By Marc Tabolsky and Adam Greiner

On December 4, 2023, the Supreme Court will hear oral argument in a case that may have major implications for bankruptcy law in the Fifth Circuit. While the Fifth Circuit (along with the Ninth and Tenth Circuits) has held that bankruptcy courts may not incorporate third-party releases,[1] this case, Harrington v. Purdue Pharma L.P., et. al., challenges the legality of Purdue Pharma L.P.’s (“Purdue”) Chapter 11 bankruptcy reorganization plan on the grounds that the plan exceeds the Bankruptcy Code’s authorization by releasing claims held by non-debtors against other non-debtor third parties without the claimants’ consent. Moreover, as amici NexPoint Advisors L.P. point out, a decision in Harrington may effectively decide the issues presented in the recent Fifth Circuit case Highland Cap. Mgmt., L.P. v. NexPoint Advisors L.P., which concerns the inclusion of non-debtor exculpatory clauses in reorganization plans.[2]

Background

The Sackler family are the longtime owners and operators of Purdue Pharma, a pharmaceutical company that manufactures the opioid Oxycontin. Purdue filed for Chapter 11 bankruptcy in 2019 after facing a flood of litigation over its role in contributing to the prescription opioid epidemic by manufacturing, marketing, and distributing OxyContin alongside other prescription opioids. Prior to the filing, however, the last members of the Sackler family left Purdue’s board while retaining ownership over Purdue through trusts. Although the Sackler family were also facing litigation, they did not file for bankruptcy alongside Purdue. Instead, they participated in the extensive negotiations between Purdue and its creditors that led to the creation of the reorganization plan at issue in Harrington, eventually choosing to contribute up to $6 billion to the plan’s fund to be distributed to Purdue’s creditors. In exchange, the Sacklers negotiated for a broad release from any and all civil liability related to their role in the opioid epidemic.

The Release

This release “permanently and forever stay[s], restrain[s], and enjoin[s]” “all persons” “from taking any action” to collect a payment on a covered claim against the Sacklers or related entities.[3] Any civil claim “of any kind, character, or nature whatsoever,” including claims for “fraud” and “willful misconduct,” so long as Purdue or Purdue’s estate’s conduct is the “legal cause” of the claim, “or is otherwise a legally relevant factor[]” is covered by the release.[4] This release covers anyone who holds a Purdue-related opioid claim, against any of the released non-debtors—a category which notably includes would-be claimants in the United States and Canada[5] that did not participate in Purdue’s Chapter 11 bankruptcy in any way.

The Arguments

Petitioner William K. Harrington draws issue with the breadth of the reorganization plan’s release—namely, that the plan’s release would extinguish all claims of affected claimants (other than the United States itself) against the individual members of the Sackler family and various related entities, without the consent of those affected claimants and beyond the bounds of what would be permissible in a release of a debtor. Harrington argues, in part, that nothing in the Bankruptcy Code allows for this grant of extensive release; instead, the Code contemplates and disallows this type of release between non-debtors. His argument relies on 11 U.S.C. § 524(e), which provides that the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt[,]”[6] suggesting that the release is a “functional equivalent” to a discharge of a non-debtor and is therefore barred by the Code.[7]

Purdue, alongside the other debtor entities in the underlying bankruptcy, in turn rely on the Bankruptcy Code’s expansive language in 11 U.S.C. §§ 105(a) and 1123(b)(6) to argue that the Bankruptcy Court is authorized to include a release between non-debtors in a reorganization plan within its “residual authority” where the Code does not expressly provide that authority.[8] According to these provisions, a bankruptcy court may “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [Chapter 11]” and may include in a reorganization plan “any other appropriate provision not inconsistent with the applicable provisions of [Chapter 11.]”[9] Purdue goes on to distinguish between the Sackler release and the discharges barred by Section 524(e), claiming that because the release does not grant the Sacklers “full repose” from liability it is not a discharge subject to Section 524(e).[10]

The Impact

The outcome of Harrington could reverse current Fifth Circuit precedent that denies the use of releases between non-debtors in Chapter 11 reorganization plans. Additionally, as NexPoint Advisors pointed out in its amicus brief, because Harrington asks the court to assess whether third-party releases are a “species of discharge” barred by 11 U.S.C. § 524(e), a decision in Harrington may effectively decide whether a similar “species of discharge” can be used in Chapter 11 reorganization plans moving forward—the third-party exculpations at issue in Highland Cap. Mgmt., L.P. v. NexPoint Advisors L.P.[11]

Marc Tabolsky is a partner and Adam Greiner is an associate at Schiffer Hicks Johnson PLLC, a Houston-based trial law firm.

[1] See, e.g., In re Pacific Lumber Co., 584 F.3d 229, 252 (5th Cir. 2009) (holding that the Code “only releases the debtor” and citing prior cases that “seem broadly to foreclose non-consensual non-debtor releases”).

[2] Brief for Amici Curiae NexPoint Advisors, L.P., et al. at 9, Harrington v. Purdue Pharma, No. 23-124 (filed September 27, 2023); see also Matter of Highland Capital Mgmt., L.P., 57 F.4th 494, 504 (5th Cir. 2023).

[3] Brief for the Petitioner at 26, Harrington v. Purdue Pharma, No. 23-124 (filed September 20, 2023).

[4] Id. at 7.

[5] The City of Grand Prairie, as representative for a class of Canadian municipalities, filed a brief in support of the Petitioner asserting in part that the release of the Sacklers and related entities would extinguish the rights of Canadian citizens to sue a non-bankrupt Sackler-owned entity called Purdue Canada, as well as the Sacklers in their individual capacity. Brief of Respondent City of Grande Prairie, as representative plaintiff for a class consisting of all Canadian municipalities, et al. at 10-11, Harrington v. Purdue Pharma, No. 23-124 (filed September 20, 2023).

[6] Petitioner also relies on 11 U.S.C. § 524(g), which explicitly authorizes an injunction of claims between non-debtors in the context of asbestos claims. Petitioner argues that considering Section 524(g)’s narrow authorization for injunctions between non-debtors and its substantive and procedural protections for those non-debtors, the Sackler release’s impermissible breadth and lack of authorization in the Bankruptcy Code are more pronounced. Brief for the Petitioner at 21, Harrington v. Purdue Pharma, No. 23-124 (filed September 20, 2023).

[7] Brief for the Petitioner at 25-26, Harrington v. Purdue Pharma, No. 23-124 (filed September 20, 2023).

[8] Brief for Debtor Respondents at 23-24, Harrington v. Purdue Pharma, No. 23-124 (filed October 20, 2023).

[9] 11 U.S.C. §§ 105(a), 1123(b)(6).

[10] Brief for Debtor Respondents at 33-35, Harrington v. Purdue Pharma, No. 23-124 (filed October 20, 2023).

[11] Brief for Amici Curiae NexPoint Advisors, L.P., et al. at 3, Harrington v. Purdue Pharma, No. 23-124 (filed September 27, 2023).