On June 27, 2024, the Supreme Court issued a pivotal decision in the case of Harrington v. Purdue Pharma L.P., fundamentally shaping the landscape of bankruptcy law. In a 5-4 decision, the Court held that the Bankruptcy Code does not permit a release and injunction that, as part of a Chapter 11 reorganization plan, discharges claims against nondebtors without the consent of the affected claimants.
Background of the Case
Purdue Pharma, the company at the center of the opioid crisis, faced a multitude of lawsuits due to its marketing of OxyContin. Owned by the Sackler family, the Sacklers withdrew approximately $11 billion from Purdue over several years before filing for Chapter 11 bankruptcy in 2019. As part of the reorganization plan, the Sacklers proposed returning $4.3 billion to Purdue’s bankruptcy estate in exchange for a judicial order that would release them from all opioid-related claims.
Key Issues and Court’s Analysis
- Scope of the Bankruptcy Code: The Court scrutinized whether the Bankruptcy Code allows for discharging claims against nondebtors without claimant consent. Section 1123(b)(6) of the Code permits a Chapter 11 plan to include any appropriate provision not inconsistent with the applicable provisions of this title. The Court interpreted this in light of its context, which pertains to the debtor’s claims and property, not extending to third-party claims without consent.
- Historical Precedent: Historically, discharge benefits have been reserved for debtors who fully surrendered their property. The Court found no precedent for extending these benefits to nondebtors without claimant consent, reinforcing the conclusion that current law does not authorize such releases.
- Judicial Interpretation: Applying the ejusdem generis canon, the Court interpreted the catchall provision in Section 1123(b)(6) to include only provisions similar in nature to the specific examples listed, which concern the debtor’s rights and responsibilities. This interpretation does not support discharging nondebtors’ liabilities without affected claimants’ consent.
Implications of the Ruling
The Court’s ruling emphasizes that bankruptcy courts cannot discharge claims against nondebtors without the explicit consent of the affected claimants. This decision safeguards the rights of claimants by ensuring that nondebtors, like the Sacklers in this case, cannot evade liability through nonconsensual releases in bankruptcy plans.
Justice Gorsuch, writing for the majority, underscored that the Bankruptcy Code is designed to provide relief primarily for debtors who place virtually all their assets on the table, a condition not met by the Sacklers. The ruling ensures that the benefits of discharge are reserved for debtors who meet the stringent requirements of the Code.
Conclusion
The Supreme Court’s decision in Harrington v. Purdue Pharma L.P. marks a significant moment in bankruptcy law, reinforcing the necessity for claimant consent in nondebtor releases. This ruling not only impacts the future of the Sacklers’ legal battles but also sets a clear precedent that protects the rights of claimants in bankruptcy proceedings.
As this landmark case unfolds, it serves as a critical reminder of the importance of adhering to the principles of the Bankruptcy Code and the protection it affords to all parties involved.