In Harrington v. Purdue Pharma LP, in a 5-4 decision, the Supreme Court held that the Bankruptcy Code does not authorize bankruptcy courts to confirm a Chapter 11 bankruptcy plan that discharges creditors’ claims against third parties without the consent of the affected claimants. The decision rejects the bankruptcy plan of Purdue Pharma, which had released members of the Sackler family from liability for their role in the opioid crisis. Justice Gorsuch wrote the majority decision. Justice Kavanaugh dissented, joined by Chief Justice Roberts and Justices Kagan and Sotomayor.
The U.S. Supreme Court reversed confirmation of Purdue Pharma’s Chapter 11 bankruptcy plan of reorganization on the basis that its non-consensual third-party releases were not permissible. It held that the Bankruptcy Code does not authorize the inclusion of a release in a plan that effectively seeks to discharge claims against a non-debtor without the consent of affected claimants. The decision prohibits an approach to global resolution of mass tort litigations that has been utilized in numerous cases over the last 40 years.
Takeaways
On June 27, 2024, the Supreme Court issued its opinion in Harrington v. Purdue Pharma L.P., 603 U.S. ____ (2024) holding that the Bankruptcy Code does not allow for the inclusion of non-consensual third-party releases in chapter 11 plans. This decision settles a long-standing circuit split on the propriety of such releases and clarifies that a plan may not provide for the release of claims against non-debtors without the consent of the claimants.
On June 27, 2024, the Supreme Court ruled in a 5-4 decision that a bankruptcy court does not have the statutory authority to discharge creditors’ claims against a non-debtor without the creditors’ consent (except in asbestos cases). The decision in Harrington v.
In In re Flatbush Rho Mezz LLC, the U.S. Bankruptcy Court for the Southern District of New York allowed a secured creditor to be paid the entirety of a $5 million bond based on a loan with 24% default rate interest that continued to accrue interest during the pendency of an appeal.
Background of the Dispute
One of the three debtors, 85 Flatbush RHO Mezz LLC ("Mezz"), acquired a mixed-use property “with a hotel component” in Brooklyn, New York.
1. Commercial Chapter 11 Bankruptcy Filings Have Increased Significantly Year-Over-Year: There has been a significant increase in the number of commercial Chapter 11 cases (larger company filings) in 2024. By way of example, there were 1,894 commercial Chapter 11 filings (including subchapter V filings) during the first quarter of 2024, up 43% from the 1,325 total commercial chapter 11 filings during the first calendar quarter of 2023 according to data provided by Epiq Bankruptcy, the leading provider of U.S. bankruptcy filing data.
The Supreme Court issued a landmark and potentially far-reaching decision in Harrington v. Purdue Pharma L.P., No. 23-124 (“Purdue”), on June 27, 2024. We set forth the facts and our initial observations below, with a more complete description of the decision at the end of this bulletin.
What Did the Court Decide?
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.