Releases of Sackler Family Too Broad and Not Authorized by the Bankruptcy Code

SUMMARY

Here’s a dilemma:

• Should bankruptcy be available as a tool for resolving mass tort cases of all types (like it already is in asbestos contexts)?

Here’s an illustration of the dilemma:

• many tort claimants in the Johnson & Johnson case DO NOT want bankruptcy involved; but
• many tort claimants in the Purdue Pharma case were BEGGING the courts to approve the bankruptcy plan.

How do we solve this dilemma?

On June 6, 2024, the United States Supreme Court issued its long-awaited ruling in Truck Insurance Exchange v. Kaiser Gypsum Co., Inc., et al.,¹ nullifying the insurance neutrality test for insurer standing in bankruptcy proceedings and holding that insurance companies that may face liability for bankruptcy claims filed against a debtor are parties in interest under section 1109(b) of the Bankruptcy Code that are entitled to “be heard on any issue” in such debtor’s bankruptcy case.

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:

On June 27, 2024, the United States Supreme Court issued its decision in Harrington v. Purdue Pharma LP, addressing the question of whether a company can use bankruptcy to resolve the liability of non-debtor third parties. The Supreme Court, in a 5-4 decision, held that the bankruptcy code does not authorize a release and an injunction that, as part of a plan of reorganization under Chapter 11, effectively seek to discharge the claims against a nondebtor without the consent of the affected claimants.

Last week, in a 5-to-4 decision in the case ofHarrington, United States Trustee, Region 2 v. Purdue Pharma L.P, et al., the U.S. Supreme Court struck down the ability of bankruptcy courts to order non-consensual third-party releases (i.e., claims held by non-debtors against non-debtor third parties) as part of a Chapter 11 plan.

In the July 2024 edition of the Restructuring Department Bulletin, we highlight recent decisions and developments impacting the restructuring arena and share the latest news on the Paul, Weiss Restructuring Department.

This article originally appeared in The Bankruptcy Strategist.

To file bankruptcy in the U.S., a debtor must reside in, have a domicile or a place of business in, or have property in the United States. 11 U.S.C. §109(a). In cross border Chapter 15 cases, courts have considered if a foreign debtor must satisfy that jurisdictional test.

The practice of conferring "derivative standing" on official creditors' committees or individual creditors to assert claims on behalf of a bankruptcy estate in cases where the debtor or a bankruptcy trustee is unwilling or unable to do so is well-established. However, until recently, Delaware bankruptcy courts have uniformly limited the practice in cases where applicable non-bankruptcy law provides that creditors do not have standing to bring claims on behalf of certain entities.

The phrase “Texas Two-Step,” as used in bankruptcy, is a legal expletive. Regardless of what the details of a Texas Two-Step might be, the phrase has become synonymous with:

• abusive behavior;
• bad faith conduct;
• a means for swindling creditors;
• the antithesis of “doing what’s right”;
• a tool for avoiding liability;
• etc., etc.

Describing a legal tactic as a “Texas Two-Step” is like calling that tactic a “#$&*#%R&” or “#*$&.” It’s a legal expletive that means “really, really bad.”