One of the time-honored principles of the Bankruptcy Code (the “Code”) is that, with limited exceptions, only debtors actually in bankruptcy proceedings can avail themselves of the benefits of the Code. This generally means that non-debtors cannot take advantage of the automatic stay and are not entitled to a discharge (release) of their liabilities.  Recently, however, there has been a trend in the courts for bankruptcy judges to approve Chapter 11 plans that have provided for the release of non-debtor third parties despite the absence of consent from the creditors of those third parties. This trend has raised eyebrows among scholars and now appears to be headed to the U.S. Supreme Court for a “final” resolution.

The rationale behind the objections to non-consensual third-party releases is simple. If a creditor wishes to invoke the Code as a shield against liability, it should play by its rules. That includes reporting and disclosure requirements, limitations on specific activities, and other typical debtor constraints. Otherwise, the non-debtor could behave in contravention of the spirit and letter of the bankruptcy laws yet still receive its benefits.

A perfect example of why this treatment has come under scrutiny is the Purdue Pharma bankruptcy. Purdue produced and marketed OxyContin, a prescription opioid that ignited and fueled the opioid epidemic. The Sackler family-owned Purdue and pledged $6 billion to the Purdue Chapter 11 reorganization fund in exchange for a release from all opioid-related civil liability. There were probably hundreds of such suits, including suits by at least 24 different states. The total amount of claims was perhaps hundreds of billions of dollars.

A federal appeals court signed off on the Chapter 11 plan, including the $6 billion pledge and the releases, which no doubt released claims against the Sackler’s far above their “generous” contributions to the people it had helped kill or make sick. In August, however, the U.S. Supreme Court temporarily blocked the bankruptcy deal. The Supreme Court will soon hear the case and presumably resolve the widely acknowledged circuit court split over the issue of third-party releases.

There is vigorous opposition to the Sackler deal. One expert opined that the Sacklers “get all the benefit with none of the costs.” Also questionable is the ability of a bankruptcy court to bind the multitude of claimants to a deal they did not expressly consent to. There is concern that allowing third-party releases will open the door for extremely wealthy and powerful people to operate companies without regard for the public welfare by providing immunity to its owners. The Sacklers are the poster children for this fear, given the severity and breadth of the opioid crisis and the perception that the Sacklers were well aware of the harm they were causing in pursuit of massive profits.

As they say, bad facts make bad law. But bad people may make good law, and if you have seen Dopesick, chances are you believe the Sacklers are bad people who did terrible things. Ruling against the Pharma/Sackler deal would not eliminate the ability of the bankruptcy court to afford specific, limited relief to third parties under appropriate circumstances under 11 U.S.C. §§105(a) and 1123(b)(6). But it would eliminate the wholesale relief approved by the lower court in the Purdue case.

Finally, note that a bill in Congress denominated the “Nondebtor Release Prohibition Act” would prohibit the discharge of non-debtor third parties’ liabilities to creditors without consent. If Congress ever acts on this, it will significantly limit the scope and utility of these releases.

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