August 1, 2024 - In late June, the United States Supreme Court, in Harrington v. Purdue Pharma, ruled that non-consensual releases of non-debtor third-parties was impermissible under the Bankruptcy Code. As we noted at the time, because non-consensual third-party releases are ubiquitous in corporate bankruptcies, the decision could have important ramifications for the broadly syndicated and private corporate credit markets. (The LSTA hosted a webinar to discuss the Purdue decision and what it may mean for corporate restructurings. A replay is available here).
Importantly, the Supreme Court’s ruling was narrow and left many open questions. Two recent articles in Bloomberg Law identify some of those issues and explain how the courts, and some members of Congress, are addressing them. Congressman Jerrold Nadler (D. NY), a senior member of the House Judiciary Committee recently introduced a bill, the “Nondebtor Release Prohibition Act” that would prohibit non-consensual third-party releases and clarify that “consent” requires a signed writing given after conspicuous notice to a party in “appropriate” language. It would clarify that consent is not given by accepting a proposed plan of reorganization or failure to accept or reject a plan. The bill would also impose a 90-day cap on temporary litigation pauses for nonbankrupt entities unless they’re affirmed by a federal appeals court.
Activity on the judicial front is also brewing. In the Parlement Technologies (Parler) case, Delaware Bankruptcy Judge Craig Goldblatt approved a preliminary injunction that would stay actions against non-debtors. Judge Goldblatt ruled that the Supreme Court’s holding in Purdue “does not preclude the entry of such a preliminary injunction but does affect how courts should consider what is meant by ‘likelihood of success on the merits’” when applying the test applicable for preliminary injunctions. Although “success on the merits” can no longer include a third-party release through the plan process, the preliminary injunction can still be granted if the court concludes that it is necessary for the administration of the case or because it believes that the parties may ultimately negotiate a consensual release. A similar result was reached by Judge Jacqueline Cox in Coast to Coast Leasing, a case in the Northern District of Illinois where the judge temporarily shielded the company’s principals and affiliates from litigation.
In a case in the New Jersey Bankruptcy Court, In Re Invitae, the U.S. Trustee (the plaintiff in Purdue Pharma) in mid-July submitted an objection to the plan because it contains third-party release provisions that are prohibited under Purdue and improperly relies on “opt-out” voting which “is insufficient to establish consent to third-party releases.” However, Judge Michael Kaplan overruled the objection this week, relying on “relevant rulings” on these issues from BlockFi and Bed Bath & Beyond, permitting the plan to move forward.
It is virtually certain that Rep. Nadler’s bill will not be taken up this year but it could be a placeholder for a more bipartisan effort in the next Congress. In the meantime, courts will continue to grapple with the third-party release issues that were not taken up by the Supreme Court.
