In recent months, two courts expressed disapproval of the use of non-consensual third-party releases in plans of reorganization: (i) the Southern District of New York, in In re Purdue Pharma, L.P., and (ii) Eastern District of Virginia, in Patterson v. Mahwah Bergen Retail Group, Inc. These decisions represent a significant shift towards curtailment of the use of non-consensual third-party releases in plans of reorganization. Non-consensual third-party releases arise in Chapter 11 plans and are an uncommon tool in bankruptcy proceedings. Instead of voluntary releases—which are the typical, and preferred, tool in Chapter 11 plans—a non-consensual third-party release is generally sought when the claim(s) against the third party must be released because the third party has a substantial and essential economic contribution that makes such release vital to the plan.
The Southern District of New York's Decision in in re Purdue Pharma L.P.
On December 16, 2021, Judge McMahon of the Southern District of New York reversed the Bankruptcy Court’s confirmation of the Debtors’ plan of reorganization because of the non-consensual third-party release provisions in the plan. In her decision, Judge McMahon analyzed whether Section 105(a), 1123(a)(5), 1123(b)(6), or 1129 of the Bankruptcy Code authorizes the Bankruptcy Court’s approval of non-consensual third-party releases. Judge McMahon concluded that none of those statutory sections confer authority on the Bankruptcy Court to grant non-consensual third-party releases.
After concluding that the Bankruptcy Code does not expressly authorize the approval of the third-party releases at issue, Judge McMahon considered the Debtors’ argument that the Bankruptcy Court could approve the non-consensual third-party releases because of the lack of any statutory prohibition prohibiting them. Judge McMahon rejected the Debtors’ argument, finding that Congress’s silence on the issue does not mean that the Bankruptcy Court has authority to approve non-consensual third-party releases. In contrast, as Judge McMahon noted, Congress has expressly authorized such releases, assuming certain conditions are met, in asbestos-related cases.