ to the specific examples preceding it.” This ancient interpretive principle, sometimes called the ejusdem generis canon, seeks to afford a statute the scope a reasonable reader would attribute to it.
The Court stated that “we do not think paragraph (6) affords a bankruptcy court the authority the plan proponents suppose. . . . When Congress authorized ‘appropriate’ plan provisions in paragraph (6), it did so only after enumerating five specific sorts of provisions, all of which concern the debtor—its rights and responsibilities, and its relationship with its creditors. Doubtless, paragraph (6) operates to confer additional authorities on a bankruptcy court. . . . But the catchall cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a nondebtor without the consent of affected nondebtor claimants.” (citations omitted).
The Court further supported its reading of § 1123(b)(6) noting that “[w]hen resolving a dispute about a statute’s meaning, we sometimes look for guidance not just in its immediate terms but in related provisions as well. . . . Paragraph (6) itself alludes to this fact by instructing that any plan term adopted under its auspices must not be ‘inconsistent with the applicable provisions of’ the bankruptcy code. Following that direction the Court pointed to three further reasons why § 1123(b)(6) cannot bear the interpretation of the plan proponents. First, the Court looked to “what is and who can earn a discharge.” A discharge releases the debtor from its debts and enjoins future efforts to collect them, but the bankruptcy code reserves this benefit to “the debtor”—the entity that files for bankruptcy.
Second, the Court looked to “how the code constrains the debtor.” To win a discharge the code generally requires the debtor to come forward with virtually all its assets and the discharge a debtor receives is not unbounded. For example, it does not reach claims based on “fraud” or those alleging “willful and malicious injury” and it cannot “affect any right to trial by jury” a creditor may have “with regard to a personal injury or wrongful death tort claim.” The plan proponents reading of § 1123(b)(6) would transgress all of these limits. The Court stated “[t]he Sacklers have not agreed to place anything approaching their full assets on the table for opioid victims. Yet they seek a judicial order that would extinguish virtually all claims against them for fraud, willful injury, and even wrongful death, all without the consent of those who have brought and seek to bring such claims. In each of these ways, the Sacklers seek to pay less than the code ordinarily requires and receive more than it normally permits.”
Third, the Court noted that Congress has allowed an exception to the code’s general rules but only for asbestos-related bankruptcies. In that limited circumstance “[n]otwithstanding” the usual rule that a debtor’s discharge does not affect the liabilities of others on that same debt, courts may issue “an injunction … bar[ring] any action directed against a third party” under certain statutorily specified circumstances. § 524(g)(4)(A)(ii). Thus, while the code does authorize courts to enjoin claims against third parties without their consent, it does so in only the one context.
The Plan proponents also argued that if 11 U.S.C. § 1123(b) does not permit a bankruptcy court to release and enjoin claims against a non-debtor without the affected claimants’ consent, § 105(a) does. That provision allows a bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of ” the bankruptcy code. § 105(a). The Court rejected that argument noting that § 105(a) alone cannot justify the imposition of nonconsensual third-party releases because it serves only to carry out authorities expressly conferred elsewhere in the code.
The Court stated “[n]o one has directed us to a statute or case suggesting American courts in the past enjoyed the power in bankruptcy to discharge claims brought by nondebtors against other nondebtors, all without the consent of those affected. Surely, if Congress had meant to reshape traditional practice so profoundly in the present bankruptcy code, extending to courts the capacious new power the plan proponents claim, one might have expected it to say so expressly ‘somewhere in the [c]ode itself.’”
The Court noted the scope of its opinion “[n]othing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan; those sorts of releases pose different questions and may rest on different legal grounds than the nonconsensual release at issue here. . . . Nor do we have occasion today to express a view on what qualifies as a consensual release or pass upon a plan that provides for the full satisfaction of claims against a third-party nondebtor. Additionally, because this case involves only a stayed reorganization plan, we do not address whether our reading of the bankruptcy code would justify unwinding reorganization plans that have already become effective and been substantially consummated.”
The Holding: The Court held “[c]onfining ourselves to the question presented, we hold 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.”
The takeaway for sureties is that now when faced with an overly broad reorganization plan release and discharge provision that may impact a surety’s rights the surety can object to inclusion of such a provision in a plan and argue against the enforceability of such a provision in the future.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Practice Group.
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