Third Party Releases – Purdue and Beyond
Sometimes the obvious answer is the right one. The Supreme Court’s decision in Purdue Pharma was the most important and consequential development in the restructuring industry in 2024, and potentially in the past 40 years.
By now, your readers are familiar with the holding of Purdue— “nonconsensual third-party releases” in favor of non-debtors are now impermissible. With the stroke of a pen, the Supreme Court ended a bedrock feature of countless mass tort bankruptcy plans. The bombshell decision had ripple effects throughout the industry:
- It immediately undid the Purdue Pharma plan, with hundreds of thousands of creditors now waiting to see if a new deal will get done or if they will have to wait years—or longer—for payouts.
- Existing deals that were either teed up for approval, or were up on appeal—most prominently the Boy Scouts bankruptcy plan, but also the scores of mass tort debtors currently in bankruptcy around the country—suddenly faced substantial uncertainty on whether their plans would be unwound or rejected
- And there are countless companies facing mass tort liabilities that are now contemplating the viability of a bankruptcy strategy to deliver them finality, or if they’ll just have to duke it out in MDLs and state courts for the foreseeable future.
In face of this uncertainty, the notion of consent—and specifically whether consent can only be manifested through an affirmative act—has taken on newfound significance in bankruptcy cases across the country.
Purdue did not resolve a preexisting split of authority over whether non-debtor releases can be approved on a consensual basis if a plan contains an opt-out mechanism, or if a party must opt in to the third-party release. Whether a plan is an “opt in” or an “opt out” plan can make all the difference: An opt-out plan provides for non-debtor releases if a party receiving a ballot or a nonvoting party (such as a shareholder deemed to reject a plan or an unimpaired creditor) receiving notice does not vote at all, or if it does not select a box indicating that the party does not wish to grant a non-debtor release. In some cases, parties that vote in favor of a plan are also deemed to consent even if they opt out. An opt-in plan, in contrast, requires a party to affirmatively check a box to grant a release. Not surprisingly, debtors—and the third parties looking to get the benefit of a release—typically advocate for an “opt out” plan in the hopes that most people won’t bother to check the box to opt out of the release.
Prior to Purdue, lower courts split over the permissibility of opt-out releases, with limited circuit-level authority addressing the issue. That split has generally continued notwithstanding Purdue, with courts either approving opt-out releases (e.g., Judge Lopez in Robertshaw), or requiring debtors to modify their plans to contain an opt-in mechanism (e.g., Judge Goldblatt in Smallhold). And still others have crafted a middle ground, for example Judge Horan in Fisker finding that creditors can be bound by opt-out releases because they receive some consideration under the plan, while shareholders who get no recovery under the same plan cannot similarly be bound.
The conflicting decisions on this issue among, and even within, judicial districts over opt-out releases may also exacerbate the ongoing trend for debtors to file their cases in venues that debtors believe will maximize their chances of obtaining favorable rulings on important case issues. Until appellate courts resolve this issue with binding precedent, we expect debtors to continue to push for opt-out plans to obtain the benefit of broad consent for third-party releases.
Copyright 2024 Creditor Rights Coalition