SUPREME COURT OF THE UNITED STATES
_________________
No. 23–124
_________________
William K. Harrington, United States Trustee,
Region 2, PETITIONER
v. Purdue Pharma L. P., et al.
on writ of certiorari to the united states
court of appeals for the second circuit
[June 27, 2024]
Justice Kavanaugh, with whom The Chief
Justice, Justice Sotomayor, and Justice Kagan join, dissenting.
Today’s decision is wrong on the law and
devastating for more than 100,000 opioid victims and their
families. The Court’s decision rewrites the text of the U. S.
Bankruptcy Code and restricts the long-established authority of
bankruptcy courts to fashion fair and equitable relief for
mass-tort victims. As a result, opioid victims are now deprived of
the substantial monetary recovery that they long fought for and
finally secured after years of litigation.
Bankruptcy seeks to solve a collective-action
problem and prevent a race to the courthouse by individual
creditors who, if successful, could obtain all of a company’s
assets, leaving nothing for all the other creditors. The bankruptcy
system works to preserve a bankrupt company’s limited assets and to
then fairly and equitably distribute those assets among the
creditors—and in mass-tort bankruptcies, among the victims. To do
so, the Bankruptcy Code vests bankruptcy courts with broad
discretion to approve “appropriate” plan provisions. 11
U. S. C. §1123(b)(6).
In this mass-tort bankruptcy case, the
Bankruptcy Court exercised that discretion appropriately—indeed,
admirably. It approved a bankruptcy reorganization plan for Purdue
Pharma that built up the estate to approximately $7 billion by
securing a $5.5 to $6 billion settlement payment from the Sacklers,
who were officers and directors of Purdue. The plan then guaranteed
substantial and equitable compensation to Purdue’s many victims and
creditors, including more than 100,000 individual opioid victims.
The plan also provided significant funding for thousands of state
and local governments to prevent and treat opioid addiction.
The plan was a shining example of the bankruptcy
system at work. Not surprisingly, therefore, virtually all of the
opioid victims and creditors in this case fervently support
approval of Purdue’s bankruptcy reorganization plan. And all 50
state Attorneys General have signed on to the plan—a rare
consensus. The only relevant exceptions to the nearly universal
desire for plan approval are a small group of Canadian creditors
and one lone individual.
But the Court now throws out the plan—and in
doing so, categorically prohibits non-debtor releases, which have
long been a critical tool for bankruptcy courts to manage mass-tort
bankruptcies like this one. The Court’s decision finds no mooring
in the Bankruptcy Code. Under the Code, all agree that a bankruptcy
plan can nonconsensually release victims’ and creditors’ claims
against a bankrupt company—here, against Purdue. Yet the
Court today says that a plan can
never release victims’ and
creditors’ claims
against non-debtor officers and directors of
the company—here, against the Sacklers.
That is true, the Court says, even when (as
here) those non-debtor releases are necessary to facilitate a fair
settlement with the officers and directors and produce a
significantly larger bankruptcy estate that can be fairly and
equitably distributed among the victims and creditors. And that is
true, the Court also says, even when (as here) those officers and
directors are indemnified by the company. When officers and
directors are indemnified by the company, a victim’s or creditor’s
claim against the non-debtors “is, in essence, a suit against the
debtor” that could “deplete the assets of the estate” for the
benefit of only a few, just like a claim against the company
itself.
In re Purdue Pharma L. P., 69 F. 4th
45, 78 (CA2 2023) (quotation marks omitted).
It therefore makes little legal, practical, or
economic sense to say, as the Court does, that the victims’ and
creditors’ claims against the debtor can be released, but that it
would be categorically “inappropriate” to release their identical
claims against non-debtors even when they are indemnified or when
the release generates a significant settlement payment by the
non-debtor to the estate.
For decades, bankruptcy courts and courts of
appeals have determined that non-debtor releases can be appropriate
and essential in mass-tort cases like this one. Non-debtor releases
have enabled substantial and equitable relief to victims in cases
ranging from asbestos, Dalkon Shield, and Dow Corning silicone
breast implants to the Catholic Church and the Boy Scouts. As
leading scholars on bankruptcy explain, “the bankruptcy community
has recognized the resolution of mass tort claims as a widely
accepted core function of bankruptcy courts for decades”—and they
emphasize that a “key feature in every mass tort bankruptcy” has
been the non-debtor release. A. Casey & J. Macey, In Defense of
Chapter 11 for Mass Torts, 90 U. Chi. L. Rev. 973, 974, 977
(2023).
No longer.
Given the broad statutory text—“appropriate”—and
the history of bankruptcy practice approving non-debtor releases in
mass-tort bankruptcies, there is no good reason for the
debilitating effects that the decision today imposes on the opioid
victims in this case and on the bankruptcy system at large. To be
sure, many Americans have deep hostility toward the Sacklers. But
allowing that animosity to infect this bankruptcy case is entirely
misdirected and counterproductive, and just piles even more injury
onto the opioid victims. And no one can have more hostility toward
the Sacklers and a greater desire to go after the Sacklers’ assets
than the opioid victims themselves. Yet the victims unequivocally
seek approval
of this plan.
With the current plan now gone and non-debtor
releases categorically prohibited, the consequences will be severe,
as the victims and creditors forcefully explained. Without
releases, there will be no $5.5 to $6 billion settlement payment to
the estate, and “there will be no viable path to any victim
recovery.” Tr. of Oral Arg. 100. And without the plan’s substantial
funding to prevent and treat opioid addiction, the victims and
creditors bluntly described further repercussions: “more people
will die without this Plan.” Brief for Respondent Official
Committee of Unsecured Creditors of Purdue Pharma L. P. et al.
55.
In short: Despite the broad term “appropriate”
in the statutory text, despite the longstanding precedents
approving mass-tort bankruptcy plans with non-debtor releases like
these, despite 50 state Attorneys General signing on, and despite
the pleas of the opioid victims, today’s decision creates a new
atextual restriction on the authority of bankruptcy courts to
approve appropriate plan provisions. The opioid victims and their
families are deprived of their hard-won relief. And the communities
devastated by the opioid crisis are deprived of the funding needed
to help prevent and treat opioid addiction. As a result of the
Court’s decision, each victim and creditor receives the essential
equivalent of a lottery ticket for a possible future recovery for
(at most) a few of them. And as the Bankruptcy Court explained,
without the non-debtor releases, there is no good reason to believe
that any of the victims or state or local governments will ever
recover anything. I respectfully but emphatically dissent.
I
To map out this dissent for the reader: Part I
(pages 5 to 18) discusses why non-debtor releases are often
appropriate and essential, particularly in mass-tort bankruptcies.
Part II (pages 18 to 31) explains why non-debtor releases were
appropriate and essential in the Purdue bankruptcy. Part III (pages
31 to 52) engages the Court’s contrary arguments and why I
respectfully disagree with those arguments. Part IV (pages 52 to
54) sums up.
Throughout this opinion, keep in mind the goal
of bankruptcy. The bankruptcy system is designed to preserve the
debtor’s estate so as to ensure fair and equitable recovery for
creditors. Bankruptcy courts achieve that overarching objective by,
among other things, releasing claims that otherwise could deplete
the estate for the benefit of only a few and leave all the other
creditors with nothing. And as courts have recognized for decades,
especially in mass-tort cases, non-debtor releases are not merely
“appropriate,” but can be absolutely critical to achieving the goal
of bankruptcy—fair and equitable recovery for victims and
creditors.
A
Article I, §8, of the Constitution affords
Congress power to establish “uniform Laws on the subject of
Bankruptcies throughout the United States” and to “make all Laws
which shall be necessary and proper for carrying into Execution”
that power.
Early in the Nation’s history, Congress
established the bankruptcy system. In 1978, Congress significantly
revamped and reenacted the Bankruptcy Code in its current form.
Bankruptcy Code of 1978, 92Stat. 2549.
The purpose of bankruptcy law is to address the
collective-action problem that a bankruptcy poses. T. Jackson,
The Logic and Limits of Bankruptcy Law 12–13 (1986). When a
company’s liabilities exceed its ability to pay creditors, every
creditor has an incentive to maximize its own recovery before other
creditors deplete the pot. Without a mandatory collective system,
the creditors would race to the courthouse to recover first. One or
a few successful creditors could then recover substantial funds,
deplete the assets, and drive the company under—leaving other
creditors with nothing. See
id., at 7–19; D. Baird, A World
Without Bankruptcy, 50 Law & Contemp. Prob. 173, 183–184
(1987); T. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and
the Creditors’ Bargain, 91 Yale L. J. 857, 860–868 (1982).
Bankruptcy creates a way for creditors to “act
as one, by imposing a
collective and
compulsory
proceeding on them.” Jackson, Logic and Limits of Bankruptcy Law,
at 13. One of the goals of Chapter 11 of the Bankruptcy Code in
particular is to fairly distribute estate assets among creditors
“in order to prevent a race to the courthouse to dismember the
debtor.” 7 Collier on Bankruptcy ¶1100.01, p. 1100–3 (R. Levin
& H. Sommer eds., 16th ed. 2023). Chapter 11 is aimed at
preserving an estate’s value for distribution to creditors in the
face of that collective-action problem.
The basic Chapter 11 case runs as follows. After
the debtor files for bankruptcy under Chapter 11, the debtor’s
property becomes property of the bankruptcy estate. 11
U. S. C. §541. Any litigation that might interfere with
the property of the estate is subject to an automatic stay, thus
preventing creditors from skipping the line by litigating in a
separate forum against the debtor while the bankruptcy is ongoing.
§362.
With litigation paused, the parties craft a plan
of reorganization for the debtor. The Code grants the bankruptcy
court sweeping powers to reorganize the debtor company and ensure
fair and equitable recovery for the creditors. For example, the
plan may authorize selling or retaining the company’s property;
merging or consolidating the company; or amending the company’s
charter. §1123(a)(5). The subsection at issue here, §1123(b), also
authorizes many other kinds of provisions that bankruptcy plans may
include.[
1] Most relevant for
this case, as I will explain, the reorganization plan may impair
and release “any class of claims” that creditors hold against the
debtor. §1123(b)(1). The plan may also settle and release “any
claim or interest” that the debtor company holds against
non-debtors. §1123(b)(3). And the plan may include “any other
appropriate provision not inconsistent with the applicable
provisions” of the Bankruptcy Code. §1123(b)(6).
To address any collective-action or holdout
problem, the bankruptcy court has the power to approve a
reorganization plan even without the consent of every creditor. If
creditors holding more than one-half in number (and at least
two-thirds in amount) of the claims in every class accept the plan,
the court can confirm the plan. §§1126(c), 1129(a)(8)(A). A plan is
“said to be confirmed consensually if all classes of creditors vote
in favor, even if some classes have dissenting creditors.” 7
Collier, Bankruptcy ¶1129.01, at 1129–13. That the bankruptcy
system considers a plan with majority (even if not unanimous)
support to be “consensual” underscores that the bankruptcy system
is designed to benefit creditors collectively and prevent holdout
problems.
Confirmation of the plan “generally discharges
the debtor from all debts that arose before confirmation.”
Id., ¶1100.09[2][f], at 1100–42 (citing §1141(d)). And
all creditors are bound by the plan’s distribution, even if some
creditors are not happy and oppose the plan.
Ibid.
B
This is a mass-tort bankruptcy case. Mass-tort
cases present the same collective-action problem that bankruptcy
was designed to address. “Without a mandatory rule that
consolidates claims in a single tribunal, tort claimants would
rationally enter a race to the courthouse.” A. Casey & J.
Macey, In Defense of Chapter 11 for Mass Torts, 90 U. Chi. L.
Rev. 973, 997 (2023). And the “plaintiffs who bring successful
suits earlier are likely to drain the firm’s resources, while
inconsistent judgments could result in inequitable payouts even
among plaintiffs who ultimately do collect.”
Id., at
994.
For many decades now, bankruptcy law has stepped
in as a coordinating tribunal in significant mass-tort cases. When
a company that is liable for mass torts files for bankruptcy, the
bankruptcy system enables (and requires) the mass-tort victims who
are seeking relief from the bankrupt company to work together to
reach a fair and equitable distribution of the company’s
assets.
In many cases, there is no workable alternative
other than bankruptcy for achieving fair and equitable recovery for
mass-tort victims. “Outside of bankruptcy,” victims face
“significant administrative costs” of multi-district litigation,
“which has limited coordination mechanisms and no tools for binding
future claimants.”
Id., at 1005. And multi-district
litigation cannot “solve the collective action problem because
dissenting claimants can opt out of settlements even when super
majorities favor them.”
Ibid.
Bankruptcy, on the other hand, reduces
administrative costs and allows all of the affected parties to come
together, pause litigation elsewhere, invoke procedural safeguards
including discovery, and reach a collective resolution that
considers both current and future victims. Cf. Federal Judicial
Center, E. Gibson, Case Studies of Mass Tort Limited Fund
Class Action Settlements & Bankruptcy Reorganizations 6 (2000)
(“bankruptcy reorganizations provide an inherently fairer method of
resolving mass tort claims” than alternative of class-action
settlements).
In some cases—including mass-tort cases—it is
not only the debtor company, but rather another closely related
person or entity such as officers and directors (non-debtors), who
may hold valuable assets and also be potentially liable for the
company’s wrongdoing.
But it may be uncertain whether the victims can
recover in tort suits against the non-debtors due to legal hurdles
or difficulty reaching the non-debtors’ assets. In those cases, a
settlement may be reached: In exchange for being released from
potential liability for any wrongdoing, the non-debtor must make
substantial payments to the company’s bankruptcy estate in order to
compensate victims. As long as the settlement is fair, the
non-debtor’s settlement payment will benefit victims “by enlarging
the pie of recoverable funds” in the bankruptcy estate. Casey &
Macey, 90 U. Chi. L. Rev., at 1001. And it will reduce
administrative costs, because the victims’ claims against both the
debtor and the non-debtor may be resolved “at the same time and in
the same tribunal.”
Id., at 1002.
The non-debtor’s settlement payment into the
estate can also solve a collective-action problem. Bringing the
non-debtor’s assets into the bankruptcy estate enables those assets
to be distributed fairly and equitably among victims, rather than
swallowed up by the first victim to successfully sue the
non-debtor.
Id., at 1002–1003.
A separate collective-action problem can arise
when the insolvent company’s officers and directors are indemnified
by the company for liability arising out of their job duties. In
such cases, “a suit against the non-debtor is, in essence, a suit
against the debtor.”
In re Purdue Pharma L. P., 69
F. 4th 45, 78 (CA2 2023) (quotation marks omitted). If not
barred from doing so, the creditors could race to the courthouse
against the indemnified officers and directors for basically the
same claims that they hold against the debtor company. If
successful, such suits would deplete the company’s assets because a
judgment against the indemnified officers and directors would
likely come out of the debtor company’s assets.
Another similar collective-action problem can
involve liability insurance, a kind of indemnification relationship
where the insurer is on the hook for tort victims’ claims against
the debtor company. See B. Zaretsky, Insurance Proceeds in
Bankruptcy, 55 Brooklyn L. Rev. 373, 375–376 (1989). The insurance
assets—meaning assets to the limits of the debtor’s insurance
coverage—are usually a key asset for the bankruptcy estate to
compensate victims. But tort victims also “may have direct action
rights against the insurance carrier, even, in some cases,
bypassing the debtor-insured.” 5 Collier, Bankruptcy ¶541.10[3],
at 541–60. If victims brought their claims directly against
the insurer for the same claims that they hold against the estate,
one group of victims could obtain from the insurer the full amount
of the debtor’s coverage. That would obviously prevent the
insurance money from being used as part of the bankruptcy estate.
See Zaretsky, 55 Brooklyn L. Rev., at 376–377, 394–395.
To address those various collective-action
problems, bankruptcy courts have long found non-debtor releases to
be appropriate in certain complex bankruptcy cases, especially in
mass-tort bankruptcies. Indeed, that is precisely why non-debtor
releases emerged in asbestos mass-tort bankruptcies in the 1980s.
See
id., at 405–414; Casey & Macey, 90 U. Chi. L.
Rev., at 998–999; see,
e.
g.,
MacArthur Co. v.
Johns-Manville Corp., 837 F.2d 89 (CA2 1988). And that is
precisely why non-debtor releases have become such a
well-established tool in mass-tort bankruptcies in the decades
since.
For example, after A. H. Robins declared
bankruptcy in 1985 in the face of massive tort liability for
injuries from its defective intrauterine device, the Dalkon Shield,
nearly 200,000 victims filed proof of claims.
In re
A. H. Robins Co.,
88 B.R. 742, 743–744, 747 (ED Va. 1988), aff ’d, 880 F.2d
694 (CA4 1989). A plan provision releasing the company’s directors
and insurance company ensured that the estate would not be depleted
through indemnity or contribution claims, or claims brought
directly against the directors or insurer. 88 B. R., at 751;
880 F. 2d, at 700–702. Preventing the victims from engaging in
“piecemeal litigation” against the non-debtor directors and
insurance company was the only way to ensure “equality of treatment
of similarly situated creditors.” 88 B. R., at 751. Therefore,
the Bankruptcy Court found (and the Fourth Circuit agreed) that the
release was “necessary and essential” to the bankruptcy’s success.
Ibid.; see 880 F. 2d, at 701–702. The plan ultimately
provided for the victims to recover in full, and they
overwhelmingly approved the plan.
Id., at 700–701.
A non-debtor release provision was similarly
essential to resolve hundreds of thousands of victims’ tort claims
against Dow Corning Corporation, which declared bankruptcy in 1995
in the face of liability for its defective silicone breast
implants. See
In re Dow Corning Corp.,
287 B.R. 396, 397 (ED Mich. 2002). The non-debtor release
provision prevented the victims from suing Dow Corning’s insurers
and shareholders for their tort claims—which would have depleted
Dow Corning’s shared insurance assets and other estate assets.
Id., at 402–403, 406–408. The non-debtor release provision
was “essential” to the bankruptcy reorganization because the
reorganization hinged “on the debtor being free from indirect suits
against parties who would have indemnity or contribution claims
against the debtor.”
In re Dow Corning Corp.,
280
F.3d 648, 658 (CA6 2002); 287 B. R., at 410–413.
The need for such a tool to deal with complex
bankruptcy cases has not gone away. Far from it. Indeed, without
the option of bankruptcy with non-debtor releases, “tort victims in
several recent high-profile cases would have received less
compensation; the compensation would have been unfairly
distributed; and the administrative costs of resolving their claims
would have been higher.” Casey & Macey, 90 U. Chi.
L. Rev., at 979; see also Brief for Law Professors in Support
of Respondents as
Amici Curiae 21–25; Brief for Certain
Former Commissioners of the American Bankruptcy Institute’s
Commission To Study the Reform of Chapter 11 as
Amici Curiae
9–11; Brief for Association of the Bar of the City of New York as
Amicus Curiae 9, 11–15.
Consider two recent examples that ensured
recovery for the victims of torts committed by the Boy Scouts of
America and by several dioceses of the Catholic Church. In both
cases, a national or regional organization was the debtor in the
bankruptcy. But that organization shared its liability and its
insurance policy with numerous other legally separate and
autonomous local entities. Without a coordinating mechanism, a
victim’s (or group of victims’) recovery against one local entity
could have eaten up all of the shared insurance assets, leaving all
of the other victims with nothing. Brief for Boy Scouts of America
as
Amicus Curiae 9–14, 17–19; Brief for U. S. Conference of
Catholic Bishops as
Amicus Curiae 9–22.
Bankruptcy provided a forum to coordinate
liability and insurance assets. A non-debtor release provision
prevented victims from litigating outside of the bankruptcy plan’s
procedures. And the provision therefore prevented one victim or
group of victims from obtaining all of the insurance funds before
other victims recovered. As a result, in each case, the local
entities were able to pool their resources to create a substantial
fund in a single bankruptcy estate to compensate victims
substantially and fairly. Brief for Boy Scouts of America as
Amicus Curiae 11–12, 20–21; Brief for Ad Hoc Group of
Local Councils of the Boy Scouts of America as
Amicus Curiae
5–6; Brief for U. S. Conference of Catholic Bishops as
Amicus Curiae 15–16.
As those examples show, in some cases where
various closely related but distinct parties share liability or
share assets (or both), bankruptcy “provides the
only forum
in the U. S. legal system where a unified and complete
resolution of mass-tort cases can reliably occur in a manner that
results in a fair recovery and distribution for all claimants.”
Brief for Association of the Bar of the City of New York as
Amicus Curiae 15. And the bankruptcy system could not do so
without non-debtor releases.
C
The Bankruptcy Code gives bankruptcy courts
authority to approve non-debtor releases to solve the complex
collective-action problems that such cases present. As noted above,
a Chapter 11 reorganization plan may release creditor claims
against debtors. §1123(b)(1). And a plan may settle and release
debtor claims against non-debtors. §1123(b)(3).
In addition, the plan may also include “any
other appropriate provision not inconsistent with the applicable
provisions of ” the Code. §1123(b)(6). Section 1123(b)(6)
provides ample flexibility for the reorganization plan to settle
and release creditor claims against non-debtors who are closely
related to the debtor. For example, officers and directors may be
indemnified by the debtor company; in those cases, creditor claims
against indemnified non-debtors are essentially the same as
creditor claims against the debtor business itself. Or the
non-debtors may reach a settlement with the victims and creditors
where the non-debtors pay a settlement amount to the estate, which
in some cases may be the only way to ensure fair and equitable
recovery for the victims and creditors. The non-debtor
releases—just like debtor releases under §1123(b)(1) and non-debtor
releases under §1123(b)(3)—can be essential to preserve and
increase the estate’s assets and can be essential to ensure fair
and equitable victim and creditor recovery.
The key statutory term in §1123(b)(6) is
“appropriate.” As this Court has often said, “appropriate” is a
“broad and all-encompassing term that naturally and traditionally
includes consideration of all the relevant factors.”
Michigan v.
EPA,
576 U.S.
743, 752 (2015) (quotation marks omitted). Because determining
propriety requires exercising judgment, the inquiry must include a
degree of “flexibility.”
Ibid. The Court has explained on
numerous occasions that the “ordinary meaning” of a statute
authorizing appropriate relief “confers broad discretion” on a
court.
School Comm. of Burlington v.
Department of Ed. of
Mass.,
471 U.S.
359, 369 (1985); see also,
e.g.,
Sheet Metal
Workers v.
EEOC,
478 U.S.
421, 446 (1986) (plurality opinion) (Title VII “vest[s]
district courts with broad discretion to award ‘appropriate’
equitable relief ”);
Cooter & Gell v.
Hartmarx
Corp.,
496 U.S.
384, 400 (1990) (“In directing the district court to impose an
‘appropriate’ sanction, Rule 11 itself indicates that the district
court is empowered to exercise its discretion”). Because the
“language is open-ended on its face,” whether a provision is
“appropriate is inherently context dependent.”
Tanzin v.
Tanvir, 592 U.S. 43, 49 (2020) (quotation marks
omitted).
By allowing “any other appropriate provision,”
§1123(b)(6) empowers a bankruptcy court to exercise reasonable
discretion. That §1123 confers broad discretion makes eminent
sense, given “the policies of flexibility and equity built into
Chapter 11 of the Bankruptcy Code.”
NLRB v.
Bildisco
& Bildisco,
465 U.S.
513, 525 (1984). Such flexibility is important to achieve
Chapter 11’s ever-elusive goal of ensuring fair and equitable
recovery to creditors. See §§1129(a)(7), (b)(1).
The catchall authority in Chapter 11 therefore
empowers a bankruptcy court to exercise its discretion to deal with
complex scenarios, like the collective-action problems that plague
mass-tort bankruptcies. Non-debtor releases are often
appropriate—indeed are essential—in such circumstances.
And courts have therefore long found non-debtor
releases to be appropriate in certain narrow circumstances under
§1123(b)(6). Indeed, courts have been approving such non-debtor
releases almost as long as the current Bankruptcy Code has existed
since its enactment in 1978. See,
e.g.,
In re
Johns-Manville Corp., 68 B.R. 618, 624–626 (Bkrtcy. Ct. SDNY
1986), aff ’d, 837 F. 2d, at 90;
A. H. Robins
Co., 88 B. R., at 751, aff ’d, 880 F. 2d, at
696. Historical and contemporary practice demonstrate that
non-debtor releases are especially appropriate when (as here)
non-debtor releases and corresponding settlement payments preserve
and increase the debtor’s estate and thereby ensure fair and
equitable recovery for creditors.
Over those decades of practice, courts have
developed and applied numerous factors for determining whether a
non-debtor release is “appropriate” in a given case. §1123(b)(6);
see H. Friendly, Indiscretion About Discretion, 31 Emory L. J.
747, 771–773 (1982) (noting the common-law-like process by which
factors important to a discretionary decision develop over time).
Those factors reflect the fact that determining whether a
non-debtor release is “appropriate” is a holistic inquiry that
depends on the precise facts and circumstances of each case. And
the factors have served to confine the use of non-debtor releases
to well-defined and narrow circumstances—precisely those
circumstances where the collective-action problems arise.
For instance, since the 1980s, the Second
Circuit has been a leader on the non-debtor release issue. See,
e.g.,
Johns-Manville Corp., 837 F.2d 89 (1988);
In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285
(1992);
In re Metromedia Fiber Network, Inc.,
416 F.3d 136 (2005). Over time, the Second Circuit has
developed a non-exhaustive list of factors for determining whether
a non-debtor release is appropriately employed and appropriately
tailored in a given case.
First, and critically, the court must determine
whether the released party is closely related to the debtor—for
example, through an indemnification agreement—where “a suit against
the non-debtor is, in essence, a suit against the debtor or will
deplete the assets of the estate.” 69 F. 4th, at 78 (quotation
marks omitted). Second, the court must determine if the claims
against the non-debtor are “factually and legally intertwined” with
claims against the debtor.
Ibid. Third, the court must
ensure that the “scope of the releases” is tailored to only the
claims that must be released to protect the plan.
Ibid.
Fourth, even then, the court should approve the release only if it
is truly “essential” to the plan’s success and the reorganization
would fail without it.
Ibid. Fifth, the court must consider
whether, as part of the settlement, the non-debtor party has paid
“substantial assets” to the estate.
Ibid. Sixth, the court
should determine if the plan provides “fair payment” to creditors
for their released claims.
Id., at 79. Seventh, the court
must ensure that the creditors “overwhelmingly” approve of the
release, which the Second Circuit defined as a 75 percent “bare
minimum.”
Id., at 78–79 (quotation marks omitted).[
2]
Factors one through four ensure that the
releases are necessary to solve collective-action problems that
threaten the bankruptcy and prevent fair and equitable recovery for
the victims and creditors. Factor five makes sure that the releases
are not a free ride for the non-debtor. Factor six ensures that the
victims and creditors receive fair compensation. Together, factors
five and six assess whether there has been a fair settlement given
the probability of victims’ and creditors’ recovery from the
non-debtor and the likely amount of any such recovery. And factor
seven ensures that the vast majority of victims and creditors
approve, meaning that the release is solving a holdout problem.
As the Courts of Appeals’ comprehensive factors
illustrate, §1123(b)(6) limits a bankruptcy court’s authority in
important respects. A non-debtor release must be “appropriate”
given all of the facts and circumstances of the case. And as the
history of non-debtor releases illustrates, the appropriateness
requirement confines the use of non-debtor releases to narrow and
relatively rare circumstances where the releases are necessary to
help victims and creditors achieve fair and equitable recovery.
As long as every class of victims and creditors
supports the plan by a majority vote in number and at least a
two-thirds vote in amount, the plan is “said to be confirmed
consensually,” “even if some classes have dissenting creditors.” 7
Collier, Bankruptcy ¶1129.01, at 1129–13. And the Courts of Appeals
have allowed non-debtor releases only when there is an even higher
level of supermajority victim and creditor approval. In the
mass-tort bankruptcy cases, most plans have easily cleared that bar
and received close to 100 percent approval.
E.g.,
Johns-Manville Corp., 68 B. R., at 631 (95 percent
approval);
A. H. Robins Co., 880 F. 2d, at 700
(over 94 percent approval);
Dow Corning, 287 B. R., at
413 (over 94 percent approval); 69 F. 4th, at 82 (over 95 percent
approval here). So in reality, as opposed to rhetoric, the
non-debtor releases in mass-tort bankruptcy plans, including this
one, have been approved by all but a comparatively small group of
victims and creditors.
In every bankruptcy of this kind, moreover, the
plan nonconsensually releases victims’ and creditors’ claims
against the debtor. The only difference with non-debtor
releases is that they release victims’ and creditors’ claims not
against the debtor but rather against non-debtors who are closely
related to the debtor, such as indemnified officers and
directors.
II
In this case, as in many past mass-tort
bankruptcies, the non-debtor releases were appropriate and
therefore authorized by 11 U. S. C. §1123(b)(6) of the
Code. The non-debtor releases were needed to ensure meaningful
victim and creditor recovery in the face of multiple
collective-action problems.
A
Purdue Pharma was a pharmaceutical company
owned and directed by the extended Sackler family. Brothers Arthur,
Mortimer, and Raymond Sackler purchased the company in 1952. Since
then, Purdue has been wholly owned by entities and trusts
established for the benefit of Mortimer Sackler’s and Raymond
Sackler’s families and descendants, and those families also closely
controlled Purdue’s operations.
In the 1990s, Purdue developed the drug
OxyContin, a powerful and addictive opioid painkiller. Purdue
aggressively marketed that drug and downplayed or hid its addictive
qualities. OxyContin helped people to manage pain. But the drug’s
addictive qualities led to its widespread abuse. OxyContin played a
central role in the opioid-abuse crisis from which millions of
Americans and their families continue to suffer.
Starting in the early 2000s, governments and
individual plaintiffs began to sue Purdue for the harm caused by
OxyContin. In 2007, Purdue settled large swaths of those claims and
pled guilty to felony misbranding of OxyContin.
But within the next decade, victims of the
opioid crisis and their families, along with state and local
governments fighting the crisis, began filing a new wave of
lawsuits, this time also naming members of the Sackler family as
defendants. Today, those claims amount to more than $40
trillion worth of alleged damages against Purdue and the
Sacklers. (For perspective, $40 trillion is about seven times the
total annual spending of the U. S. Government.)
As the litigation by victims and state and local
governments mounted, the U. S. Government then brought federal
criminal and civil charges against Purdue. The U. S.
Government has not brought criminal charges against any of the
Sacklers individually. Nor have any States brought criminal charges
against any of the Sacklers individually.
As to the criminal charges against Purdue, the
company pled guilty to conspiracy to defraud the United States, to
violate the Food, Drug, and Cosmetic Act, and to violate the
federal anti-kickback statute. As part of the global resolution of
the charges, Purdue agreed to a $2 billion judgment to the U. S.
Government that would be “deemed to have the status of an allowed
superpriority” claim in bankruptcy. 17 App. in No. 22–110 etc.
(CA2), p. 4804. The U. S. Government agreed not to
“initiate any further criminal charges against Purdue.” 16
id., at 4798.
Unable to pay its colossal potential
liabilities, Purdue filed for bankruptcy under Chapter 11 of the
Bankruptcy Code. The ensuing case exemplified the flexibility and
common sense of the bankruptcy system at work.
The proceedings were extraordinarily complex.
The case involved “likely the largest creditor body ever,” and the
number of claims filed—totaling more than 600,000—was likely “a
record.”
In re Purdue Pharma L. P., 633 B.R. 53,
58 (Bkrtcy. Ct. SDNY 2021). Further complicating matters was the
need to allocate funds between, on the one hand, individual victims
and the hospitals that urgently needed relief and, on the other
hand, government entities at all levels that urgently needed funds
for opioid crisis prevention and treatment efforts.
Id., at
83.
Aided by perhaps “the most extensive discovery
process” that “any court in bankruptcy has ever seen,” the parties
engaged in prolonged arms-length negotiations.
Id., at
85–86. They ultimately agreed on a multi-faceted compensation plan
for the victims and creditors and reorganization plan for Purdue.
Under that plan, Purdue would cease to exist and would be replaced
with a new company that would manufacture opioid-abatement
medications. And approximately $7 billion would be distributed
among nine trusts to compensate victims and creditors and to fund
efforts to abate the opioid crisis by preventing and treating
addiction.
To determine how to allocate the $7 billion, the
victims and creditors then engaged in a series of “heavily
negotiated and intricately woven compromises” and devised a
“complex allocation” of the funds to different classes of victims
and creditors.
Id., at 83, 90. In the end, more than 95
percent of voting victims and creditors approved of the
distribution scheme.
That plan would distribute billions of dollars
to communities to use exclusively for prevention and treatment
programs. And $700 to $750 million was set aside to compensate
individual tort victims and their families. 1 App. 561. Opioid
victims and their families would each receive somewhere between
$3,500 and $48,000 depending on the category of claim and level of
harm.
Id., at 573–584; 6 App. in No. 22–110 etc. (CA2), at
1695.
B
Under the reorganization plan, victims’ and
creditors’ claims
against Purdue Pharma were released (even
if some victims and creditors did not consent). As in other
mass-tort bankruptcies described above, a related and equally
essential facet of the Purdue plan was the non-debtor release
provision. Under that provision, the victims’ and creditors’ claims
against the Sacklers were also released. As a result,
Purdue’s victims and creditors could not later sue either Purdue
Pharma or members of the Sackler family (the officers and directors
of Purdue Pharma) for Purdue’s and the Sacklers’ opioid-related
activities.
The non-debtor release provision prevented a
race to the courthouse against the Sacklers. As a result, the
non-debtor release provision solved two separate collective-action
problems that dogged Purdue’s mass-tort bankruptcy: (i) It
protected Purdue’s estate from the risk of being depleted by
indemnification claims, and (ii) it operated as a settlement
of potential claims against the Sacklers and thus enabled the
Sacklers’ large settlement payment to the estate. That settlement
payment in turn quadrupled the amount in the Purdue estate and
enabled substantially greater recovery for the victims.
I will now explain both of those important
points in some detail.
First, and critical to a proper
understanding of this case, the non-debtor release provision was
essential to
preserve Purdue’s existing assets. By
preserving the estate, the non-debtor release provision ensured
that the assets could be fairly and equitably apportioned among all
victims and creditors rather than devoured by one group of
potential plaintiffs.
How? Pursuant to a 2004 indemnification
agreement, Purdue had agreed to pay for liability and legal
expenses that officers and directors of Purdue faced for decisions
related to Purdue, including opioid-related decisions. See
In re Purdue Pharma L. P., 69 F. 4th 45,
58–59 (CA2 2023). That indemnification agreement covered judgments
against the Sacklers and related legal expenses.
As explained above, the Sacklers wholly owned
and controlled Purdue, a closely held corporation. The Sacklers
“took a major role” in running Purdue, including making decisions
about “Purdue’s practices regarding its opioid products.” 633
B. R., at 93. In short, the Sacklers potentially shared much
of the liability that Purdue faced for Purdue’s opioid practices.
See
In re Purdue Pharma, L. P., 635 B.R. 26, 87
(SDNY 2021) (claims against the Sacklers are “deeply connected
with, if not entirely identical to,” claims against Purdue
(quotation marks omitted)); see also 633 B. R., at 108.
But due to the indemnification agreement, if
victims and creditors were to sue the Sacklers directly for claims
related to Purdue or opioids, the Sacklers would have a reasonable
basis to seek reimbursement from Purdue for liability and
litigation costs. So Purdue could potentially be on the hook for a
substantial amount of the Sacklers’ liability and litigation costs.
In such indemnification relationships, “a suit against the
non-debtor is, in essence, a suit against the debtor or will
deplete the assets of the estate.” 69 F. 4th, at 78 (quotation
marks omitted).
As a real-world matter, therefore,
opioid-related claims
against the Sacklers could come out of
the same pot of Purdue money as opioid-related claims
against
Purdue. So releasing claims against the Sacklers is not
meaningfully different from releasing claims against Purdue itself,
which the bankruptcy plan here of course also mandated. Both sets
of releases were necessary to preserve Purdue’s estate so that it
was available for all victims and creditors to recover fairly and
equitably. Otherwise, the estate could be zeroed out: A few victims
or creditors could race to the courthouse and obtain recovery from
Purdue or the Sacklers (ultimately the same pot of money) and
thereby deplete the assets of the company and leave nothing for
everyone else.
To fully understand why both sets of releases
were necessary—against Purdue and against the Sacklers—suppose that
the plan did
not release the Sacklers from opioid- and
Purdue-related liability. Victims’ and creditors’ opioid-related
claims
against Purdue would be discharged in Purdue’s
bankruptcy (even without their consent). But any victims or
creditors could still sue
the Sacklers for essentially the
same claims.
Suppose that a State or a group of victims sued
the Sacklers and received a large reward. The Sacklers “would have
a reasonable basis to seek indemnification” from Purdue for
judgments and legal expenses
. Id., at 72. Therefore, any
liability judgments and litigation costs for certain plaintiffs in
their suits
against the Sacklers could “deplete the
res” of
Purdue’s bankruptcy—meaning that there might
well be nothing left for all of the other victims and creditors.
Id., at 80. Even if the Sacklers’ indemnification claims
against Purdue were unsuccessful, Purdue would “be required to
litigate” those claims, which would likely diminish the
res,
“no matter the ultimate outcome of those claims.”
Ibid.
Every victim and creditor knows that a single
judgment by someone else against the Sacklers could deplete the
Purdue estate and leave nothing for anyone else. So every victim
and creditor would have an incentive to race to the courthouse to
sue the Sacklers. A classic collective-action problem.
The non-debtor releases of claims against the
Sacklers prevented that collective-action problem in the same way
that the releases of claims against Purdue itself prevented the
identical collective-action problem. Both protected Purdue’s assets
from being consumed by the first to sue successfully. And the
non-debtor releases were narrowly tailored to the problem. The
non-debtor releases enjoined victims and creditors from bringing
claims against the Sacklers only in cases where Purdue’s conduct,
or the victims’ or creditors’ claims asserted against Purdue, was a
legal cause or a legally relevant factor to the cause of action
against the Sacklers. 633 B. R., at 97–98 (defining the
release to encompass only claims that “directly affect the
res of the Debtors’ estates,” such as claims that would
trigger the Sacklers’ “rights to indemnification and
contribution”); see also
id., at 105. In other words, the
releases applied only to claims for which the Sacklers had a
reasonable basis to seek coverage or reimbursement from Purdue.
The non-debtor release provision therefore
released claims against the Sacklers that are essentially the same
as claims against Purdue. Doing so preserved Purdue’s bankruptcy
estate so that it could be fairly apportioned among the victims and
creditors.
Second, the non-debtor releases not only
preserved the existing Purdue estate; those non-debtor
releases also greatly
increased the funds in the Purdue
estate so that the victims and creditors could receive greater
compensation.
Standing alone, Purdue’s estate is estimated to
be worth approximately $1.8 billion—a small fraction of the sizable
claims against Purdue.
Id., at 90; 22 App. in No. 22–110
etc. (CA2), at 6507. If that were all the money on the table,
the Bankruptcy Court found, the victims and creditors “would
probably recover nothing” from Purdue’s estate. 633 B. R., at
109. That is because the United States holds a $2 billion
“superpriority” claim, meaning that the United States would be
first in line to recover ahead of all of the victims and other
creditors. The United States’ claim would wipe out Purdue’s entire
$1.8 billion value. “As a result, many victims of the opioid crisis
would go without any assistance.” 69 F. 4th, at 80.
So for the victims and other creditors to have
any hope of meaningful recovery, Purdue’s bankruptcy estate needed
more funds.
Where to find those funds? The Sacklers’ assets
were the answer. After vigorous negotiations, a settlement was
reached: In exchange for the releases, the Sacklers ultimately
agreed to make significant payments to Purdue’s estate—between $5.5
and $6 billion. Adding that substantial amount to Purdue’s
comparatively smaller bankruptcy estate enabled Purdue’s
reorganization plan to distribute an estimated $7 billion or more
to the victims and creditors—thereby quadrupling the size of the
estate available for distribution. With that enhanced estate, the
plan garnered 95 percent support from the voting victims and
creditors. That high level of support tends to show that this was a
very good plan for the victims and creditors. Because it led to
that high level of support, the Sacklers’ multi-billion-dollar
payment was critical to creating a successful reorganization
plan.
That payment was made possible by heavily
negotiated settlements among Purdue, the victims and creditors, and
the Sacklers. Most relevant here, in exchange for the Sacklers
agreeing to pay billions of dollars to the bankruptcy estate, the
victims and creditors agreed to release their claims against the
Sacklers. The settlement—exchanging releases for the Sacklers’ $5.5
to $6 billion payment—enabled the victims and creditors to avoid
“the significant risk, cost and delay (potentially years) that
would result from pursuing the Sacklers and related parties through
litigation.” 1 App. 31.
Indeed, after a 6-day trial involving 41
witnesses, the Bankruptcy Court found that the settlement provided
the best chance for the victims and creditors to ever see any money
from the Sacklers. See 633 B. R., at 85, 90. (That is a
critical point that the Court today whiffs on.) Indeed, the
Bankruptcy Court found that the victims and creditors would be
unlikely to recover from the Sacklers by suing the Sacklers
directly due to numerous potential weaknesses in and defenses to
the victims’ and creditors’ legal theories. See
id., at
90–93, 108. Even if the suits were successful, the Bankruptcy Court
expressed “significant concern” about the ability to collect any
judgments from the Sacklers due to the difficulty of reaching their
assets in foreign countries and in spendthrift trusts.
Id.,
at 89; see also
id., at 108–109.
For those reasons, the Bankruptcy Court
concluded that the $5.5 to $6 billion settlement payment and the
releases were fair and equitable and in the victims’ and creditors’
best interest.
Id., at 107–109, 112. The settlement amount
of $5.5 to $6 billion was “properly negotiated” and “reflects the
underlying strengths and weaknesses of the opposing parties’ legal
positions and issues of collection.”
Id., at 93.[
3]
From the victims’ and creditors’ perspective,
“suing the Sacklers would have been a costly endeavor with a small
chance of success. From the Sacklers’ perspective, defending those
suits would have been a costly endeavor with a very small chance of
a large liability.” A. Casey & J. Macey, In Defense of Chapter
11 for Mass Torts, 90 U. Chi. L. Rev. 973, 1004 (2023). So as
in many litigation settlements, the parties agreed to the $5.5 to
$6 billion settlement in light of that “very small chance of a
large liability.”
Ibid.
Importantly, the victims and creditors—who
obviously have no love for the Sacklers—insisted on the releases of
their claims against the Sacklers. Tr. of Oral Arg. 61, 93; Brief
for Respondent Official Committee of Unsecured Creditors of Purdue
Pharma L. P. et al. 10. Why did the releases make sense for
the victims and creditors?
For starters, the releases were part of the
settlement and enabled the Sacklers’ $5.5 to $6 billion settlement
payment. Moreover, without the releases, some of Purdue’s victims
and creditors—maybe a State, maybe some opioid victims—would sue
the Sacklers directly for claims “deeply connected with, if not
entirely identical to,” claims that the victims and creditors held
against Purdue. 635 B. R., at 87 (quotation marks omitted). To
be sure, the Bankruptcy Court found that those suits would face
significant challenges. But the victims and creditors were
understandably worried, as they explained during the Bankruptcy
Court proceedings, that the Sacklers would “exhaust their
collectible assets fighting and/or paying ONLY the claims of
certain creditors with the best ability to pursue the Sacklers in
court.” 1 App. 76. And if even a
single direct suit against
the Sacklers succeeded, the suit could potentially wipe out much if
not all of the Sacklers’ assets in one fell swoop—making those
assets unavailable for the Purdue estate and therefore unavailable
for all of the other the victims and creditors.
In sum, if there were no releases, and victims
and creditors were therefore free to sue the Sacklers directly, one
of three things would likely happen. One possibility is that no
lawsuits against the Sacklers would succeed, and no victim or
creditor would recover any money from them. And without the $5.5 to
$6 billion settlement payment, there would be no recovery from
Purdue either. Another possibility is that a large claim or claims
would succeed, and the Sacklers would be indemnified by
Purdue—thereby wiping out Purdue’s estate for all of the other
victims and creditors. Last, suppose that a large claim succeeded
and that the Sacklers were not indemnified for that liability. Even
in that case, only a few victims or creditors would be able to
recover from the Sacklers at the expense of fair and equitable
distribution to the rest of the victims and creditors.
As the Second Circuit stated, without the
releases, the victims and creditors “would go without any
assistance and face an uphill battle of litigation (in which a
single claimant might disproportionately recover) without fair
distribution.” 69 F. 4th, at 80. Another classic
collective-action problem.
In short, without the releases and the
significant settlement payment, two separate collective-action
problems stood in the way of fair and equitable recovery for the
victims and creditors: (1) the Purdue estate would not be preserved
for the victims and creditors to obtain recovery, and (2) the
Purdue estate would be much smaller than it would be with the
Sacklers’ settlement payment. The releases and settlement payment
solved those problems and ensured fair and equitable recovery for
the opioid victims.
C
For those reasons, the Bankruptcy Court found
that without the releases and settlement payment, the
reorganization plan would “unravel.” 633 B. R., at 107, 109.
All of the “heavily negotiated and intricately woven compromises in
the plan” that won the victims’ and creditors’ approval,
id., at 90, would “fall apart for lack of funding and the
inevitable fighting over a far smaller and less certain recovery
with its renewed focus on pursuing individual claims and races to
collection.”
Id., at 84. There simply would not be enough
money to support a reorganization plan that the victims and
creditors would approve.
Absent the releases and settlement payment, the
Bankruptcy Court found, the “most likely result” would be
liquidation of a much smaller $1.8 billion estate.
Id., at
90. In a liquidation, the United States would recover first with
its $2 billion superpriority claim, taking for itself the whole
pie. And the victims and other creditors “would probably recover
nothing.”
Id., at 109.
Given that alternative, it is hardly surprising
that the opioid victims and creditors almost universally support
Purdue’s Chapter 11 reorganization plan and the non-debtor
releases. That plan promised to obtain significant assets from the
Sacklers, to preserve those assets from being depleted by
litigation for a few, and to distribute those much-needed funds
fairly and equitably.
As a result, the opioid victims’ and creditors’
support for the reorganization plan was
overwhelming. Every
victim and creditor had a chance to vote on the plan during the
bankruptcy proceedings. And of those who voted, more than 95
percent approved of the plan.
Id., at 107.
Since then, even more victims and creditors have
gotten on board. Now, all 50 States have signed on to the plan. The
lineup before this Court is telling. On one side of the case: the
tens of thousands of opioid victims and their families; more than
4,000 state, city, county, tribal, and local government entities;
and more than 40,000 hospitals and healthcare organizations. They
all urge the Court to uphold the plan.
At this point, on the other side of this case
stand only a sole individual and a small group of Canadian
creditors.[
4]
Given all of the extraordinary circumstances,
the Bankruptcy Court and Second Circuit concluded that the
non-debtor releases here not only were appropriate, but were
essential to the success of the plan. The Bankruptcy Court and
Second Circuit thoroughly analyzed each of the relevant factors
before reaching that conclusion: First, the released non-debtors
(the Sacklers) closely controlled and were indemnified by the
company. 69 F. 4th, at 79. Second, the claims against the
Sacklers were based on essentially the same facts and legal
theories as the claims against Purdue.
Id., at 80. Third,
the releases were essential for the reorganization to succeed,
because the releases protected the Purdue estate from
indemnification claims and expanded the Purdue estate to enable
victim and creditor recovery.
Id., at 80–81. Fourth, the
releases were narrowly tailored to protect the estate from
indemnification claims.
Ibid. Fifth, the releases secured a
substantial settlement payment to significantly increase the funds
in the estate.
Id., at 81. Sixth, that enhanced estate
allowed the plan to distribute “fair and equitable” payments to the
victims and creditors.
Id., at 82 (quotation marks omitted).
And seventh, for all those reasons, the victims and creditors do
not just urgently and overwhelmingly approve of the releases, they
all but demanded the releases.
Ibid.
Congress invited bankruptcy courts to consider
exactly those kinds of extraordinary circumstances when it
authorized bankruptcy plans to include “any other appropriate
provision” that is “not inconsistent” with the Code.
§1123(b)(6).
III
The Court decides today to reject the plan by
holding that non-debtor releases are categorically impermissible as
a matter of law. That decision contravenes the Bankruptcy Code. It
is regrettable for the opioid victims and creditors, and for the
heavily negotiated equitable distribution of assets that they
overwhelmingly support. And it will harm victims in pending and
future mass-tort bankruptcies. The Court’s decision deprives the
bankruptcy system of a longstanding and critical tool that has been
used repeatedly to ensure fair and sizable recovery for victims—to
repeat, recovery for
victims—in mass torts ranging from
Dalkon Shield to the Boy Scouts.
On the law, the Court’s decision to reject the
plan flatly contradicts the Bankruptcy Code. The Code explicitly
grants broad discretion and flexibility for bankruptcy courts to
handle bankruptcies of extraordinary complexity like this one. For
several decades, bankruptcy courts have been employing non-debtor
releases to facilitate fair and equitable recovery for victims in
mass-tort bankruptcies. In this case, too, the Bankruptcy Court
prudently and appropriately employed its discretion to fairly
resolve a mass-tort bankruptcy.
At times, the Court seems to view the Sacklers’
settlement payment into Purdue’s bankruptcy estate as insufficient
and the plan as therefore unfair to victims and creditors. If that
were true, one might expect the fight in this case to be over
whether the non-debtor releases and settlement amount were
“appropriate” given the facts and circumstances of this case. 11
U. S. C. §1123(b)(6).
Yet that is not the path the Court takes. The
Court does not contest the Bankruptcy Court’s and Second Circuit’s
conclusion that a non-debtor release was necessary and appropriate
for the settlement and the success of Purdue’s reorganization—the
best, and perhaps the only, chance for victims and creditors to
receive fair and equitable compensation. Indeed, no party has
challenged the Bankruptcy Court’s factual findings or made an
argument that non-debtor releases were used inappropriately in this
specific case.
Instead, the Court categorically decides that
non-debtor releases are
never allowed as a matter of law.
The text of the Bankruptcy Code does not remotely support that
categorical prohibition.[
5]
As explained, §1123(b)(6)’s catchall authority
affords bankruptcy courts broad discretion to approve “any other
appropriate provision not inconsistent with the applicable
provisions” of the Bankruptcy Code. Recall that §1123(b)(1)
expressly authorizes releases of victims’ and creditors’ claims
against the debtor company—here, against Purdue. And recall that
§1123(b)(3) expressly authorizes settlements and releases of the
debtor company’s claims against non-debtors—here, against the
Sacklers. Section 1123(b)(6)’s catchall authority is easily broad
enough to allow settlements and releases of the same victims’ and
creditors’ claims against the same non-debtors (the Sacklers), who
are indemnified by the debtor and who made a large settlement
payment to the debtor’s estate. After all, the Second Circuit
stated that in indemnification relationships “a suit against the
non-debtor is, in essence, a suit against the debtor.”
In re Purdue Pharma L. P., 69 F. 4th 45, 78
(2023) (quotation marks omitted). And even when the officers and
directors are not indemnified, the releases may enable a settlement
where the non-debtor makes a sizable payment to the estate that can
be fairly and equitably distributed to the victims and creditors,
rather than being zeroed out by the first successful suit.
A
So how does the Court reach its atextual and
ahistorical conclusion? The Court primarily seizes on the canon of
ejusdem generis, an interpretive principle that “limits
general terms that follow specific ones to matters similar to those
specified.”
CSX Transp., Inc. v.
Alabama Dept. of
Revenue,
562 U.S.
277, 294 (2011) (quotation marks and alteration omitted). But
the Court’s use of that canon here is entirely misguided.
The
ejusdem generis canon “applies when a
drafter has tacked on a catchall phrase at the end of an
enumeration of specifics, as in
dogs, cats, horses, cattle, and
other animals.” A. Scalia & B. Garner, Reading Law 199
(2012); see also
id., at 200–208 (“trays, glasses, dishes,
or other tableware”; “gravel, sand, earth or other material”; and
numerous other similar lists (quotation marks omitted)); W.
Eskridge, Interpreting Law 77 (2016) (“automobiles, motorcycles,
and other mechanisms for conveying persons or things” (quotation
marks omitted)).
As a general matter, as Justice Scalia explained
for the Court, a catchall at the end of the list should be
construed to cover “matters not specifically contemplated—known
unknowns.”
Republic of Iraq v.
Beaty,
556 U.S.
848, 860 (2009). That is the “whole value of a generally
phrased residual clause.”
Ibid. Or stated otherwise, the
fact that “a statute can be applied in situations not expressly
anticipated by Congress does not demonstrate ambiguity. It
demonstrates breadth.”
Pennsylvania Dept. of Corrections v.
Yeskey,
524 U.S.
206, 212 (1998) (quotation marks omitted).
The
ejusdem generis canon can operate to
narrow a broad catchall term in certain circumstances. The canon
“parallels common usage,” reflecting the assumption that when “the
initial terms all belong to an obvious and readily identifiable
genus, one presumes that the speaker or writer has that category in
mind for the entire passage.” Scalia & Garner, Reading Law, at
199. The canon in essence “implies the addition” of the term
“similar” in the catchall so that the catchall does not extend so
broadly as to defy common sense.
Ibid. Rather, the catchall
extends to similar things or actions that serve the same statutory
“purpose.”
Id., at 208.
Here, the Court applies the canon to breezily
conclude that there is an “obvious link” through §§1123(b)(1)–(5)
that precludes a non-debtor release provision being approved under
§1123(b)(6).
Ante, at 11. The obvious link, according to the
Court, is that plan provisions must “concern
the debtor—its
rights and responsibilities, and its relationship with its
creditors.”
Ibid.
As an initial matter, the Court does not explain
why its supposed common thread excludes the non-debtor releases at
issue here. Those releases obviously “concern” the debtor in
multiple overlapping respects.
Ibid. As explained, Purdue’s
bankruptcy plan released the Sacklers only for claims based on
the debtor’s (Purdue’s) misconduct. See 69 F. 4th, at
80 (releasing only claims to which Purdue’s conduct was “a legal
cause or a legally relevant factor to the cause of action”
(quotation marks omitted)). The releases therefore applied only to
claims held by
the debtor’s victims and creditors. And the
releases protected
the debtor from indemnification claims.
So the non-debtor releases here did not just “concern” the debtor,
they were critical to the debtor’s reorganization.
So the Court’s purported “link” manages the rare
feat of being so vague (“concerns the debtor”?) as to be almost
meaningless—and if not meaningless, so broad as to plainly cover
non-debtor releases. It is hard to conjure up a weaker
ejusdem
generis argument than the one put forth by the Court today.
In any event, even on its own terms, the Court’s
ejusdem generis argument is dead wrong for two independent
reasons. First, the Court’s purported common thread is factually
incorrect as a description of (b)(1) to (b)(5). Second, and
independent of the first point, black-letter law says that the
ejusdem generis canon requires looking at the “evident
purpose” of the statute in order to discern a common thread. Scalia
& Garner, Reading Law, at 208; see Eskridge, Interpreting Law,
at 78. And here, the Court’s purported common thread ignores (and
indeed guts) the evident purpose of §1123(b).
First, the Court’s purported common
thread is factually incorrect. The Court says that the “obvious
link” through paragraphs (b)(1) to (b)(5) is that all are limited
to “
the debtor—its rights and responsibilities, and its
relationship with its creditors.”
Ante, at 11. But in
multiple respects, that assertion is not accurate.
For one thing, paragraph (b)(3) allows a
bankruptcy court to modify the rights of debtors with respect to
non-debtors. Under (b)(3), a bankruptcy court may approve a
reorganization plan that settles, adjusts, or enforces “any claim”
that the debtor holds against non-debtor third parties. That
provision allows the debtor’s estate to enter into a settlement
agreement with a third party, where the estate agrees to release
its claims against the third party in exchange for a settlement
payment to the bankruptcy estate. And the bankruptcy court has the
power to approve such a settlement if it finds the settlement fair
and in the best interests of the estate. The bankruptcy court may
later enforce that settlement. See generally 7 Collier on
Bankruptcy ¶1123.02[3] (R. Levin & H. Sommer eds., 16th ed.
2023).
Importantly, in some cases, including this one,
the debtor’s creditors may hold derivative claims against that same
non-debtor third party for the same “harm done to the estate.” 69
F. 4th, at 70 (quotation marks omitted). So when the debtor
settles with the non-debtor third party, that settlement also
extinguishes the creditors’ derivative claims against the
non-debtor. And the creditors’ consent is not necessary to do
so.
To connect the dots: A plan provision settling
the debtor’s claims against non-debtors under (b)(3) therefore
nonconsensually extinguishes creditors’ derivative claims
against those non-debtors. That fact alone defeats the Court’s
conclusion that §§1123(b)(1)–(5) deal only with relations between
the debtor and creditors. If a plan provision under (b)(3) can
nonconsensually release some of the creditors’ derivative claims
against a non-debtor, a plan provision under the catchall in (b)(6)
that nonconsensually releases some of the creditors’ direct claims
against those same non-debtors is easily of a piece—basically the
same thing.
This case illustrates the point. Some of the
more substantial assets of Purdue’s estate are fraudulent transfer
claims worth $11 billion that Purdue holds against the non-debtor
Sacklers.
In re Purdue Pharma L. P., 633 B.R. 53,
87 (Bkrtcy. Ct. SDNY 2021). Under (b)(3), as part of its
reorganization plan, Purdue settled the fraudulent transfer claims
with the non-debtor Sacklers. The Bankruptcy Court approved that
settlement as fair and equitable.
Id., at 83–95. That
settlement resolved the claims that likely would have had “the best
chance of material success among all of the claims against” the
Sacklers.
Id., at 109; see also
id., at 83.
Notably, the result of that settlement was to
also
nonconsensually extinguish the victims’ and creditors’
derivative fraudulent transfer claims against the Sacklers. In the
absence of the bankruptcy proceeding, victims and creditors could
have litigated the fraudulent transfer claims themselves as
derivative claims. But because Purdue settled the claims under
§1123(b)(3), the victims and creditors could no longer do so.
Moreover, not all victims and creditors
consented to the release of those derivative claims. But no one
disputes that the Bankruptcy Code authorized that nonconsensual
non-debtor release of derivative claims. See 69 F. 4th, at 70
(that conclusion is “well-settled”).
The plan therefore released both the estate’s
claims against the Sacklers
and highly valuable derivative
claims that the victims and creditors held against the Sacklers.
Paragraph (b)(3) therefore demonstrates that §1123(b) reaches
beyond just creditor-debtor relationships, particularly when the
relationship between creditors and other non-debtors can affect the
estate. That indisputable point alone defeats the Court’s
conclusion that §1123(b)’s provisions relate only to the debtor and
do not allow releases of claims that victims and creditors hold
against non-debtors.
The Court tries to sidestep that conclusion by
distinguishing derivative claims from direct claims. Releases of
derivative claims, the Court says, are authorized by paragraph
(b)(3) “because those claims belong to the debtor’s estate.”
Ante, at 12. No doubt. But the question then becomes whether
releases of direct claims under (b)(6)’s catchall are relevantly
similar to releases of derivative claims that all agree are
authorized under (b)(3). The answer in this case is yes. Here, both
the derivative and direct claims against the Sacklers are held by
the same victims and creditors, and both the derivative and direct
claims against the Sacklers could deplete Purdue’s estate.
The Court’s purported common thread is further
contradicted by several other kinds of non-debtor releases that
“are commonplace, important to the bankruptcy system, and broadly
accepted by the courts and practitioners as necessary and proper”
plan provisions under §1123(b)(6). Brief for American College of
Bankruptcy as
Amicus Curiae 3.
Three examples illustrate the point: consensual
non-debtor releases, full-satisfaction non-debtor releases, and
exculpation clauses.
Consensual non-debtor releases are routinely
included in bankruptcy plans even though those releases apply to
claims by victims or creditors against non-debtors—just like the
claims here. And it is “well-settled that a bankruptcy court may
approve” such consensual releases. 69 F. 4th, at 70; see also
Brief for American College of Bankruptcy as
Amicus Curiae
5–7.
Consensual releases are uncontroversial, but
they are not expressly authorized by the Bankruptcy Code. So the
only provision that could possibly supply authority to include
those releases in the bankruptcy plan is the catchall in
§1123(b)(6).
The Court today does not deny that consensual
releases are routine in the bankruptcy context and that courts have
long approved them. See
ante, at 18–19. But where, on the
Court’s reading of the Bankruptcy Code, would the bankruptcy court
obtain the authority to enter and later enforce that consensual
release?
One suggestion is that the authority comes from
the parties’ consent and is akin to a “contractual agreement.” Tr.
of Oral Arg. 33. But that theory does not explain what provision of
the Bankruptcy Code authorizes consensual releases
in bankruptcy
plans. After all, contracts are enforceable under state law,
ordinarily in state courts. But in bankruptcy, consensual releases
are routinely part of a reorganization plan with voting overseen by
the bankruptcy court and conditions enforceable by the bankruptcy
court. See Brief for American College of Bankruptcy as
Amicus
Curiae 4–7.
To reiterate, the only provision that could
provide such authority is §1123(b)(6). So if the Court thinks that
a consensual release can be part of the plan, even the Court must
acknowledge that §1123(b)(6) can reach creditors’ claims against
non-debtors.
The Court’s purported common thread is still
further contradicted by yet another regular bankruptcy practice:
full-satisfaction releases. Full-satisfaction releases provide full
payment for creditors’ claims against non-debtors and then release
those claims. When a full-satisfaction release is included in a
reorganization plan, the bankruptcy court exercises control over
creditors’ claims against non-debtors.
Again, the only provision that could possibly
supply authority to include those full-satisfaction releases in a
bankruptcy plan is the catchall in §1123(b)(6). Any contract-law
theory would not work for full-satisfaction releases, given that
holdout creditors often refuse to consent to full-satisfaction
releases. See,
e.g.,
In re A. H. Robins
Co., 880 F.2d 694, 696, 700, 702 (CA4 1989);
In re Boy
Scouts of Am. and Del. BSA, LLC, 650 B.R. 87, 115–116, 141
(Del. 2023). So if full-satisfaction releases are to be allowed,
§1123(b)(6) must be read to reach creditor claims against
non-debtors, even without consent.
The Court does not deny that consensual
non-debtor releases and full-satisfaction releases might be
permissible under §1123(b)(6).
Ante, at 19. If they are
permissible, then the Court’s purported
ejusdem generis
common thread is thoroughly eviscerated because those releases
involve claims by victims or creditors against non-debtors, just
like here. (And if the Court instead means to hold open the
possibility that consensual and full-satisfaction releases are
actually impermissible, then its holding today is even more extreme
than it appears.)
Exculpation clauses are yet another example.
Exculpation clauses shield the estate’s fiduciaries and other
professionals (non-debtors) from liability for their work on the
reorganization plan. See Brief for American College of Bankruptcy
as
Amicus Curiae 9. Without such exculpation clauses,
“competent professionals would be deterred from engaging in the
bankruptcy process, which would undermine the main purpose of
chapter 11—achieving a successful restructuring.”
Id., at
11; see also Brief for Highland Capital Management, L. P. as
Amicus Curiae 3–5. For that reason, bankruptcy courts
routinely approve exculpation clauses under §1123(b)(6). For
exculpation clauses to be allowed, however, §1123(b)(6) must be
read to reach creditor claims against non-debtors. So exculpation
clauses further refute the Court’s purported common thread.
The fact that plan provisions under §1123(b)(6)
can reach non-debtors finds still more support in this Court’s only
case to analyze the catchall authority in §1123(b)(6),
United
States v.
Energy Resources Co. The plan provision in
Energy Resources ordered the IRS, a creditor, to apply the
debtor’s tax payments to trust-fund tax liability before other
kinds of tax liability.
United States v.
Energy Resources
Co.,
495 U.S.
545, 547 (1990). Importantly, if the debtor did not pay the
trust-fund tax liability, then non-debtor officers of the company
would be on the hook.
Ibid. So the plan provision served to
protect the company’s non-debtor officers from “personal liability”
for those taxes.
In re Energy Resources Co., 59 B.R.
702, 704 (Bkrtcy. Ct. Mass. 1986). In exchange for that protection,
a non-debtor officer contributed funds to the bankruptcy plan.
Ibid.
Echoing the Court today, the IRS objected to
that plan, arguing that the bankruptcy court exceeded its authority
under (b)(6) in part because there was no provision in the Code
that expressly supported the plan provision.
Energy
Resources, 495 U. S., at 549–550. But this Court disagreed
with the IRS and approved the plan based on the “residual
authority” in (b)(6).
Id., at 549.
The plan provision in
Energy Resources
operated akin to a non-debtor release: It reduced the potential
liability of a non-debtor (the non-debtor’s officers) to another
non-debtor (the IRS).
Energy Resources therefore further
demonstrates that plan provisions under §1123(b)(6) can affect
creditor–non-debtor relationships.
In sum, the Court’s statement that §1123(b)
reaches only “
the debtor—its rights and responsibilities,
and its relationship with its creditors,”
ante, at 11, is
factually incorrect several times over. Paragraphs 1123(b)(3) and
(b)(6) already allow plans to affect creditor claims against
non-debtors, such as through releases of creditors’ derivative
claims, consensual releases, full-satisfaction releases, and
exculpation clauses. And this Court’s precedent in
Energy
Resources confirms the point. The Court’s
ejusdem
generis argument rests on quicksand.
Second, independent of those many flaws,
the Court’s entire approach to
ejusdem generis is wrong from
the get-go. When courts face a statute with a catchall, it is
black-letter law that courts must try to discern the common thread
by examining the “evident purpose” of the statute. Scalia &
Garner, Reading Law, at 208; see also
Begay v.
United
States,
553 U.S.
137, 146 (2008) (defining common thread “in terms of the Act’s
basic purposes”); Eskridge, Interpreting Law, at 78 (“statutory
purpose” helps identify the common thread in
ejusdem generis
cases).[
6]
Importantly, this Court has already explained
that the purpose of §1123(b) is to grant bankruptcy courts “broad
power” to approve plan provisions “necessary for a reorganization’s
success.”
Energy Resources, 495 U. S., at 551.
Energy Resources demonstrates that the common thread of
§1123(b) is bankruptcy court action to preserve the estate and
ensure fair and equitable recovery for creditors. See,
e.
g.,
Pioneer Investment Services Co. v.
Brunswick Associates L. P.,
507
U.S. 380, 389 (1993);
NLRB v.
Bildisco &
Bildisco,
465 U.S.
513, 528 (1984); J. Feeney & M. Stepan, 2
Bankruptcy Law Manual §11:1 (5th ed. 2023).
As explained at length above, to maximize
recovery, the Court must solve complex collective-action problems.
And for a bankruptcy court to solve all of the relevant
collective-action problems, §§1123(b)(1)–(5) give the bankruptcy
court broad power to modify parties’ rights without their
consent—most notably, to release creditors’ claims against the
debtor. §1123(b)(1). Under that provision, the Purdue plan released
the victims’ and creditors’ claims
against Purdue in order
to prevent a collective-action problem in distributing Purdue’s
assets—and thereby to preserve the estate and ensure fair and
equitable recovery for victims and creditors.
The non-debtor release provision approved under
§1123(b)(6) does the same thing and serves that same statutory
purpose. As discussed above, the victims’ and creditors’ claims
against the non-debtor Purdue officers and directors (the Sacklers)
are essentially the same as their claims against Purdue. The claims
against the Sacklers rest on the same legal theories and facts as
the claims against Purdue, largely the Sacklers’ opioid-related
decisions in running Purdue. And the Sacklers are indemnified by
Purdue’s estate for their liability. So any liability could
potentially come out of the Purdue estate just like the claims
against Purdue itself.
Therefore, the nonconsensual releases against
the Sacklers are not only of a similar genus, but in effect
the
same thing as the nonconsensual releases against Purdue
that everyone agrees §1123(b)(1) already authorizes. Both were
necessary to preserve the estate and prevent collective-action
problems that could drain Purdue’s estate, and thus both were
necessary to enable Purdue’s reorganization plan to succeed and to
equitably distribute assets. And without the releases, there would
be no settlement, meaning no $5.5 to $6 billion payment by the
Sacklers to Purdue’s estate. That would mean either that no victim
or creditor could recover anything from the Sacklers (or indeed
from Purdue), or that only a few victims or creditors could recover
from the Sacklers at the expense of fair and equitable distribution
to everyone else.
The statute’s evident purpose therefore easily
answers the
ejusdem generis inquiry here. Absent other
limitations and restrictions in the Code, §1123(b)(6) authorizes a
bankruptcy court to modify parties’ claims that could otherwise
threaten to deplete the bankruptcy estate when doing so is
necessary to preserve the estate and provide fair and equitable
recovery for creditors.
In light of the “evident purpose” of §1123(b) to
preserve the estate and ensure fair and equitable recovery for
creditors in the face of collective-action problems, Scalia &
Garner, Reading Law, at 208; see Eskridge, Interpreting Law, at 78,
the Court’s
ejusdem generis theory simply falls apart.
In sum, for each of two independent reasons, the
Court’s
ejusdem generis argument fails. First, its common
thread is factually wrong. And second, its purported common thread
disregards the evident purpose of §1123(b).
B
Despite the fact that non-debtor releases
address the very collective-action problem that the bankruptcy
system was designed to solve, the Court next trots out a few
minimally explained arguments that non-debtor release provisions
are “inconsistent with” various provisions of the Bankruptcy Code,
including: (i) §524(g)’s authorization of non-debtor releases
in asbestos cases; (ii) §524(e)’s statement that debtors’
discharges do not automatically affect others’ liabilities; and
(iii) the Code’s various restrictions on bankruptcy
discharges. None of those arguments is persuasive.
First, the Court cites §524(g), which was
enacted in 1994 to expressly authorize non-debtor releases in a
specific context: cases involving mass harm “caused by the presence
of, or exposure to, asbestos or asbestos-containing products.”
§524(g)(2)(B)(i)(I). From the fact that §524(g) allows non-debtor
releases in the asbestos context, the Court infers that non-debtor
releases are prohibited in other contexts.
Ante, at 15.
But the very text of §524(g)
expressly
precludes the Court’s inference. The statute says: “Nothing in
[§524(g)] shall be construed to modify, impair, or supersede any
other authority the court has to issue injunctions in connection
with an order confirming a plan of reorganization.” 108Stat. 4117,
note following 11 U. S. C. §524. Congress expressly
authorized non-debtor releases in one specific context that was
critically urgent in 1994 when it was enacted. But Congress also
enacted the corresponding rule of construction into binding
statutory text to “make clear” that §524(g) did not “alter” the
bankruptcy courts’ ability to use non-debtor release mechanisms as
appropriate in other cases. 140 Cong. Rec. 27692 (1994).
Keep in mind that Congress enacted §524(g) in
the early days of non-debtor releases, soon after bankruptcy courts
began approving non-debtor releases in asbestos cases. See,
e.
g.,
In re Johns-Manville Corp., 68 B.R. 618,
621–622 (Bkrtcy. Ct. SDNY 1986), aff ’d, 837 F.2d 89, 90 (CA2
1988);
UNARCO Bloomington Factory Workers v.
UNR
Industries, Inc.,
124 B.R. 268, 272, 278–279 (ND Ill. 1990). Section 524(g)
set forth a detailed scheme sensitive to the specific needs of
asbestos mass-tort litigation that was then engulfing and
overwhelming American courts. For example, because asbestos
injuries often have a long latency period, asbestos mass-tort
bankruptcies needed to account for unknown claimants who could come
out of the woodwork in the future. See Bankruptcy Reform Act of
1994, 108Stat. 4114–4116;
In re Johns-Manville Corp.,
68 B. R., at 627–629.
But as explained above, throughout the history
of the Code and at the time §524(g) was enacted, bankruptcy courts
were also issuing non-debtor releases in other contexts as well,
such as in the Dalkon Shield mass-tort bankruptcy case.
A. H. Robins Co., 880 F. 2d, at 700–702; see also,
e.
g.,
In re Drexel Burnham Lambert Group,
Inc., 960 F.2d 285, 293 (CA2 1992) (securities litigation
context). Congress therefore made clear that enacting §524(g) for
the urgent asbestos cases did not disturb bankruptcy courts’
preexisting authority to issue such releases in other cases.
Bottom line: The Court’s reliance on §524(g)
directly contravenes the actual statutory text.
Second, the Court cites §524(e), which
states that a plan’s discharge of the debtor “does not affect the
liability of any other entity on . . . such debt.” By its
terms, §524(e) does not purport to preclude releases of creditors’
claims against non-debtors. (And were the rule otherwise, even
consensual releases would be prohibited as well.)
Notably, Congress changed §524(e) to its current
wording in 1979. Before 1979, the statute arguably did preclude
releases of claims against non-debtors who were co-debtors with a
bankrupt company. See 11 U. S. C. §34 (1976 ed.)
(repealed Oct. 1, 1979) (“The liability of a person who is a
co-debtor with, or guarantor or in any manner a surety for, a
bankrupt
shall not be altered by the discharge of such
bankrupt” (emphasis added)). But Congress then changed the law. And
the text now means only that the discharge of the debtor does not
itself automatically wipe away the liability of a
non-debtor. Section 524(e) does not speak to the issue of
non-debtor releases or other steps that a plan may take regarding
the liability of a non-debtor for the same debt. As the American
College of Bankruptcy says, “Section 524(e) is agnostic as to
third-party releases.” Brief for American College of Bankruptcy as
Amicus Curiae 6, n. 3; see also
In re Airadigm
Communications, Inc., 519 F.3d 640, 656 (CA7 2008).
Third, citing §§523(a), 524(a), and
541(a), the Court says that the plan improperly grants a
“discharge” to the Sacklers.
Ante, at 4, 14–15. And the
Court suggests that giving the Sacklers a “discharge” in Purdue’s
bankruptcy plan in exchange for $5.5 to $6 billion allows the
Sacklers to get away too easy—without filing for bankruptcy
themselves, without having to comply with the Code’s various
restrictions, and without paying enough. See
ante, at 14–15.
That point also fails.
To begin, the premise is incorrect. The Sacklers
did not receive a bankruptcy discharge in this case. Discharge is a
term of art in the Bankruptcy Code.
Wainer v.
A. J.
Equities, Ltd., 984 F.2d 679, 684 (CA5 1993); J. Silverstein,
Hiding in Plain View: A Neglected Supreme Court Decision Resolves
the Debate Over Non-Debtor Releases in Chapter 11 Reorganizations,
23 Emory Bkrtcy. Developments J. 13, 130 (2006). When a debtor in
bankruptcy receives a discharge, most (if not all) of their
pre-petition debts are released, giving the debtor a fresh start.
See §1141(d)(1) (Chapter 11 discharge relieves the debtor “from any
debt that arose before the date of ” plan confirmation, with
narrow exceptions);
Taggart v.
Lorenzen, 587 U.S.
554, 556, 558 (2019). The Sacklers did not receive such a
discharge.
As courts have always recognized, non-debtor
releases are different. Non-debtor releases “do not offer the
umbrella protection of a discharge in bankruptcy.”
Johns-Manville Corp., 837 F. 2d, at 91. Rather,
non-debtor releases are accompanied by settlement payments to the
estate by the non-debtor. So non-debtor releases are simply one
part of a settlement of pending or potential claims against the
non-debtor that arise out of some torts committed by the debtor.
They are in essence a traditional litigation settlement. They are
not a blanket discharge for the non-debtor.
Here, therefore, the releases apply only to
certain claims against the Sacklers—namely, those “that arise out
of or relate to” Purdue’s bankruptcy.
Ibid.; see 69
F. 4th, at 80 (releasing the Sacklers only for claims to which
Purdue’s conduct was “a legal cause or a legally relevant factor to
the cause of action” (quotation marks omitted)). And the non-debtor
releases were negotiated in exchange for a significant settlement
payment that enabled
Purdue’s bankruptcy reorganization to
succeed.
In short, the releases do not grant discharges
to non-debtors and cannot be disallowed on that basis.
Next, the Court suggests that the Sacklers must
file for bankruptcy themselves in order to be released from
liability. That, too, is incorrect. Nowhere does the Code say that
a non-debtor may be released from liability only by filing for
bankruptcy. On the contrary, §1123(b)(3) of the Code already
expressly allows a bankruptcy plan to release a non-debtor from
liability to the debtor.
The Court’s suggestion that a non-debtor must
file for bankruptcy in order to be released from liability not only
is directly at odds with the text of the Code, but also is at odds
with reality. Non-debtor releases are often used in situations
where it is not possible or practicable for the non-debtors to
simply file for individual bankruptcies. This case is just one
example. The “Sacklers are not a simple group of a few defendants”
that could simply have declared one bankruptcy. 633 B. R., at
88. They are “a large family divided into two sides, Side A and
Side B, with eight pods or groups of family members within those
divisions,” many of whom live abroad (beyond bankruptcy
jurisdiction).
Ibid. And their assets are spread across
trusts that are likely beyond the jurisdiction of U. S. courts as
well.
Ibid.; see also
id., at 109.
Likewise, in many other mass-tort bankruptcy
cases, released non-parties could not simply declare their own
bankruptcies either. Insurers, for example, cannot declare
bankruptcy just because a policy limit is reached.
B. Zaretsky, Insurance Proceeds in Bankruptcy, 55 Brooklyn L.
Rev. 373, 394–395, and n. 60 (1989). And in cases involving
hundreds of affiliated entities who share liability and share
insurance, such as the Boy Scouts and the Catholic Church, it would
be almost impossible to coordinate assets and ensure equitable
victim recovery across hundreds of distinct bankruptcies. Section
§1123(b)(6) provides bankruptcy courts with flexibility to deal
with such situations by approving appropriate non-debtor releases.
See Brief for Boy Scouts of America as
Amicus Curiae 18–20;
Brief for Ad Hoc Group of Local Councils of the Boy Scouts of
America as
Amicus Curiae 6; Brief for U. S. Conference of
Catholic Bishops as
Amicus Curiae 3–4, 17–22.
The Court next says that the non-debtor release
allowed the Sacklers to bypass certain restrictions on
discharges—for example, that individual debtors are generally not
discharged for fraud claims, §523(a). That argument fails for the
same reason. Non-debtor releases are part of a negotiated
settlement of potential tort claims. They are not a discharge. And
nothing in §523(a) prohibits a debtor’s reorganization plan from
releasing non-debtors for fraud claims. Indeed, it is
undisputed that Purdue’s bankruptcy could release the Sacklers from
at least some fraud claims—namely, the fraudulent transfer
claims—under §1123(b)(3). No provision in the Code forbids
releasing other fraud claims against the Sacklers, too. The Court’s
concern that the releases apply to claims for “fraud,”
ante,
at 15, therefore falls flat.
In all of those scattershot arguments, the Court
seems concerned that the Sacklers’ $5.5 to $6 billion settlement
payment was not enough. To begin with, even if that were true, it
would not be a reason to
categorically disallow non-debtor
releases as a matter of law, as the Court does today. In any event,
that concern is unsupported by the record and contradicted by the
Bankruptcy Court’s undisputed findings of fact. The Bankruptcy
Court found that the creditors’ and victims’ ability to recover
directly from any of the Sacklers in tort litigation was far from
certain. So as in other tort settlements, the settlement amount
here reflected the parties’ assessments of their probabilities of
success and the likely amount of possible recovery. The Court today
has no good basis for its subtle second-guessing of the settlement
amount.
And lest we miss the forest for the trees, keep
in mind that the victims and creditors have no incentive to short
their own recoveries or to let the Sacklers off easy. They despise
the Sacklers. Yet they strongly support the plan. They call the
settlement a “remarkable achievement.” Brief for Respondent Ad Hoc
Group of Individual Victims of Purdue Pharma, L. P.
et al. 2. And given the high level of victim and creditor
support, the Bankruptcy Court emphasized: “[T]his is
not the
Sacklers’ plan,” and “anyone who contends to the contrary” is
“simply misleading the public.” 633 B. R., at 82.
The Court today unfortunately falls into that
trap. And it is rather paternalistic for the Court to tell the
victims that they should have done better—and then to turn around
and leave them with potentially nothing.
C
Finally, the Court suggests that non-debtor
releases are not “appropriate” because they are inconsistent with
history and practice. That, too, is seriously mistaken.
Importantly, Congress did not enact the current
Bankruptcy Code—and with it, §1123(b)(6)—until 1978. Bankruptcy
Code of 1978, 92Stat. 2549. For nearly the entire life of the Code,
courts have approved non-debtor release provisions like this one.
So for decades, Chapter 11 of the Code has been understood to grant
authority for such releases when appropriate and necessary to the
success of the reorganization.[
7]
The Court’s citations to pre-Bankruptcy Code
cases are an off-point deflection and do not account for important
and relevant changes made in the current Bankruptcy Code. For
example, unlike the former Bankruptcy Act of 1898, the modern
Bankruptcy Code grants courts jurisdiction over “suits between
third parties which have an effect on the bankruptcy estate.”
Celotex Corp. v.
Edwards,
514
U.S. 300, 307, n. 5 (1995); see 28 U. S. C.
§§157(a), 1334(b) (giving bankruptcy courts jurisdiction over any
litigation “related to” the bankruptcy).
Under the current Bankruptcy Code, it is well
settled that Chapter 11 bankruptcies can and do affect
relationships between creditors and non-debtors who are intimately
related to the bankruptcy. For example, under the modern Bankruptcy
Code, bankruptcy courts routinely use their broad jurisdiction and
equitable powers to stay any litigation—even litigation entirely
between third parties—that would affect the bankruptcy estate.
Celotex, 514 U. S., at 308–310.
The longstanding practice of staying litigation
that could affect the bankruptcy estate is similar in important
respects to non-debtor releases. In each situation, a provision of
the Code provides an explicit authority: to stay litigation
involving the debtor, §362, and to release claims involving the
debtor, §§1123(b)(1), (3). And in each, the bankruptcy court
invokes its broad jurisdiction and equitable power to “augment”
that authority, extending it to litigation and claims against
non-debtors that might have a “direct and substantial adverse
effect” on the bankruptcy estate.
Celotex, 514 U. S.,
at 303, 310.
In short, the common and long-accepted practice
of staying litigation that could affect the bankruptcy estate shows
that under the modern Code, bankruptcy courts can and do exercise
control over relationships between creditors and non-debtors. The
Court’s reliance on pre-Code practice is misplaced.[
8]
IV
As I see it, today’s decision makes little
sense legally, practically, or economically. It upends the
carefully negotiated Purdue bankruptcy plan and the prompt and
substantial recovery guaranteed to opioid victims and creditors.
Now the opioid victims and creditors are left holding the bag, with
no clear path forward. To reiterate the words of the victims:
“Without the release, the plan will unravel,” and “there will be no
viable path to any victim recovery.” Tr. of Oral Arg. 100.
The Court does not say what should happen next.
The Court seems to hope that a new deal is possible, with the
Sacklers buying off the last holdouts.
But even if it were true that the parties could
eventually reach a new deal, that outcome would likely come at a
cost. Future negotiations and litigation would mean additional
litigation expense that eats away at the recovery that the opioid
victims and creditors have already negotiated, as well as years of
additional delay even though victims and family members want and
need relief
now.
And more to the point, without non-debtor
releases, a new deal will be very difficult to achieve. By
eliminating nonconsensual non-debtor releases, today’s decision
gives every victim and every creditor an absolute right to sue the
Sacklers. Some may hold out from any potential future settlement
and instead sue because they want to have their day in court to
hold the defendants accountable, or because they want to try to hit
the jackpot of a large recovery that they can keep all to
themselves. Moreover, because every victim and creditor knows that
the Sacklers’ resources are limited, they will now have an
incentive to promptly sue the Sacklers before others sue. To be
sure, the victims and creditors would face an uphill climb in any
such litigation, the Bankruptcy Court found, so it may be that no
one will succeed in tort litigation against the Sacklers, meaning
that no one will get anything. But even if just one of the victims
or creditors—say, a State or a group of victims—is successful in a
suit against the Sacklers, its judgment “could wipe out all of the
collectible Sackler assets,” which in turn could also deplete
Purdue’s estate and leave nothing for any other victim or creditor.
Id., at 103. That reality means that everyone has an
incentive to race to the courthouse to sue the Sacklers pronto—the
classic collective-action problem.
Because some victims or creditors may hold out
from any potential future settlement for any one of those reasons
and instead still sue, the Sacklers are less likely to settle with
anyone in the first place. Maybe the clouds will part. But in a
world where nonconsensual non-debtor releases are categorically
impermissible, any hope for a new deal seems questionable—indeed,
the parties to the bankruptcy label it “pure fantasy.” Brief for
Debtor Respondents 4.
The bankruptcy system was designed to prevent
that exact sort of collective-action problem. Non-debtor releases
have been indispensable to solving that problem and ensuring fair
and equitable
victim recovery in multiple bankruptcy
proceedings of extraordinary scale—not only opioids, but also many
other mass-tort cases involving asbestos, the Boy Scouts, the
Catholic Church, silicone breast implants, the Dalkon Shield, and
others.
The Court’s apparent concern that the Sacklers’
settlement payment of $5.5 to $6 billion was not enough should have
led at most to a remand on whether the releases were “appropriate”
under 11 U. S. C. §1123(b)(6) (if anyone had raised that
argument here, which they have not). But instead the Court responds
with the dramatic step of repudiating the plan and eliminating
non-debtor releases altogether.
The Court’s decision today jettisons a carefully
circumscribed and critically important tool that bankruptcy courts
have long used and continue to need to handle mass-tort
bankruptcies going forward. The text of the Bankruptcy Code does
not come close to requiring such a ruinous result. Nor does its
structure, context, or history. Nor does hostility to the
Sacklers—no matter how deep: “Nothing is more antithetical to the
purpose of bankruptcy than destroying estate value to punish
someone.” A. Casey & J. Macey, In Defense of Chapter 11 for
Mass Torts, 90 U. Chi. L. Rev. 973, 1017 (2023). Gutting this
longstanding bankruptcy court practice is entirely
counterproductive, and simply inflicts still more injury on the
opioid victims.
Opioid victims and other future victims of mass
torts will suffer greatly in the wake of today’s unfortunate and
destabilizing decision. Only Congress can fix the chaos that will
now ensue. The Court’s decision will lead to too much harm for too
many people for Congress to sit by idly without at least carefully
studying the issue. I respectfully dissent.