Philip Anker Speaks On Third-Party Releases
The propriety of non-consensual third-party releases, and the decisions in Purdue and Ascena,can be analyzed on many different levels.
One is a question of policy, more than law: Should Congress permit plans of reorganization that release claims by creditors, without their consent, against non-debtors? My personal view is that it should, but that it should prescribe exacting standards for such plans in order to ensure that they are very much the exception, not the rule, and that, in particular, such plans are confirmed only where the non-consensual third-party releases are truly necessary to maximize value for creditors and to enable the debtor’s businesses to reorganize. A cause of action is a form of property. Forcing a creditor against its will to release its claims, just like forcing it to give away any other property it owns, is not something that courts should be permitted to do lightly, especially when the parties to be released have not filed for bankruptcy. That said, I do think Chapter 11 cases are occasionally filed – mostly in the mass tort context – where non-debtors face liability that overlaps substantially with the debtor’s; those non-debtors may be the only viable source of funding for a confirmable plan of reorganization for the debtor, but they may be unwilling to provide that funding unless they can obtain complete peace through a release of the claims against them. In these rare circumstances, allowing a small subset of hold-out creditors to block such a plan benefiting the debtor and the creditor body as a whole may not be appropriate. So, I think Congress should permit plans that include non-consensual third-party releases, but only where demanding standards are met that build on those that Congress has already specified for a plan in an asbestos case that channels third-party claims. Those standards would include approval of the plan by a super-majority of affected claimants; an identity of interests between the debtor and the third parties; a finding that the releases are necessary to the debtor’s reorganization; and a determination that dissenting creditors are likely to receive value for their claims that is fair in light of what they could expect to recover, as a legal and practical matter, outside bankruptcy.
Another set of issues is one of law: Does the current Bankruptcy Code (other than in asbestos cases) permit plans of reorganization that release (or channel) claims by creditors, without their consent, against non-debtors? Those who argue that the answer is no point to Section 524(e) of the Code, which provides that the discharge of a debtor’s liability on a debt does not affect any third party’s liability on the debt, and contend that Congress has expressly permitted the release or channeling of claims against non-debtors only in asbestos cases under Section 524(g). Those who argue that the answer is yes note that a release is not a discharge and that Congress made clear when it enacted Section 524(g) that it did not mean to imply that bankruptcy courts otherwise lacked the power to confirm plans containing non-consensual third-party releases. While the case law is not uniform, most courts seem to have held that the Bankruptcy Code does permit such plans, at least in extraordinary cases. As I read its decision, the district court in Ascena did not hold that the Code absolutely prohibits as a matter of law any plan containing non-consensual third-party releases, but rather merely held that the standards for such a release were not met on the facts of that case. The district court in Purdue did hold that the Code provides no statutory authority (outside the asbestos context) for non-consensual third-party releases. Whether one agrees or disagrees with that analysis as a matter of first principles, I found somewhat surprising the district court’s conclusion that the issue had not already been resolved by the Second Circuit, whose precedents were binding on it. I think most practitioners had read the case law in that Circuit to hold that such releases are permissible, albeit only in extraordinary cases.
A third set of issues is whether the facts of Purdue and Ascena justified the third-party non-consensual releases under the appropriately demanding standards for such releases. Based on the district court’s opinion, the answer in Ascena seems to be no. The debtors’ businesses were liquidated, not reorganized, and there does not appear to have been anything necessary about the releases. Indeed, it is telling that after the district court invalidated the releases and determined that they could be severed from the rest of the plan, the Chapter 11 case did not fall apart; the debtors simply modified the plan to remove the releases. The argument that the releases were necessary in Purdue was obviously stronger. To obtain complete peace, the Sacklers agreed to provide billions of dollars in funding that would enable trusts created under the plan to engage in abatement efforts and to compensate injured claimants, and the bankruptcy court made findings suggesting that the creditors were unlikely to obtain a better outcome outside bankruptcy. That said, after the district court invalidated the releases, the debtors and the objecting creditors continued to mediate and reached a revised settlement under which the Sacklers agreed to increase their contributions by more than $1 billion. It is unfair to apply hindsight, but given what we now know, one could question whether the non-consensual third-party releases in that case were necessary. On the other hand, there were also many private creditors (individual claimants injured by opioids or their estates), and the Sacklers may not have been willing to pay billions of dollars unless they obtained the benefit of non-consensual third-party releases barring claims by all the creditors, public and private alike.
As to whether the decisions in Purdue and Ascena will help creditors, I don’t think the answer is black and white. Purdue may or may not hold up on appeal, but even if it does, third-party non-consensual releases are, at least in my experience, often not that big an issue in commercial bankruptcy cases. They can, however, be far more important in mass tort cases. In that context, the most likely alternative to a Chapter 11 plan in which third parties contribute what are often very substantial sums and, in exchange, are released from liability may be continued litigation in the tort system. While I am not a tort trial lawyer, my impression is that some claimants do well in that system, but others do not. Juries are not always consistent, and the sheer number of lawsuits can lead to considerable delay. At least in some cases, I suspect that a majority of claimants may do better through the bankruptcy process, which can facilitate large settlements from third parties seeking to obtain complete peace.
Although Purdue and Ascena may not directly affect many commercial Chapter 11 cases, they may do so indirectly. They may lead other district courts and courts of appeal to review with special care bankruptcy court decisions that take an expansive view of the Bankruptcy Code and to question the ability of bankruptcy judges to, one might say, push the envelope a bit beyond the text of the statute and the powers it expressly provides. In general, I think a more narrow, literal reading of the Code may benefit most creditors in most cases. Fidelity to principles such as the absolute priority rule and the rule requiring equal treatment of creditors in the same class provide protections for the bulk of creditors. At the same time, a few creditors with the largest claims and a lot of capital have been creative in some recent cases in providing DIP and exit financing that, one might argue, has allowed them to do better than other, less powerful, but arguably similarly situated, creditors have been able to do. So, in the end, Purdue and Ascena may prove to be good for some creditors and bad for others.