Reshaping Chapter 11: unpacking Harrington v. Purdue Pharma

December 2024 | FEATURE | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

November 2024 Issue

Considered by many to be the most significant US bankruptcy law ruling in a decade, the 2024 Harrington v. Purdue Pharma decision has key implications for complex bankruptcies and the resolution of mass tort litigation.

By way of background, Purdue Pharma, a manufacturer of the opioid drug OxyContin, among others, faced a wave of litigation and damage claims that ran into the trillions of dollars after one of its affiliates pled guilty to misbranding OxyContin as a less-addictive and less-abusable alternative to other pain medication.

As a result of these claims, Purdue Pharma filed for bankruptcy in 2019. The bankruptcy proceedings resulted in a plan of reorganisation that – in addition to resolving opioid claims against Purdue – released related claims that Purdue’s creditors held against members of the Sackler family who owned and controlled Purdue.

In exchange, the Sackler family agreed to contribute billions of dollars to Purdue’s bankruptcy estate. The plan was approved by over 95 percent of the voting claimants, but the United States Trustee (among a number of dissenters) objected and appealed, arguing that such ‘non-debtor releases’ require unanimous consent of the released parties.

“Third party releases have long been a useful and reliable device in the Chapter 11 toolkit, especially in the context of mass tort cases,” says Madlyn Gleich Primoff, a partner at Freshfields Bruckhaus Deringer US LLP. “In these cases, alleged tortfeasors have contributed to a settlement fund established under the Chapter 11 plan for the purpose of providing distributions to tort claimants.”

In June 2024, the case came before the Supreme Court to rule on whether the Bankruptcy Code – section 1123(b)(6) of which provides that a Chapter 11 plan may include any other ‘appropriate’ provision not inconsistent with the applicable provisions of the Bankruptcy Code – authorises a court to approve releases, as part of a plan of reorganisation under Chapter 11, that extinguish claims held against non-debtor third parties without the claimants’ consent.

The Supreme Court ruling: key implications

At the outset of its ruling in In Harrington v. Purdue Pharma (2024), the Supreme Court made it clear that the Sackler family “ha[d] not filed for bankruptcy and ha[d] not placed virtually all their assets on the table for distribution to creditors, yet… [sought] what essentially amount[ed] to a discharge”, something usually reserved for debtors.

“As well as settling a longstanding dispute in the bankruptcy world, the Supreme Court’s decision in Harrington v. Purdue Pharma is likely to have a major influence on how Chapter 11 reorganisations will be prosecuted in future.”

“At its core, the five person majority of the Supreme Court disagreed with the four person minority over whether it is ‘appropriate’ to release a non-debtor without the consent of affected claimants,” attests Ms Primoff. “The Supreme Court observed that a discharge, in effect, a release, is normally reserved for debtors – persons or entities that file for bankruptcy and, consequently, put all of their assets on the table for distribution to creditors.”

The court reached its decision by: (i) conducting a textual and statutory interpretation analysis of section 1123(b) of the Bankruptcy Code; (ii) looking at related and relevant provisions in the code to further interpret the meaning of section 1123(b); (iii) taking notice of the history of bankruptcy law; and (iv) analysing the parties’ policy arguments.

In short, the Supreme Court’s ruling vetoes providing alleged tortfeasors with non-consensual releases in order to induce them to fund distributions under a plan. This decision will have significant implications for complex bankruptcies and the resolution of mass tort litigation. It may even weaken bankruptcy as a tool for fully resolving such liabilities.

“We can expect to see challenges to third-party releases outside the mass tort context, including releases of officers, directors, guarantors, lenders and other parties, which have been a regular and customary part of Chapter 11 practice,” continues Ms Primoff. “We can also expect litigation about whether a release is consensual or non-consensual. Parties that may have typically granted consensual releases in the past may be influenced by the decision to withhold their consent because of some perceived advantage in doing so.”

The shape of torts to come

As well as settling a longstanding dispute in the bankruptcy world, the Supreme Court’s decision in Harrington v. Purdue Pharma is likely to have a major influence on how Chapter 11 reorganisations will be prosecuted in future.

“There could be a legislative solution whereby Congress acts, just as it has done so in the context of asbestos bankruptcies,” suggests Ms Primoff. “There are still questions remaining about whether a release in a given situation is consensual or non-consensual and who has the power and authority to consent for the tort claimants. These are issues to be developed in future cases.

According to Ms Primoff, the decision is unlikely to bring mass tort bankruptcy filings to a halt if for no other reason than that companies laboring under the weight of adverse mass tort judgments can benefit from the automatic stay of litigation that Chapter 11 provides

“Instead, traditional principles of Chapter 11 law would apply, including the need for tort claimants to file their claims and for courts to engage in estimation proceedings,” she continues. “These practices may be less efficient but, as we see time and time again, Chapter 11 has a remarkable ability to adapt.”

Fraser Tennant