In the most significant decision of the decade on a matter of U.S. bankruptcy law, the U.S. Supreme Court rendered its highly anticipated decision in Harrington v. Purdue Pharma L.P., 603 U.S. ____ (2024) on June 27, 2024, striking down the non-consensual third party releases that were the cornerstone of Purdue Pharma's Chapter 11 Plan of Reorganization by a vote of 5-4. In doing so, the Court said:
“[W]e hold only that the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants.” Id. at 19.
The Court’s decision was narrowly tailored and based principally on an issue of statutory interpretation under Chapter 11, specifically Section 1123(b)(6) of the U.S. Bankruptcy Code. The Court expressly declined to engage in the “public policy debate” about releases in opioid-related Chapter 11 cases. Thus, the Court left the door wide open for non-consensual third party releases to be approved in the context of a case under Chapter 15 of the U.S. Bankruptcy Code.
Although the full implications of the Purdue decision have yet to play out, if a company (especially a large, multinational corporation) has a choice of jurisdictions, the option to use a cross border restructuring toolbox with Chapter 15 recognition in the U.S. will potentially be attractive. Particularly where third party non-consensual releases are important for the success of a restructuring, companies may wish to consider pursuing their restructuring under a non-U.S. regime (such as an English Scheme of Arrangement or Restructuring Plan, Dutch WHOA, or Canadian CCAA) coupled with recognition of the non-U.S. restructuring under U.S. law pursuant to Chapter 15 of the U.S. Bankruptcy Code.
Background
Facing thousands of claims and trillions of dollars in potential damages resulting from its manufacture, sale, and distribution of the addictive opioid OxyContin, Purdue and its affiliated companies filed for Chapter 11 protection in 2019. The Sacklers, the family that owned and controlled Purdue, did not seek relief under the U.S. Bankruptcy Code.
The Purdue debtors proposed a Chapter 11 Plan of Reorganization, and solicited votes for their Plan. A cornerstone of the Plan was the establishment of a victim compensation fund. The Sacklers were to contribute $6 billion to the victim compensation fund in exchange for releases from all opioid-related claims against them. Under the terms of the Plan and related confirmation order, these third party releases were accompanied by broad injunctions that would be effective regardless of whether claimants or potential claimants consented to the releases. Although the Plan received the overwhelming support of 95% of the voting opioid claimants, the U.S. Trustee appealed the Plan, and the issue of the third party releases eventually reached the Supreme Court.
Supreme Court Decision
At a mere 20 pages, the Court’s decision is narrow in scope and textual in its analysis of the U.S. Bankruptcy Code, including Section 1123(b)(6) of Chapter 11. As the Court explained, the U.S. Bankruptcy Code can be boiled down to the “simple bargain” that “a debtor can win a discharge of its debts if it proceeds with honesty and places virtually all of its assets on the table for creditors.” Id. at 1. Permitting the Sacklers to receive a third party release would give them the benefits of that bargain without any of the drawbacks. Id. at 7-8. Notably, the Sacklers had distributed to themselves over 75% of Purdue’s assets, totalling about $11 billion, in the years preceding the company’s Chapter 11 filing, yet were to contribute only $6 billion to the victim compensation fund. Id. The Court determined there was no textual, contextual, or historical basis in the U.S. Bankruptcy Code to provide non-debtors the kind of third party releases designed for Chapter 11 debtors. Id. at 8-17.
Potential Exists to Obtain Non-Consensual Third Party Releases Through a Non-U.S. Restructuring Coupled With Chapter 15 Recognition
On its face, the Purdue decision is confined to non-consensual third party releases granted “as part of a plan of reorganization under Chapter 11.” Id. at 19. Consequently, the decision leaves the door wide open for multinational companies (or even U.S. companies) to pursue their restructuring under a non-U.S. regime that permits non-consensual third party releases, and then obtain recognition of their restructuring (including the releases) in the U.S. under Chapter 15 of the U.S. Bankruptcy Code.
Under Chapter 15, non-U.S. restructurings are generally recognized in the U.S., so long as the non-U.S. proceeding offers protection for creditors and recognition in the U.S. is not contrary to U.S. public policy. The Purdue Court expressly acknowledged in the decision that it was staying away from the “policy debate.” Moreover, there is ample precedent under Chapter 15 for U.S. recognition and enforcement of restructuring plans approved under non-U.S. restructuring regimes, including plans containing third party releases. Notably, “the releases in a foreign proceeding subject to Chapter 15 need not be identical to those that a U.S. court would endorse in a Chapter 11 case.” In re PT Bakrie Telecom Tbk, 628 B.R. 859 (Bankr. S.D.N.Y. 2021). The Court in Purdue explicitly shied away from making judgments on the parties’ public policy arguments regarding the third party releases, potentially permitting potential debtors to pursue such releases in other forums. Purdue, 603 U.S. at 18-19.
In the wake of the Court’s decision, companies may wish to consider whether a non-U.S. restructuring regime – such as an English Scheme of Arrangement or Restructuring Plan, Dutch WHOA, or Canadian CCAA – will be a viable means in a given set of circumstances for obtaining non-consensual third party releases. If it is, then even with the Court’s decision in Purdue, the releases should still be approved in the U.S. based on existing Chapter 15 precedents.
With capability in Amsterdam (Michael Broeders), London (Ken Baird and Craig Montgomery), and the U.S. (Madlyn Primoff and Crystal Kong), the Freshfields authors are uniquely situated to explore these concepts with you.