WASHINGTON — The U.S. Supreme Court recently delivered a landmark decision that shook the foundations of bankruptcy law, specifically addressing the contentious issue of non-consensual third-party releases. The court’s ruling in Harrington v. Purdue Pharma L.P. categorically denies the use of these releases under the U.S. Bankruptcy Code, except in asbestos-related cases. This decision not only has profound implications for future bankruptcy cases but also undermines a tool long used to settle mass tort litigations effectively.
Previously regarded as an extraordinary legal maneuver, non-consensual third-party releases had become widespread in Chapter 11 bankruptcy plans, including in high-profile cases like those involving Purdue Pharma, Boy Scouts of America, and several religious institutions. These releases typically allowed non-debtor entities associated with the debtor — such as officers, directors, or parent companies — to evade litigation by claimants, in exchange for contributing to the financial resolution of the bankruptcy.
The recent Supreme Court decision overrules the assumption that bankruptcy courts hold broad powers to extinguish the liabilities of non-debtor third parties without the consent of affected claimants. This ruling effectively closes the door on what many see as a legal loophole that allowed non-debtors to shield themselves from lawsuits by piggybacking on bankruptcy filings of related entities.
The history of third-party releases traces back to the 1980s during the Johns-Manville asbestos bankruptcy, which set a precedent for such legal constructs. For decades, federal circuits were divided over the legality of these releases. While many supported their use under specific, unusual circumstances, others completely opposed them.
The practical implications of this decision are far-reaching. It complicates how mass tort liabilities, such as the opioid crisis litigations against Purdue Pharma, are resolved in bankruptcy. Purdue Pharma, under the ownership of the Sackler family, faced numerous lawsuits due to its aggressive marketing of OxyContin. The financial contributions from the Sacklers were pivotal to the proposed reorganization plan, highlighting the role of third-party releases in facilitating comprehensive settlements.
The Supreme Court’s ruling sets a precedent that will require adjustments in the strategies employed by entities facing similar mass tort claims. Without the ability to offer sweeping legal immunity to co-liable parties, debtors might find it more challenging to negotiate settlements that consolidate numerous lawsuits into a unified bankruptcy resolution. This could lead to a surge in litigation, increased legal costs, and potentially less favorable outcomes for claimants.
Moreover, the court’s decision could burden the judicial system, as bankruptcy courts have provided a relatively efficient forum for handling large-scale tort claims under coordinated proceedings. Without the availability of non-consensual third-party releases, each claim might need to be litigated individually, leading to protracted and overlapping lawsuits in multiple jurisdictions.
Despite the Supreme Court’s firm stance on non-consensual releases, the ruling does not address the broader use and legality of consensual third-party releases, which are common in corporate restructuring. This leaves open questions about what constitutes “consent” and how bankruptcy courts will handle these issues moving forward.
The unraveling of assumptions about third-party releases in bankruptcy reflects a significant shift in legal practice and could have a ripple effect, influencing not only future Chapter 11 cases but also the broader mechanisms through which large-scale liabilities are managed and resolved in the United States.
As the dust settles from this landmark decision, stakeholders in upcoming high-stakes bankruptcy cases will be keenly observing how lower courts interpret and apply these new guidelines under the tightened scrutiny of the Supreme Court.
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