Rochelle's Daily Wire

In a 5/4 decision, the Supreme Court reversed the Second Circuit’s Purdue decision and declined an invitation to anoint chapter 11 as the remedy for deficiencies in the state and federal tort systems.

In his 20-page majority opinion June 27, Justice Neil M. Gorsuch defined the question before the Court as “whether a court in bankruptcy may effectively extend to nondebtors the benefits of a Chapter 11 discharge usually reserved for debtors.” He held “that the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants.”

Justice Gorsuch telegraphed the outcome when he said in the very first paragraph that the owners and executives of the opioid manufacturer were aiming for absolution from claims against them “without securing the consent of those affected or placing anything approaching their total assets on the table for their creditors.”

The Profit by the Owners from Opioids

Justice Gorsuch recited the facts and procedural history, focusing on the profits that the owners and managers of the Purdue opioid manufacturer had realized in the years leading up to the filing of the company’s chapter 11 case in 2019. In the years before the opioid crisis grabbed national attention, the owners and managers received some 15% of company revenue, compared to about 70% each year after 2007. Ultimately, they received distributions of about $11 billion.

In the original chapter 11 plan, the owners proposed to contribute $4.325 billion, spread over 10 years, in exchange for nonconsensual “releases” of all claims, present and future, that might be brought against them. Justice Gorsuch noted that “thousands” of “opioid victims” voted against the plan. The U.S. Trustee, eight states and others opposed confirmation of the plan.

The bankruptcy court confirmed the plan over objections by the U.S. Trustee, eight states and others. On appeal, the district court reversed and vacated the decision confirming the plan. In re Purdue Pharma, L.P., 635 14 B.R. 26 (S.D.N.Y. 2021). To read ABI’s report, click here.

After reversal in district court, the owners contributed another $1.675 billion to the plan to alleviate objections from states. Justice Gorsuch said that the owners’ “proposed contribution still fell well short of the $11 billion they received from the company between 2008 and 2016.”

On the debtor’s appeal, the Second Circuit reversed and reinstated the plan over a dissent. Purdue Pharma LP v. City of Grand Prairie (In re Purdue Pharma LP), 69 F.4th (2d Cir. May 30, 2023). To read ABI’s report, click here.

The U.S. Trustee filed an application with the Supreme Court for a stay pending appeal. The Court treated the application as a petition for certiorari and granted the petition in August along with a stay. The Court heard argument on December 4.

The Merits and Section 1123(b)(6)

Before turning to Section 1123(b)(6) and the principal reason for reversing the Second Circuit, Justice Gorsuch noted that the owners “have not filed for bankruptcy and have not placed virtually all their assets on the table for distribution to creditors, yet they seek what essentially amounts to a discharge.”

If there were any basis for a discharge in favor of nondebtors, Justice Gorsuch said it would be found in Section 1123(b)(6). It provides that a chapter 11 plan may include “any other appropriate provision not inconsistent with the applicable provisions of this title.”

The plan proponents argued before the Court that the releases were permissible because they were nowhere prohibited in the Bankruptcy Code. As a so-called catchall subject to the ejusdem generis canon, Justice Gorsuch said that the subsection is “not necessarily” given the broadest possible construction but “must be interpreted in light of its surrounding context.”

“Viewed with that much in mind,” Justice Gorsuch said, “we do not think paragraph (6) affords a bankruptcy court the authority the plan proponents suppose.” Rather, he said that “the catchall cannot be fairly read to endow a bankruptcy court with the ‘radically different’ power to discharge the debts of a nondebtor without the consent of affected nondebtor claimants.” The other subsections in Section 1123(b), he said, authorize releases “without consent only to the extent such claims concern the debtor.”

Justice Gorsuch said that “no one (save perhaps the dissent) thinks [that the catchall] provides a bankruptcy court with a roving commission to resolve all such problems that happen its way.”

Other Grounds for Reversal

In the Bankruptcy Code, Justice Gorsuch found three other grounds for reversal. First, the Code reserves discharges for the debtor. Second, the Code requires the debtor to submit all of the debtor’s assets to the court. Furthermore, he said, a discharge is not “unbounded,” because some claims are exempted from discharge. The Purdue plan, he said, “transgresses all these limits too.”

Third, Justice Gorsuch pointed to Section 524(g)(4)(A)(ii) and said that the Code authorizes nondebtor releases “but does so in only one context,” namely, plans dealing with asbestos.

Saying that “word games cannot obscure the underlying reality,” Justice Gorsuch rejected the idea that the plan just gave releases to the owners, not discharges.

Prior Law

“History” offers a “third” ground for dismissal, Justice Gorsuch said, observing that “pre-code practice may sometimes inform our interpretation of the code’s more ‘ambiguous’ provisions.” From 1800 to 1978, he said,

No one has directed us to a statute or case suggesting American courts in the past enjoyed the power in bankruptcy to discharge claims brought by nondebtors against other nondebtors, all without the consent of those affected.

As far as policy is concerned, Justice Gorsuch noted arguments going both ways. If a policy decision were to be made, “it is for Congress to make,” he said.

What the Opinion Does Not Decide

Justice Gorsuch devoted the last page of his decision to noting what the opinion does not decide. First, he said,

Nothing in what we have said should be construed to call into question consensual third-party releases offered in connection with a bankruptcy reorganization plan; those sorts of releases pose different questions and may rest on different legal grounds than the nonconsensual release at issue here.

Likewise, he said that the decision does not say “what qualifies as a consensual release,” nor does the decision “pass upon a plan that provides for the full satisfaction of claims against a third-party nondebtor.” The statement appears to express no view on whether a consensual release must be “opt-in” rather than “opt-out.”

Of significance with respect to plans already confirmed, Justice Gorsuch said, “because this case involves only a stayed reorganization plan, we do not address whether our reading of the bankruptcy code would justify unwinding reorganization plans that have already become effective and been substantially consummated.” The statement is pertinent to the confirmed Boy Scouts plan, where an appeal is pending in the Third Circuit. The statement is another way of saying that the opinion says nothing about the validity of the doctrine of equitable mootness.

Holding that “the bankruptcy code does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants,” Justice Gorsuch reversed and remanded.

The Lengthy Dissent

Joined by Chief Justice John G. Roberts, Jr., Sonia Sotomayor and Elena Kagan, Justice Brett Kavanaugh “respectfully” dissented in a 54-page opinion. However, he was dissenting “respectfully but emphatically,” which became evident with his choice of language, as the reader will see below.

Justice Kavanaugh said that the majority’s decision was “wrong on the law and devastating for more than 100,000 opioid victims and their families.” Chapter 11, he said, was designed to prevent a race to the courthouse by vesting “bankruptcy courts with broad discretion to approve ‘appropriate’ plan provisions. 11 U.S.C. § 1123(b)(6).”

In the case at hand, he said that “the Bankruptcy Court exercised that discretion appropriately — indeed, admirably.” It was, he said, a “shining example of the bankruptcy system at work.” In making a categorical preclusion of nondebtor releases for “no good reason,” he said that the majority “now throws out . . . a critical tool for bankruptcy courts to manage mass-tort bankruptcies like this one.”

Justice Kavanaugh said that mass torts “present the same collective-action problem that bankruptcy was designed to address,” by preventing “victims from litigating outside of the bankruptcy plan’s procedures.” He found authority for the releases in Section 1123(b)(6), saying that the word “appropriate” was broad and all-encompassing authority that “empowers a bankruptcy court to exercise reasonable discretion.” He said that the majority’s decision “flatly contradicts the Bankruptcy Code” and that the Code “does not remotely support that categorical prohibition.”

In terms of history, Justice Kavanaugh said that “courts have been approving such nondebtor releases almost as long as the current Bankruptcy Code has existed since its enactment in 1978.” He lauded the Second Circuit for having “developed a non-exhaustive list of factors for determining whether a non-debtor release is appropriately employed and appropriately tailored in a given case.”

Judge Kavanaugh said that the majority’s use of the ejusdem generis canon was “dead wrong” for two reasons. “First,” he said, “its common thread is factually wrong. And second, its purported common thread disregards the evident purpose of § 1123(b).”

The majority should not have relied on Section 524(g), Justice Kavanaugh said, because the “very text of § 524(g) expressly precludes the Court’s inference.” He quoted the statute as follows: “‘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.’ 108 Stat. 4117, note following 11 U.S.C. § 524.”

Justice Kavanaugh disagreed with the majority’s belief that a release was the same as a discharge. He pointed out that the release only pertains to claims related to Purdue.

Concluding his dissent, Justice Kavanaugh said that the majority’s opinion “makes little sense legally, practically, or economically.” Pointing to Boy Scouts, the Catholic Church cases, breast implants, Dalkon Shield and others, he said that nondebtor releases “have been indispensable to solving that problem and ensuring fair and equitable victim recovery.”

Justice Kavanaugh said that 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.” If the majority believed that $5.5 billion to $6 billion from the owners was not enough, he said that the Court “at most” should have remanded for the lower courts to decide “whether the releases were ‘appropriate’ under 11 U.S.C. § 1123(b)(6) (if anyone had raised that argument here, which they have not).”

Note: Justice Kavanaugh said that the U.S. Trustee opposed the plan “for reasons that remain mystifying.”