The Future of Third-Party Releases in Bankruptcy

The United States Supreme Court’s decision in Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), represents one of the most consequential bankruptcy rulings in recent years. By holding that the Bankruptcy Code does not authorize nonconsensual third-party releases in Chapter 11 plans outside the asbestos context, the Court significantly curtailed a restructuring tool that had been widely used in complex corporate and mass tort bankruptcies.

For creditors, lenders, landlords, vendors, and other stakeholders, the implications extend well beyond the opioid litigation that gave rise to the dispute. The ruling materially changes how leverage is exercised in large Chapter 11 cases and reshapes the strategy surrounding plan negotiations.

What the Supreme Court Decided

In Purdue Pharma, the proposed Chapter 11 plan included releases of claims against members of the Sackler family, who had not themselves filed for bankruptcy. In exchange for a multibillion dollar contribution to a settlement trust, the Sacklers would receive protection from civil liability relating to opioid claims.

Although the bankruptcy court, district court, and court of appeals approved the structure, the Supreme Court reversed. The Court held that the Bankruptcy Code does not authorize nonconsensual third-party releases in ordinary Chapter 11 cases.

The Court’s analysis focused on statutory interpretation. While the Code grants debtors powerful restructuring tools and the ability to obtain a discharge, it does not provide a general power to extinguish claims against non-debtors without claimant consent. The Court rejected arguments that Section 105(a) or Section 1123 implicitly authorize such relief. Instead, it emphasized that Congress expressly authorized limited third-party injunctions in asbestos cases under Section 524(g). The absence of similar language elsewhere in the Code was decisive.

What This Means for Creditors

For creditors, the decision materially alters the leverage dynamic in complex reorganizations.

Nonconsensual third-party releases had become common in plans involving:

• Private equity sponsors
  
• Officers and directors
  
• Parent companies and affiliates
  
• Guarantors and insiders
  

In many cases, these releases were justified as necessary to secure settlement contributions or facilitate global resolution. After Purdue Pharma, those releases cannot be imposed over objection in most Chapter 11 cases.

Creditors now retain the right to pursue direct claims against non-debtor parties unless they affirmatively agree to release them. That preservation of claims can significantly enhance negotiating leverage during plan discussions.

Consensual Releases Remain Possible

The decision does not eliminate third-party releases altogether. Consensual releases remain permissible.

Debtors may still:

• Solicit affirmative consent to release provisions
  
• Structure opt-out mechanisms where supported by law
  
• Negotiate settlements that include voluntary claim waivers
  

However, the assumption that a Chapter 11 plan can compel global non-debtor releases as part of confirmation is no longer viable.

Creditors must carefully review ballot language, disclosure statements, and release provisions to ensure they are not unintentionally consenting to broad waivers.

Cross-Border Implications

The ruling also introduces complexity in cross-border restructurings.

In certain Chapter 15 recognition cases, including In re Crédito Real, S.A.B. de C.V., 635 B.R. 649 (Bankr. D. Del. 2022), and In re Odebrecht S.A., 648 B.R. 512 (Bankr. S.D.N.Y. 2023), U.S. courts recognized foreign restructuring plans containing release provisions.

Those courts relied on principles of international comity under Chapter 15, distinguishing the domestic statutory analysis addressed in Purdue Pharma. As a result, while nonconsensual releases are limited in domestic Chapter 11 cases, creditors dealing with multinational debtors must still evaluate whether foreign plans may be recognized in the United States and what protections may accompany that recognition.

Cross-border cases require careful analysis of both U.S. and foreign insolvency frameworks.

Strategic Considerations Going Forward

The decision heightens the importance of early case assessment.

Creditors should evaluate:

• Whether independent claims exist against non-debtor affiliates
  
• Whether guarantors or insiders face direct exposure
  
• How release provisions are structured in proposed plans
  
• Whether opt-out or consent mechanisms are valid and enforceable
  

In some cases, the inability to impose nonconsensual releases strengthens creditor leverage. In others, it may complicate global settlements and prolong litigation.

Debtors, in turn, may increasingly rely on:

• Section 363 asset sales
  
• Structured dismissals
  
• State law assignments for the benefit of creditors
  
• Alternative restructuring mechanisms outside Chapter 11
  

Expect more focused litigation over the scope and enforceability of release language and more precise drafting in plan negotiations.

A Shift in the Bankruptcy Landscape

Harrington v. Purdue Pharma L.P. reinforces that bankruptcy courts operate within statutory limits. For creditors, that clarification restores important rights but also requires vigilance.

Plan confirmation is no longer a vehicle to eliminate claims against non-debtors without consent. Preserving recovery options will depend on careful review, timely objections, and strategic positioning early in the case.If you are a creditor, lender, landlord, vendor, or stakeholder in a Chapter 11 case involving proposed third-party releases, do not assume your rights are protected. Contact us today to evaluate your exposure, preserve your claims against non-debtors, and ensure the plan does not compromise your recovery.