May 9, 2024
Nonconsensual third-party releases have been at the forefront of bankruptcy debates for decades, growing in popularity as mass tort bankruptcies have become more frequent. The permissibility of nonconsensual third-party releases is at the core of the In re Purdue Pharma L.P. chapter 11 reorganization, the subject of a pending appeal before the U.S. Supreme Court.[1] Given the hotly contested nature of the releases in Purdue Pharma’s plan of reorganization, and the varying standards across the circuits, the U.S. Supreme Court granted certiorari on August 10, 2023.[2]
There is arguably no bigger gap in the Bankruptcy Code than the lack of express guidance on nonconsensual third-party releases. The U.S. circuit courts are split on the permissibility of such releases and offer varying interpretations of the Bankruptcy Code to justify their positions. A few circuits interpret § 524(e) literally and hold that discharge is strictly limited to the debtor.[3] Other circuits rely on the equitable powers conferred upon bankruptcy courts under § 105(a) to grant any ‘necessary or appropriate’ order to carry out the provisions of the Bankruptcy Code—nonconsensual third-party releases are accordingly permissible per the bankruptcy court’s discretion.[4]
Where statutory gaps and ambiguity exist in the Code, the Supreme Court has instructed courts and practitioners to rely on pre-Code guidance.[5] The precursor to § 105(a) is § 2a(15) of the 1898 Act; § 105(a) contains analogous language and functionally grants bankruptcy courts the same equitable discretion that § 2a(15) did.[6] One of the seminal cases discussing the authority conferred upon bankruptcy courts through § 2a(15) is Continental Illinois Nat. Bank v. Chicago, Rock Island & Pacific Railway Co.[7] This case has been cited as support for the assertion that bankruptcy courts are courts of equity and are thus authorized to grant nonconsensual third-party releases where they deem such releases necessary to the reorganization.[8] Continental Illinois’ instruction does not reach that far. While it is true that Continental Illinois established bankruptcy courts as courts of equity,[9] Continental Illinois does not stand for the presumption that this equitable power can be imposed outside of the scope of the debtor’s reorganization. On the contrary, Continental Illinois specifically states that the extent of this equitable authority is limited to making orders as necessary to enforce the Act and enable a reorganization.”[10] Other pre-Code cases have also echoed this principle[11]—alteration of a non-debtor’s liability is not necessary to a debtor’s reorganization;[12] alteration of a non-debtor’s liability does not interfere with the debtor’s assets;[13] § 2a(15) could not be used to grant relief to non-debtors who had not subjected themselves to the bankruptcy process; consequently neither can § 105(a).[14] Pre-Code case law simply did not contemplate the concept of third-party releases and does not provide support for them.
Congress did not contemplate the release of non-debtor third-parties when it wrote the Code—using § 105(a) to read this substantive right into the Code would be contrary to the purpose of Chapter 11 as Congress envisioned it.[15] Consequently, the Supreme Court should find that nonconsensual third-party releases are an impermissible abuse of the Bankruptcy Code.
Jasnoor Hundal is a 3L at Temple University Beasley School of Law. You can read her full article for Temple Law Review here.
[1] Jonathan C. Lipson, The Rule of the Deal: Bankruptcy Bargains and Other Misnomers, 97 AM. BANKR. L.J. 41 (2023); 633 B.R. 53 (Bankr. S.D.N.Y. 2021), vacated, 635 B.R. 26 (S.D.N.Y. 2021), rev’d in part sub nom, Purdue Pharma, L.P. v. City of Grande Prairie, 69 F.4th 45 (2d Cir. 2023), cert. granted sub nom, Harrington v. Purdue Pharma, L.P., No. 23-124, 2023 WL 5116031 (Aug. 10, 2023).
[2] Harrington v. Purdue Pharma L.P., No. 23-124, 2023 WL 5116031 (Aug. 10, 2023).
[3] Feld v. Zale Corp., 62 F.3d 746, 760 (5th Cir. 1995); In re W. Real Est. Fund, 922 F.2d 592, 602 (10th Cir. 1990).
[4] 11 U.S.C. § 105(a).; Airadigm Commc’ns Inc. v. FCC, 519 F.3d 640, 657 (7th Cir. 2008).
[5] Kelly v Robinson, 479 U.S. 36 (1986); Pa. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552 (1990).
[6] Adam J. Levitin, Toward a Federal Common Law of Bankruptcy: Judicial Lawmaking in a Statutory Regime, 80 Am. Bankr. L.J. 1, 32 (2006); 1 Collier on Bankruptcy § 2(15), at 327–39 (14th ed. 1976); 11 U.S.C. § 105(a).
[7] 294 U.S. 648 (1935).
[8] See In re Johns-Manville Corp., 68 B.R. 618, 625 (Bankr. S.D.N.Y. 1986).
[9] See Cont’l Ill. Nat’l Bank , 294 U.S. at 676.
[10] Id.
[11] See generally In re Nine N. Church St., 82 F.2d 186 (2d Cir. 1936); In re Diversey Bldg. Corp., 86 F.2d 456 (7th Cir. 1936).
[12] In re Nine N. Church St., 82 F.2d at 188; In re Diversey Bldg. Corp., 86 F.2d at 458.
[13] In re Diversey Bldg. Corp., 86 F.2d at 457; In re Nine N. Church St., 82 F.2d at189.
[14] In re Diversey Bldg. Corp., 86 F.2d at 458; see also In re Nine N. Church St., 82 F.2d at 188 (holding that bankruptcy courts are exceeding the limits of their equitable power when they alter a non-debtor’s liability through the use of bankruptcy tools and at the detriment of objecting creditors)
[15] In re Purdue Pharma, L.P. 635 B.R. 26, 98 (Bankr. S.D.N.Y. 2021) (explaining that Section 105(a) does not allow the bankruptcy court “to create substantive rights that are otherwise unavailable under applicable law”(quoting Deutsche Bank AG v. Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005))), rev’d in part sub nom, Purdue Pharma, L.P. v. City of Grande Prairie, 69 F.4th 45 (2d Cir. 2023), cert. granted sub nom, Harrington v. Purdue Pharma, L.P., 216 L. Ed. 2d 1300 (2023).