After Purdue Pharma: The Future of Nonconsensual Third-Party Releases in Chapter 15 Proceedings
Posted on Feb 16, 2024Gillian Ho
On December 4, 2023, the Supreme Court heard Harrington v. Purdue Pharma L.P. (“Purdue Pharma”), where they were asked to consider whether the Bankruptcy Code grants bankruptcy courts—in the adjudication of domestic cases—the authority to approve releases that would extinguish direct claims held against non-debtor third parties without the claimants’ consent. This hearing came on the heels of increased public scrutiny on bankruptcy courts following recent high-profile cases involving the Boy Scouts of America[1], USA Gymnastics[2], Alex Jones’s Infowars[3], and the myriad of clergy abuse cases from the Catholic Church.[4] Yet few are aware that certain key entities and individuals singled out for their roles as facilitators of the reported crimes have been or will be silently discharged from their liabilities via a bankruptcy vehicle known as a nonconsensual, third-party release. In exchange for a financial settlement or any additional form of compensation stipulated in the bankruptcy agreement, these parties are shielded from any related lawsuits before they even reach the court—and dissenting victims are not given the opportunity to opt out of this binding agreement.
Although the spotlight is currently trained on the fate of third-party releases in the domestic Chapter 11 proceedings, the Purdue Pharma ruling may affect the availability of nonconsensual third-party releases in the Chapter 15 proceedings. If the Supreme Court categorically prohibits nonconsensual, third-party releases or is persuaded by the public policy issues raised in recent Chapter 11 cases, practitioners may invoke the decision in arguing for the exclusion of such releases when bankruptcy courts consider the enforcement of foreign restructuring plans.
Nonconsensual Third-Party Releases in Chapter 15 Proceedings
Under Chapter 15 of the Bankruptcy Code, foreign representatives of bankruptcy proceedings can seek recognition and assistance from U.S. bankruptcy courts in enforcing against a debtor’s U.S.-based assets, thus gaining access to robust, debtor-friendly remedies including third-party releases. Any application for recognition and enforcement must satisfy 11 U.S.C. §§ 1515 and 1520, after which the appropriateness of post-recognition relief would be determined by the court.[5]
The statutory authority to grant nonconsensual, third-party releases in Chapter 15 proceedings comes from a completely separate section of the Bankruptcy Code from that in Chapter 11 cases. It arises from the court’s discretion to provide “appropriate relief” under § 1521 or “additional assistance” that may not otherwise be available via the Bankruptcy Code or United States law under § 1507(b).[6] As such, even the Fifth Circuit, which has categorically prohibited third-party releases in Chapter 11 proceedings outside the asbestos context, has acknowledged that such prohibitive stances in Chapter 11 cases do not preclude the grant of nonconsensual, third-party releases in Chapter 15 proceedings.[7]
When determining whether to approve the releases, the Second Circuit has held that the relevant inquiry is not whether the foreign order could be enforced under an equivalent Chapter 11 case under U.S. law, but whether recognition of the foreign court’s decision would be proper pursuant to principles of the enforcement of foreign judgments, international comity, and the public policy under Chapter 15.[8] The enforcement of third-party releases is predicated on the authorization of a similar remedy in the original foreign proceeding and the demonstration of the justification for third-party releases in the record.[9] Provided that the foreign representative satisfies the requirements under § 1507(b) in addition to those for the application for recognition and enforcement, bankruptcy courts are empowered to grant third-party releases in Chapter 15 proceedings.
§ 1506 Public Policy Exception to Granting Nonconsensual Third-party Releases in Chapter 15 Proceedings
In addition to satisfying the statutory requirements outlined above, a crucial limitation to the court’s ability to grant enforcement is if doing so would be manifestly contrary to the public policy of the United States.[10] While a foreign representative is not required to make a showing that public policy will not be violated, this is an issue that can be raised by an interested party or by the court sua sponte. The use of § 1506 is restricted to exceptional circumstances concerning the most fundamental policies of the United States.[11]
When determining whether to apply § 1506, courts will examine whether (1) the foreign proceeding was procedurally unfair; and (2) the application of foreign law or the recognition of a foreign main proceeding under Chapter 15 would “severely impinge the value and import” of a U.S. statutory or constitutional right, such that granting comity would “severely hinder United States bankruptcy courts' abilities to carry out ... the most fundamental policies and purposes of these rights.”[12] A difference in foreign law and U.S. law does not necessarily mean that recognition would be manifestly contrary to U.S. public policy, nor the absence of certain procedural or constitutional rights.[13]
So far, the use of the § 1506 public policy exception for prohibiting nonconsensual third-party releases has only gained traction in the Fifth Circuit—yet it remains unclear whether this argument would succeed on its own. In In re Vitro, the Northern District of Texas applied the Fifth Circuit’s decree that “the protection of third-party claims in a bankruptcy case is a fundamental policy of the United States [under § 524],” and determined that since the plan in question “[did] not recognize and protect such rights, [it] is manifestly contrary to such policy of the United States and cannot be enforced here.”[14] However, the public policy consideration was one of three reasons for which the court denied enforcement—the court also raised concerns regarding insufficient protection of the interests of creditors in the United States and an imbalance between the interests of the creditors and the debtor (as well as its non-debtor subsidiaries) that precluded the plan from enforcement under §§ 1507, 1521, and 1522.[15]
On appeal, the Fifth Circuit stated in obiter that the prohibition of third-party releases under Fifth Circuit precedent does not preclude another U.S. bankruptcy court from enforcement under § 1507 as a permissible form of “additional assistance” not otherwise available under the Bankruptcy Code or U.S. law. While the Fifth Circuit did not reach the question of “whether the [Mexican reorganization] plan would be manifestly contrary to a fundamental public policy of the United States” under § 1506, this signals the potential influence of a Circuit’s stance on nonconsensual third-party releases in Chapter 11 cases on a bankruptcy court’s application of the public policy exception in Chapter 15 cases.[16] It remains uncertain whether the existence of third-party releases in a foreign proceeding would automatically trigger the § 1506 public policy exception in Circuits that categorically prohibit them under Chapter 11 circumstances.
The Impact of Purdue Pharma on Nonconsensual Third-Party Releases in Chapter 15 Proceedings
Given that the authority to grant nonconsensual, third-party releases in Chapter 11 and 15 proceedings are separate and distinct within the Bankruptcy Code, the Purdue Pharma ruling will not directly interfere with the availability of such releases in Chapter 15 proceedings. Foreign representatives can still request for enforcement of such releases under § 1507’s “additional relief.”[17]
Instead, the ruling may come into play under § 1506’s “manifestly contrary to public policy” exception. The Northern District of Texas has already expressed how fundamental the protection of third-party claims is. Moreover, the U.S. Trustee and several amici have submitted additional constitutional concerns raised by nonconsensual, third-party releases, primarily under the Fifth (one’s right to their “day in court”) and Seventh Amendments (one’s right to a jury trial).[18] If the Supreme Court finds such arguments persuasive—even if in dicta or in the absence of a categorical prohibition of the releases—future practitioners are likely to invoke such reasoning to show that fundamental policies of the United States would be in jeopardy.
While the grant of nonconsensual, third-party releases may result in a clash between foreign laws and American stances on constitutional issues, it is unlikely that these distinctions would be deemed so “manifestly contrary” to fundamental policies of the United States where nonconsensual, third-party releases would be categorically denied in Chapter 15 proceedings. Firstly, foreign judgments “are generally granted comity as long as the proceedings in the foreign court ‘are according to the course of a civilized jurisprudence, i.e. fair and impartial.’”[19] Even if the Supreme Court ruled to categorically prohibit nonconsensual, third-party releases in Chapter 11 proceedings, unilaterally opposing the enforcement of all foreign schemes that have nonconsensual, third-party releases as part of the approved relief would be inconsistent with the spirit of cooperation between jurisdictions that underscores Chapter 15.
Moreover, bankruptcy courts have previously ruled that a difference between foreign law and U.S. law does not mean that recognition would be manifestly contrary to U.S. public policy. In Black Gold S.A.R.L., the Ninth Circuit did not believe that the differences between Monegasque and U.S. bankruptcy laws (including the lack of a concept equivalent to abandonment, how the automatic stay does not terminate once the insolvency case is closed, and the absence of the legal theory of alter ego) should bar recognition under §1506.[20] While one could argue that the issue of protecting third-party claims is more serious and warrants a bar to recognition, past rulings have not indicated that it is a “matter of fundamental importance for the United States” that would compel invoking § 1506. Since even the Fifth Circuit—which already categorically prohibits nonconsensual third-party releases in Chapter 11 proceedings—has expressed reluctance over the idea that third-party claims are a fundamental policy that invokes the § 1506 public policy exception, courts are more likely to continue taking a case-by-case approach when assessing the enforcement of foreign schemes that involve nonconsensual, third-party releases.
As such, U.S. bankruptcy courts will likely continue their case-by-case scrutiny of the appropriateness of granting such assistance to foreign courts’ administration of cross-border restructuring proceedings.
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[1] Boy Scouts' $2.4 billion bankruptcy plan upheld by judge, CBS News Texas (March 28, 2023), https://www.cbsnews.com/texas/news/boy-scouts-2-4-billion-bankruptcy-plan-upheld-by-judge/.
[2] Nancy Armour, USA Gymnastics, survivors reach agreement on proposed $425 million settlement, USA TODAY (Aug. 31, 2021), https://www.usatoday.com/story/sports/2021/08/31/usa-gymnastics-abuse-survivors-reach-425-million-settlement-agreement/5673248001/.
[3] Derrick Bryson Taylor, Alex Jones’s Infowars Files for Bankruptcy, N.Y. TIMES (Apr. 18, 2022), https://www.nytimes.com/2022/04/18/us/alex-jones-infowars-bankruptcy.html.
[4] Brief of Amicus Curiae U.S. Conference of Catholic Bishops in Support of Debtor Respondents at 3–5, Harrington v. Purdue Pharma L.P., No. 23-124 (filed October 27, 2023).
[5] See U.S.C. §§ 1515, 1520.
[6] See 11 U.S.C. §§ 1521, 1507.
[7] See In re Vitro S.A.B. de CV, 701 F.3d 1031 (5th Cir. 2012).
[8] In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685, 694 (Bankr. S.D.N.Y. 2010).
[9] See In re PT Bakrie Telecom Tbk, 601 B.R. 707 (Bankr. S.D.N.Y. 2019) (noting that releases in a foreign proceeding do not be identical to those that a U.S. court would approve in a chapter 11 case).
[10] See 11 U.S.C. § 1506.
[11] See In re Ran, 607 F.3d 1017, 1021 (5th Cir. 2010) (citing In re Iida, 377 B.R. 243 (9th Cir. BAP 2007)). “[The public policy exception should only be] invoked only under exceptional circumstances concerning matters of fundamental importance for the United States.” See also Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 139 (2d Cir. 2013) (finding that the legislative history urges a narrow interpretation as the “word ‘manifestly’ in international usage restricts the public policy exception to the most fundamental policies of the United States” (quoting H.R. Rep. No. 109-31, pt. 1, at 109 (2005), as reprinted in 2005 U.S.C.C.A.N. 88, 171)).
[12] In re Qimonda AG Bankr. Litig., 433 B.R. 547, 568–69 (Bankr. E.D.Va. 2010).
[13] See Ad Hoc Group of Vitro Noteholders v. Vitro S.A.B. de C.V. (In re Vitro S.A.B. de C.V.), 701 F.3d 1031, 1069 (5th Cir. 2012) (citing In re RSM Richter Inc. v. Aguilar (In re Ephedra Products Liability Litigation), 349 B.R. 333, 336 (S.D. N.Y. 2006)) (“[F]ederal courts have enforced against U.S. citizens foreign judgments rendered by foreign courts for whom the very idea of a jury trial is foreign.”).
[14] In re Vitro, S.A.B de C.V., 473 B.R. 117, 132 (Bankr. N.D.Tex 2012).
[15] Id.
[16] In re Vitro, 701 F.3d at 1070.
[17] The Fifth and Second Circuit have both stated that bankruptcy courts could still grant enforcement of such releases as a permissible form of “additional assistance” not otherwise available under the Bankruptcy Code or U.S. law.
[18] See Brief for “Texas Two-Step” Victims as Amici Curiae Supporting Petitioner, Harrington v. Purdue Pharma L.P., No. 23-124.
[19] In re Ephedra, 349 B.R. at 336 (citing and quoting the seminal case on comity, Hilton v. Guyot, 159 U.S. 113, 205–06 (1895)).
[20] In re Black Gold S.A.R.L., 635 B.R. 517, 528 (9th Cir. BAP 2022) (“differences in insolvency schemes do not, without more, justify a finding that enforcing one State's laws would violate the public policy of another State”).