Purdue Ruling Tees Up ‘Consent’ Question for Bankruptcy Courts

The US Supreme Court, in rejecting Purdue Pharma LP‘s bankruptcy plan, definitively shut down third-party litigation shields that don’t have consent from creditors. Now it’s up to bankruptcy courts to determine what, exactly, counts as “consent.”

The answer is likely going to boil down to judges’ views on the specific language and presentation of documents sent to creditors who are entitled to vote on a company’s bankruptcy exit plan.

“Third-party releases are a very important part of the process, but they’re going to have to be consensual, and we’re going to have to spend some time figuring out what that means,” Jonathan Carson, co-CEO of bankruptcy claims agent Stretto, said.

The proposed liability releases for members of the billionaire Sackler family who own Purdue under a $6 billion litigation settlement would have protected the family against lawsuits accusing it of improperly pushing opioid sales. The Sacklers have long denied wrongdoing.

The high court ruled that the releases, which would’ve been granted to the Sacklers via a bankruptcy plan even though they are not themselves bankrupt, are impermissible because they were obtained without the consent of some people who sued.

But Justice Neil Gorsuch’s June 27 opinion for a 5-4 majority in William K. Harrington v. Purdue Pharma LP made clear that nonbankrupt parties can still obtain liability releases as long as they are obtained consensually.

The task now before bankruptcy judges arises from the Supreme Court’s decision not to define “consensual” releases.

Gorsuch said the court didn’t “have occasion today to express a view on what qualifies as a consensual release or pass upon a plan that provides for the full satisfaction of claims against a third-party nondebtor.”

Opt-ins and Opt-outs

With nonconsensual third-party releases off the table, “tremendous” questions for courts remain, including whether silence equals consent in a bankruptcy plan, said former bankruptcy judge Bruce Markell, a professor of bankruptcy law at Northwestern Pritzker School of Law.

Some courts have said that while silence isn’t consent, it could count as a waiver of a creditor’s rights, he said.

The answer could depend on how judges think about so-called “opt-out” provisions in bankruptcy plans. In cases with opt-out procedures, creditors can decline to grant releases to nonbankrupt people and entities by checking a box on a ballot. If creditors don’t check that box and return the ballot, they’re deemed to consent to that release.

The question, then, is whether those who don’t actively opt out of a bankruptcy plan release by taking those steps can be deemed consenting creditors. Some judges, including in the US Bankruptcy Court for the District of Delaware and the US Bankruptcy Court for the Southern District of New York, have held that opt-out provisions can be considered consensual.

In those cases, whether claimants were given proper notice of their opportunity to opt out becomes a key issue, said Scott Underwood of Underwood Murray PA, who represents distressed businesses. Judges want to make sure that claimants had a chance to opt out, which means proving they had a chance to view the ballot, Underwood said.

Even opt-outs can be an ineffective tool for achieving a settlement, said Wake Forest University law professor Samir Parikh, who focuses on mass tort restructurings. Opt-out releases are insufficient in complicated, non-asbestos mass tort cases because creditors holding the high value claims will opt out and pursue their suits in other courts, believing they can receive more from a judgment than they will from the settlement, Parikh said. Asbestos cases have their own rules under bankruptcy law.

With the high-value claims removed, there’s far less incentive for a company to put forth a robust settlement offer, attorneys said.

Still, courts that deem opt-outs to be consensual will become preferred venues for debtors in light of the Purdue decision, said Leyza B. Florin of Sequor Law, who focuses on debt restructuring and representation of creditors. It will take time to fully flesh out how courts view opt-ins versus opt-outs, Florin said.

“I think you’re going to see a lot more body of law on the distinction between those two,” she said.

Ultimately, the additional litigation over the issue of consensual releases will lead to less recovery for claimants, she said.

“It’s an unfortunate result for those of us who practice in this area because it takes away the ability for us to divert money in a more efficient manner,” Florin said.

The case is William K. Harrington v. Purdue Pharma LP, U.S., No. 23-124, 6/27/24.