BANKRUPTCY CORNER
BANKRUPTCY CORNER
The End of Non-Debtor , Third-Party , Non-Consensual Releases
JASON S . RIGOLI
On June 27 , 2024 , in a 5-4 decision , the Supreme Court issued its opinion in Harrington v . Purdue Pharma L . P ., 219 L . Ed . 721 , 144 S . Ct . 2071 ( 2024 ), holding that 11 U . S . C . § 1123 ( b )( 6 ) does not authorize a release and injunction that , as part of a plan of reorganization under Chapter 11 , effectively sought to discharge claims against a non-debtor without the consent of affected claimants . 219 L . Ed . at 739-40 .
The question the Supreme Court answered was whether Bankruptcy Code granted authority to provide for non-consensual , third-party releases of non-debtors under the so called “ catchall provision ” of 11 U . S . C . § 1123 ( b )( 6 ), which reads : “[ s ] ubject to subsection ( a ) of this section , a plan may — include any other appropriate provision not inconsistent with the applicable provisions of this title .” Reading § 1123 ( b )( 6 ) in context with the rest of the Bankruptcy Code , the majority found there was no authority to grant non-debtor parties a “ discharge ” without the consent of the affected claimants .
The majority considered “ what a discharge is ” and “ who can earn it .” 219 L . Ed . at 736 . Looking to the Bankruptcy Code , the Supreme Court noted that only a debtor could obtain a discharge under 11 U . S . C . §§ 524 ( e ), 727 ( a ) - ( b ), and 1142 ( d )( 1 ) ( A ). Id . To obtain the discharge a debtor had to come forward with virtually all of its assets and the discharge is subject to exceptions . Id . The Supreme Court also noted that the discharge injunction of 11 U . S . C . § 524 , expressly authorized courts to issue non-debtor injunctions in asbestos related bankruptcies only . Id . at 736-737 ( citing 11 U . S . C . § 524 ( g )( 4 )( A )( ii )). The proposed “ release ” transgressed all of the requirements for , and limitations on , a discharge under the Bankruptcy Code . Id . at 736 .
The majority was keen to point out that it was not ruling on whether authority exists to grant “ consensual third-party releases ,” what constitutes “ a consensual non [ - ] debtor third-party release ,” or whether a confirmed and substantially consummated plan with such a release could be unwound . Id . at 739 .
A Potential Test of an “ Opt-in ” Release of Non-debtor Releases
Post-Harrington , a “ consensual ” third-party release is being tested in the chapter 11 of Red Lobster Management , LLC , Case No . 24- 02486-GER ( Jointly Administered ) ( Bankr . M . D . Fla .), where the bankruptcy court conditionally approved the disclosure statement after the debtors agreed to include an “ opt-in ” procedure for some creditors to release third parties from liability under the plan .
Impact on Preliminary Injunctions
Since the Harrington opinion was issued , two courts have issued opinions on the authority to enter preliminary injunctions temporarily enjoining litigation against non-debtor third parties .
In Parlement Techs ., Inc ., Case No . 24- 10755 ( CTG ), 2024 Bankr . LEXIS 1627 , 2024 WL 3417084 ( Bankr . Del . July 15 , 2024 ), Judge Goldblatt held that preliminary injunctions were still available , however , the “ success on the merits ” prong for issuing a preliminary injunction has changed . “ Success on the merits ” can no longer be based on the likelihood of success of a non-debtor obtaining a nonconsensual , third-party release through the plan confirmation process , but the demonstration of “( a ) providing the debtor ' s management a breathing spell from the distraction of other litigation is necessary to permit the debtor to focus on the reorganization of its business or ( b ) because it believes the parties may ultimately be able to negotiate a plan that includes a consensual resolution of the claims against the non-debtors .” 2024 Bankr . LEXIS 1627 at * 2-3 ; Accord Coast to Coast Leasing , LLC v . M & T Equip . Fin . Corp . ( In re Coast to Coast Leasing , LLC ), -- B . R . - - , 2024 Bankr . LEXIS 1662 at * 7-8 , 2024WL 3454805 ( Bankr . N . D . Ill , Jul . 17 , 2024 ) ( adopting rationale of Parlement ).
Conclusion
While questions remain unanswered , the Supreme Court made it clear that the Bankruptcy Code does not authorize non-debtor , nonconsensual , third-party releases as part of a plan of reorganization .
This article was submitted by Jason S . Rigoli , Esq ., Furr and Cohen , P . A ., 2255 Glades Road , Suite 419A , Boca Raton , FL 33431 , jrigoli @ furrcohen . com
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