On June 27, 2024, the Supreme Court of the United States (“SCOTUS” or the “Court”) released its widely-anticipated decision in Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P. et al. (“Purdue Pharma”).[1]  In a 5-4 split decision, and in the face of a scathing dissent, the majority of the Court held that the United States Bankruptcy Code (the “Bankruptcy Code”)[2] does not authorize a U.S. bankruptcy court to grant releases in favour of non-debtor third parties, as part of a Chapter 11 plan of reorganization, without the consent of the affected claimants.

Following Purdue Pharma, there is now a vast gulf between the Canadian and American approaches to third-party releases within restructuring proceedings.  The decision is of significant interest not only to insolvency practitioners in both countries, but also multi-national enterprises assessing restructuring strategies and the potential commencement of formal insolvency proceedings.

Third-Party Releases in Restructuring Proceedings

In the ordinary course, restructuring proceedings in the U.S. and Canada may result in the compromise and release of claims against the restructuring debtor.  A “third-party release” goes one step further, resulting in the court-ordered, non-consensual release of claims against a third party, other than the debtor undergoing restructuring. 

Third-party releases have been utilized in Canadian and American restructuring proceedings to shield a variety of stakeholders from liability.  This often takes the form of a quid pro quo in which the released party makes some form of contribution to the restructuring and in return, receives the tangible benefit of a release from certain claims.  In Canadian restructuring proceedings under the Companies’ Creditors Arrangement Act (“CCAA”),[3] the wide-ranging jurisdiction afforded to supervising courts has been used to grant releases in favour of a variety of parties, such as the auditors, directors, officers, or non-filing affiliates of a debtor company, including in contested proceedings where the third-party release has been opposed.[4]  The general rule in CCAA proceedings is that there must be a reasonable connection between the claims being compromised and the restructuring being achieved by the debtors.[5] 

Outside of the relatively uncontroversial practice of granting releases to restructuring professionals participating in the proceedings, third-party releases typically receive a high degree of scrutiny from the parties and the courts.  In assessing whether a third-party release should be approved, Canadian courts have considered factors including whether:

1. the claims to be released are rationally connected to the purpose of the plan;
    
2. the debtors’ restructuring plan can succeed without the releases;
    
3. the parties being released contributed to the plan;
    
4. the releases benefit the debtors as well as the creditors generally;
    
5. the creditors voting on the plan have knowledge of the nature and the effect of the releases;
    
6. the releases are fair, reasonable and not overly-broad; and,
    
7. the claims to be released are relatively strong (militating against granting a release) or relatively weak or speculative (making a release more appropriate).[6]

Accordingly, although the approval of a third-party release in CCAA proceedings is far from a rubber stamp exercise, the underlying jurisdictional basis for the relief is well-established in Canada.

Purdue Pharma

The Purdue saga requires little introduction.  Purdue, the manufacturer of the opioid drug OxyContin, has long been embroiled in litigation regarding Purdue’s role in the opioid epidemic, a significant and ongoing public health crisis.[7]  Purdue’s owners, the Sackler family, have also faced a multitude of claims related to their control of Purdue and Purdue’s alleged deceptive marketing of OxyContin, with the potential for significant personal liability.[8]  The situation came to a head in 2019, when Purdue commenced restructuring proceedings under Chapter 11 of the Bankruptcy Code.

As part of Purdue’s reorganization plan, the Sacklers sought a third-party release, in exchange for a payment of $4.3 billion USD from the Sacklers to Purdue’s bankruptcy estate.[9]  This release would discharge the Sacklers from essentially all liability in relation to two categories of existing and future claims against them: (i) firstly, in relation to funds transferred to them from Purdue in the years preceding its bankruptcy; and, (ii) secondly, in relation to claims brought by opioid victims against the Sacklers.[10]  The U.S. Bankruptcy Trustee, and various opioid claimants, opposed the release as overly broad and fundamentally unfair, depriving claimants of their rights to a trial and precluding the possibility of a better settlement.  Other parties, including many opioid claimants, supported Purdue’s reorganization plan and, by extension, the release, as the best available means of recovery.[11]

The majority in Purdue Pharma took a narrow, textualist approach to jurisdiction under the Bankruptcy Code, holding that:

1. the Bankruptcy Code does not expressly contemplate the discharge or release of claims against parties other than the debtor;[12] and,
    
2. section 1123(b)(6) of the Bankruptcy Code, which permits a reorganization plan to “include any other appropriate provision not inconsistent with the applicable provisions of this title,”[13] is constrained to provisions affecting the debtor and its property.[14] As a result, a reorganization plan cannot sanction the extinguishment of claims against non-debtors, without the consent of affected claimants.[15]

While the decision in Purdue Pharma resolved long-standing uncertainties regarding the jurisdiction to grant third-party releases in U.S. proceedings, the holding is narrow in scope.  The SCOTUS majority was careful to clarify that Purdue Pharma does not call into question consensual third-party releases, nor settle the law with respect to a host of corollary issues, including whether it would be appropriate to unwind previously-approved reorganization plans containing third-party releases which have been substantially consummated.[16] 

Takeaways and Future Developments

Purdue Pharma has already attracted attention from insolvency and restructuring professionals outside of the U.S.  It remains to be seen whether, and to what extent, the outcome will influence restructuring proceedings north of the border.  The narrow interpretation of the Bankruptcy Code in Purdue Pharma is in marked contrast with the approach of Canadian courts in considering the limits of jurisdiction under the CCAA.  As the decision is inherently constrained by the text of the Bankruptcy Code itself, which differs from the language of the CCAA, it is doubtful that Purdue Pharma will have any significant impact on the availability of third-party releases in Canadian proceedings.

In circumstances where there is flexibility in choosing the jurisdiction of the restructuring proceedings, and obtaining a third-party release is anticipated to be critical to obtaining support for the debtors’ restructuring plan, there may be increased interest in seeking relief from non-U.S. jurisdictions in which third party releases are available in appropriate circumstances.  For instance, multi-national debtor companies with operations in Canada and the United States may seek to use Canadian proceedings under the CCAA to implement a plan of arrangement which includes third-party releases. That could be followed by efforts to seek recognition of the CCAA proceedings pursuant to Chapter 15 of the Bankruptcy Code.  The Purdue decision does not appear to close the door to this kind of relief and, in appropriate cases, this may be a viable means to give effect to third party releases in cross-border proceedings.

[1] Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P. et al., Docket No. 23-124, 603 U.S.1 (2024) [Purdue Pharma].

[2] 11 U.S.C. [Bankruptcy Code].

[3] R.S.C. 1985, c. C-36.

[4] For instance, in Re Green Relief Inc., 2020 ONSC 6837 [Green Relief]; and Lydian International Limited (Re), 2020 ONSC 4006 [Lydian].

[5] Re Metcalfe & Mansfield Alternative Investments II Corp, 2008 ONCA 587 at paras. 69 - 70.

[6] Green Relief at paras. 27 – 30, citing Lydian at para. 54.

[7] Purdue Pharma at pp. 2 – 3 (Gorsuch J., for the majority).

[8] Purdue Pharma at pp. 3 – 4 (Gorsuch J., for the majority).

[9] Purdue Pharma at p. 3 – 4, 14 – 15 (Gorsuch J., for the majority).

[10] Purdue Pharma at p. 4 (Gorsuch J., for the majority).

[11] Purdue Pharma at pp. 5, 17 – 18 (Gorsuch J., for the majority); pp. 2 – 4 (Kavanaugh J., in dissent).

[12] Purdue Pharma at p. 7 (Gorsuch J., for the majority).

[13] Bankruptcy Code, §1123(b)(6).

[14] Purdue Pharma at pp. 9 – 11 (Gorsuch J., for the majority).

[15] Purdue Pharma at pp. 13, 19 (Gorsuch J., for the majority).

[16] Purdue Pharma at p. 19 (Gorsuch J., for the majority).