High Court Ruling Curtails Use of Third-Party Releases in Chapter 11
The U.S. Supreme Court’s decision in what is known as the Sackler Discharge case has fundamentally altered how companies and their equity owners use Chapter 11 bankruptcy to resolve large-scale liability. The court definitively rejected the use of non-consensual third-party releases for equity holders or affiliates who are not themselves seeking a discharge through bankruptcy.
The case, Harrington v. Purdue Pharma L.P., emerged from Purdue Pharma’s Chapter 11, which was filed as the company faced thousands of lawsuits centered on its marketing of the opioid OxyContin and alleged deception about the drug’s addictive potential. Members of the Sackler family (Purdue’s owners) sought non-consensual third-party releases in exchange for large financial contributions to a settlement fund. Under this arrangement, claimants would be barred from pursuing lawsuits against the Sacklers in connection with Purdue’s conduct, effectively granting them a legal shield.
Historically, some lower courts have allowed such releases, especially in complex mass tort cases, viewing them as pragmatic tools for marshaling settlement funds. However, these releases have been controversial, as they protect individuals or entities (who had not themselves sought the protections or transparency of bankruptcy) from civil liability, often over the objection of at least some claimants.
The Supreme Court has now made clear that Chapter 11’s discharge provisions apply solely to entities or persons who have subjected themselves and their assets to the bankruptcy process. Equity holders and affiliates, the court declared, cannot use the bankruptcy of their company as a means to shield themselves from liability for their separate alleged wrongdoing unless all affected claimants consent.
This ruling cuts off a previously powerful tool for global settlements of mass tort bankruptcies, in which where thousands of plaintiffs may have claims connected to the actions of both the company and its insiders. Corporations can no longer promise their executives or equity holders blanket protection to encourage large settlement contributions unless every plaintiff affirmatively agrees.
This means, in practical terms, that company executives, owners or affiliates must now either file their own bankruptcy petition — thereby opening themselves up to the accompanying scrutiny, loss of asset control, legal obligations and transparency — or face the risk of ongoing and future litigation outside the company’s main bankruptcy plan.
The Supreme Court’s decision leaves room for negotiation of third-party releases in Chapter 11 for which every affected claimant consents. The opinion also notes exceptions where Congress has expressly authorized tailored third-party releases in mass tort contexts, such as in connection with asbestos cases under Section 524(g) of the Bankruptcy Code. Outside specific statutory authorizations, the blanket protection sought by many non-debtors is no longer generally available.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your business is facing overwhelming debt, please call 310-271-6223 or contact us online to schedule a consultation.
