The debtor sold OxyContin, an opioid prescription pain reliever, marketing it as a “less addictive” pain medication. In 2007, an affiliate of the debtor pleaded guilty to a federal felony for its misrepresentation of the drug as less addictive and less subject to abuse. The debtor was owned by some members of a single family (the “Sacklers”), who began a “milking program” following the guilty plea out of fear that the future litigation would soon directly impact them. The Sacklers increased their distributions from the debtor greatly (taking as much as 70% of the debtor’s annual revenue, compared to the 15% taken prior to the plea). Eventually, the Sacklers drained the debtor’s total assets by 75%, leaving the debtor in a compromised financial state. The debtor filed for Chapter 11 bankruptcy. The Sacklers proposed to return to the debtor’s bankruptcy estate some of the eleven billion dollars they had withdrawn from the debtor in return for what amounted to a discharge – a release of any opioid victim’s pending claims and an injunction foreclosing all future claims against them– without the consent of all the victims. The debtor included the proposal in its bankruptcy reorganization plan and presented it for approval. The plan was objected to, primarily by opioid victims; however, the bankruptcy court entered an order confirming the plan, including the provisions related to the non-debtor discharge of the Sacklers. The district court vacated the decision but was overturned by the Second Circuit which ruled that the reorganization plan was appropriate under the bankruptcy laws. The Supreme Court granted certiorari and addressed “whether a court in bankruptcy may effectively extend to nondebtors the benefits of a Chapter 11 discharge usually reserved for debtors.”
In Harrington v. Purdue Pharma L.P., 144 S.Ct. 2071 (2024), the Supreme Court reversed the Second Circuit, holding that the Bankruptcy Code, specifically section 1123(b)(6), “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 the affected claimants.” The Supreme Court first looked to section 1123(b) of the Bankruptcy Code, which governs what a plan “may” do. Paragraphs 1 through 5 permit a plan to address claims related to the debtor specifically, which is not the issue here. Paragraph 6 is a “catchall phrase” permitting a plan to “include any other appropriate provision not inconsistent with the applicable provisions of this title.” Proponents of the plan and the dissent argued the paragraph permits a plan to include any other term deemed “appropriate” by the bankruptcy judge so long as it is consistent with the purpose of bankruptcy and not expressly forbidden by the Bankruptcy Code. However, the Court ‘s majority opinion explained that when faced with a catchall phrase, the “interpretive principle” of the ejusdem generis canon applies. Therefore, the statute is not afforded the broadest construction but rather interpreted with its surrounding context in mind. The Court reasoned that paragraph 6 could not be read to allow a bankruptcy court to discharge debts of a nondebtor without the consent of non-debtor claimants because that interpretation would grant the bankruptcy court a “radically different” power than that contemplated by the remainder of section 1123(b). Additionally, the Court reasoned that the text of 1123(b)(6) does not lend itself to the proponents’ interpretation because Congress could have written, “everything not expressly prohibited is permitted,” but instead, Congress only permitted “appropriate” provisions in a reorganization plan. Further, the Court looked to the Bankruptcy Code as a whole and found three reasons 1123(b)(6) could not be interpreted to allow the nondebtor discharge: (1) the Bankruptcy Code generally reserves the benefit of a discharge to the debtor; (2) to receive the benefit of a discharge, a debtor is first required to contribute with all its non-exempt assets to the bankruptcy estate (which was not required of the Sacklers) and even then a debtor discharge does not cover fraud claims or claims “alleging ‘willful and malicious injury’” and cannot “affect any [creditor’s] right to trial by jury” for “a personal injury or wrongful death tort claim” (yet, here the reorganization plan would bar all claims including fraud, willful injury, and wrongful death); and (3) the Bankruptcy Code specifically provides an exception allowing a court to issue an injunction barring claims against a nondebtor as to asbestos-related bankruptcies under section 524, indicating that if Congress meant for the exception to extend to other types of bankruptcies they would have also listed those in the Code. The Court then looked to the history of section 1123(b)(6) and again found no basis for a nondebtor discharge without consent of nondebtor claimants. The Court found that the statutes and cases pointed to by the parties generally reserved the benefit of a discharge to a debtor who surrendered its property to the bankruptcy estate. The Court emphasized that the nondebtor was not permitted under any provision of the Bankruptcy Code “to pay less than the Code ordinarily requires and receive more than it normally permits.” Finally, the Court dismissed any policy arguments, stating its only role was “to interpret and apply the law as we find it.”
By Kristin Meurer, [email protected]
Edited By Hayden Mariott, [email protected]