Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024)
In re Roman Catholic Diocese of Syracuse, (Bankr. Ct. N.D.N.Y. Nov. 14, 2024), case New York, 20-30663. The US Supreme Court, in Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024) ruled that it is illegal/not permitted for a proposed bankruptcy plan to have nonconsensual releases, that make tort claimant creditors subject to the proposed bankruptcy plan, which plan releases not just debtor, but also non-debtors, and the tort claimant creditors are only paid what the plan gives them, instead of the tort claimant creditors being able to sue non-debtors directly. In that case the non-debtors were the Sacklar family.
What are Courts doing after the US Supreme Court Purdue decision?
In In re Roman Catholic Diocese of Syracuse, the Bankruptcy Judge held that a proposed chapter 11 plan, which provides that non-debtors will receive discharges in the plan, along with the bankruptcy debtor receiving a discharge, can require tort claimant creditors to OPT-OUT of being bound by the plan. If a tort claimant creditor fails to OPT-OUT of being bound by the plan, that creditor will be bound by the plan. An opt out plan is one where a creditor will give releases to nondebtors if the creditor does not vote or if the creditor votes and does not check a box to indicate that the creditor is not giving nondebtor releases.
In another case, Bankruptcy Judge Christopher M. Lopez of Houston confirmed a plan with opt-outs, saying that Purdue did not change law in the Fifth Circuit where nondebtor releases were always prohibited. He imposed nondebtor releases on anyone who did not opt out, including creditors who did not vote on the plan. In re Robertshaw US Holdings Corp., 24-90052, 2024 BL 292649, 2024 Bankr Lexis 1958 (Bankr. S.D. Tex. Aug. 16, 2024).
In an additional case, in a more restrictive opinion on September 25, Bankruptcy Judge Craig T. Goldblatt of Delaware refused to approve a plan, although he decided that nondebtor releases were permissible if the creditor’s actions would have been sufficient to form a contract. More specifically, he held that a creditor would be bound by nondebtor releases if the creditor voted on the plan and did not opt out. A creditor who did not vote would not be bound. In re Smallhold Inc., 24-10267, 2024 BL 337399, 2024 WL 4296938 (Bankr. D. Del. Sept. 25, 2024).
In a fourth case, Chief Bankruptcy Judge Carl L. Bucki of Buffalo, N.Y., decided that state contract law does not permit a plan to confer releases on nondebtors when creditors are only entitled to opt out. The plan had $300,000 for distribution among creditors with more than $282 million in unsecured claims. He held that creditors “have not given consent as required by the Supreme Court” in Purdue “[a]bsent a writing expressly agreeing to a release of nondebtors.” In re Tonawanda Coke Corp., 662 B.R. 220 (Bankr. W.D.N.Y. Aug. 27, 2024).
OPTING-OUT requires affirmative action by the tort claimant creditor.
The other possibility, is that tort claimant creditors are NOT bound by the proposed Chapter 11 plan, unless a tort claimant creditor OPTS-IN, that is, opts to be bound by the plan. In the view of attorney March of the Bankruptcy Law Firm, PC, requiring OPT-IN is more in line with what the US Supreme Court ruled in Purdue. Time will tell, as cases are decided by appeals courts, whether OPT-OUT is permissible, or whether only OPT-IN is permissible.