The recent US Supreme Court ruling in Harrington v. Purdue Pharma has invalidated nonconsensual third-party releases in Chapter 11 cases, a ruling that will profoundly influence large-scale restructurings. These releases have been a common fixture in mass tort bankruptcies and large corporate reorganizations, wherein entities connected to the debtor gain immunity from creditor claims.
The Supreme Court’s decision signals that such releases contravene the statutory text of Chapter 11, opting not to address constitutional concerns such as the Due Process Clause and the Takings Clause. This delineation raises questions about the applicability of Chapter 15, which governs the recognition of foreign insolvency proceedings in the US.
One potential outcome of this ruling is that more multinational corporations may opt to file for bankruptcy outside of the US, in jurisdictions where nonconsensual third-party releases are permissible. This maneuver is feasible due to Chapter 15 of the Bankruptcy Code, which allows US courts to recognize and enforce foreign insolvency proceedings, provided that due process is observed.
However, this recognition is not unconditional. Chapter 15 contains a public policy exception, enabling US courts to reject foreign bankruptcy relief that is “manifestly contrary to the public policy” of the United States. Historically, this threshold has been stringent, evidenced by the limited successful invocations since Chapter 15’s enactment. More information on the high burden of this exception can be found here.
The Supreme Court’s avoidance of constitutional questions in the Purdue ruling denotes that arguments for the “public policy” exception under Chapter 15 did not gain traction, leaving a potential loophole for foreign bankruptcy plans that include nonconsensual third-party releases. The ruling’s emphasis was on the lack of statutory basis within Chapter 11 rather than a broader constitutional critique. This distinction underlines the focused parameters of the court’s decision while leaving open questions about the boundary conditions for Chapter 15.
Ultimately, the Harrington v. Purdue Pharma ruling revokes the legal grounding for nonconsensual third-party releases in the US, compelling corporations to consider international insolvency regimes and the nuanced interplay of Chapter 15 for their restructuring strategies. The case, decided on June 27, 2024, marks a pivotal development in bankruptcy law and multinational corporate restructuring.