Supreme Court Restricts Nonconsensual Releases in Chapter 11 Bankruptcies, Impacting Mass Tort Litigation

Washington, D.C. – In a significant ruling that may transform the landscape of bankruptcy law, the U.S. Supreme Court has decisively limited the use of “nonconsensual third-party releases” in chapter 11 reorganization plans. This decision, falling on a narrow 5-4 margin, rejected these provisions, which previously allowed for the involuntary release of claims against nondebtors, such as the controversial inclusion of the Sackler family in Purdue Pharma’s bankruptcy case.

Delivering the majority opinion, Justice Neil Gorsuch, joined by Justices Clarence Thomas, Samuel Alito, Amy Coney Barrett, and Ketanji Brown Jackson, articulated that such releases improperly relieve nondebtors of personal liability, a protective measure that the Bankruptcy Code reserves exclusively for debtors. For decades, appellate courts across the country have been divided on this issue, but this ruling brings uniformity, emphasizing that bankruptcy protections should not extend to third parties without their consent.

Specifically, the court pointed out the misalignment of chapter 11 plans including nonconsensual releases with the existing statutory framework of the Bankruptcy Code, notably underlining that the broad “catchall” provision does not override explicit restrictions outlined in other sections of the law. Justice Gorsuch’s opinion underscored this interpretation, noting that Congress could have explicitly allowed such releases for all chapter 11 cases, as it did with certain asbestos-related cases, but chose not to.

Adding further restrictions, the court highlighted that these contested releases often aim to absolve third parties from a range of substantial liabilities such as fraud and wrongful death claims—categories of debt specifically precluded from discharge for individual debtors under bankruptcy protections.

The dissenting opinion, penned by Justice Brett Kavanaugh and backed by Chief Justice John Roberts, and Justices Sonia Sotomayor and Elena Kagan, expressed apprehension over the potential adverse effects this decision could unleash on bankruptcy proceedings involving mass tort litigations. The dissent argued that nondebtor releases have historically played a crucial role in facilitating fair and equitable outcomes for victims in large-scale tort settlements, including prominent cases involving organizations like Boy Scouts of America and major manufacturers like Dow Corning.

This landmark decision has spurred a mix of reactions from legal scholars and practitioners, signaling a potentially restricted scope of relief for entities in complex bankruptcy cases. While the practical implications of this ruling may initially seem far-reaching, Justice Gorsuch clarified in the decision’s closing remarks that the court refrained from addressing the validity of consensual third-party releases. This leaves open significant areas related to how these consensual agreements are treated under the law.

Notably, most bankruptcy courts have previously recognized the validity of consensual third-party releases. Legal precedents have treated these consensual agreements as comparable to any other settlements or contracts agreed upon by the affected creditors voluntarily.

However, defining what exactly constitutes “consent” remains a contentious and varied issue among courts, highlighting significant differences in required thresholds ranging from affirmative opt-in by creditors to non-objection presumed as acceptance.

The Supreme Court’s decision in this case does not address the potential unwinding of confirmed reorganization plans that have been substantially consummated, nor does it provide guidance on several underlying chapter 11 issues not connected to mass torts.

Legal experts advise those involved in chapter 11 reorganization plans to carefully evaluate alternatives to nonconsensual third-party releases, in the wake of this decision. As bankruptcy courts adjust to this new legal framework, the decision’s long-term impact on bankruptcy law and practice will continue to unfold.