Purdue Prohibition of Nonconsensual Third-Party Chapter 11 Plan Releases Does Not Apply to Bankruptcy Asset Sales

The U.S. Supreme Court's 2024 ruling in the Purdue Pharma bankruptcy cases generally prohibiting nonconsensual releases of non-debtors in chapter 11 plans sent shockwaves through the restructuring community. With one fell swoop, it appeared to upend long-standing practice facilitating successful chapter 11 cases premised upon releases of third parties in exchange for funding to pay creditor claims and achieve confirmation of restructuring or liquidation plans. Since Purdue, courts have been called upon to interpret the scope of the ruling, including whether it applies outside the context of chapter 11 plans. The U.S. Bankruptcy Court for the Eastern District of Virginia addressed this issue in In re Hopeman Brothers Inc., 667 B.R. 101 (Bankr. E.D. Va. 2025). It joined two other bankruptcy courts in concluding that Purdue simply does not apply to injunctions or releases approved as part of bankruptcy settlements or asset sales under section 363 of the Bankruptcy Code. 

Purdue 

In 2024, the U.S. Supreme Court handed down a long-awaited ruling regarding the validity of nonconsensual third-party releases in the chapter 11 plan of pharmaceutical company Purdue Pharma, Inc. and its affiliated debtors. In Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P., 603 U.S. 204 (2024), a 5–4 majority of the Court reversed and remanded a 2023 ruling by the U.S. Court of Appeals for the Second Circuit affirming the bankruptcy court's order confirming the debtors' chapter 11 plan. According to the majority, no provision in the Bankruptcy Code other than section 524(g) (providing for the creation of a trust for the payment of asbestos personal injury claims) authorizes a chapter 11 plan to release the claims of nonconsenting creditors against non-debtor entities absent full satisfaction of such claims. 

In so ruling, the majority reasoned that: 

• The "catchall" provision in section 1123(b)(6) of the Bankruptcy Code stating that a chapter 11 plan "may" also "include any other appropriate provision not inconsistent with the applicable provisions of this title" must be construed narrowly in light of its surrounding context and read to "embrace only objects similar in nature" to the specific examples preceding it, all of which deal with the relationship between a debtor and its creditors, rather than the "radically different" power to discharge the debts of a non-debtor without the consent of affected creditors;
• The proponents of a chapter 11 plan cannot evade the Bankruptcy Code's general limitation that a discharge applies only to debtors who place "substantially all of their assets on the table" and its exclusion from discharge of debts based on "fraud" or those alleging "willful and malicious injury" simply "by rebranding the discharge a 'release'"; and
• If lawmakers had intended "to reshape traditional practice so profoundly" in the Bankruptcy Code, compared to its predecessor statutes, by "extending to courts the capacious new power the plan proponents claim, one might have expected them to say so expressly somewhere" in the Bankruptcy Code itself. 

The majority emphasized that nothing in its ruling should be construed to call into question consensual releases in a bankruptcy reorganization plan, and further declined to express a view on what qualifies as a consensual release, observing that those sorts of releases pose different questions and may rest on different legal grounds. Similarly, the majority declined to pass upon a plan that provides for full satisfaction of claims against a non-debtor. The majority also expressly cabined its ruling to the situation before it, noting that "we hold only that the [B]ankruptcy [C]ode does not authorize a release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants." Id. at 206.  

The dissent faulted the majority opinion for being both "wrong on the law" and devastating for opioid victims. According to the dissent, the majority ignored the reality of shared assets (e.g., insurance) and shared liability (e.g., indemnity) and disregarded a goal of bankruptcy, which is to ensure the fair and equitable recovery for creditors, instead promoting a "race to the courthouse." Id. at 227 (dissenting opinion).  

The reach of Purdue beyond nonconsensual third-party releases in a chapter 11 plan has been a matter of dispute. The bankruptcy court weighed in on the debate in Hopeman. 

Hopeman 

Hopeman Brothers, Inc. (the "debtor") operated as a "ship joiner" subcontractor to outfit vessel interiors. It ceased operating in the 1980s but maintained a corporate presence to deal with approximately 126,000 personal injury claims arising from its use of products containing asbestos. Over the years, the debtor purchased asbestos-related insurance from various carriers. The coverage periods for most of the policies (both primary and excess) expired in 1984. 

In 1985, the debtor and some of its insurers entered into agreements whereby the signatory insurers agreed to share pro rata liability for asbestos-related claims. On June 30, 2024, after coverage under most of its policies was exhausted, the debtor filed for chapter 11 protection in the Eastern District of Virginia. At that time, fewer than 3,000 of the asbestos personal injury claims against the debtor remained unresolved. 

In July 2024, the debtor sought bankruptcy court approval of a settlement with certain insurers (the "settling insurers") with which there were coverage disputes. Under the proposed settlement: (i) the settling insurers would pay the debtor a specified sum to fund a chapter 11 plan liquidation trust to pay asbestos claimants; (ii) in exchange, the settling insurers would be released and discharged from all claims related to the policies; (iii) the policies would be sold back to the debtor under section 363 of the Bankruptcy Code; and (iv) asbestos claimants would be enjoined from asserting claims against the settling insurers arising from the policies. 

The Office of the U.S. Trustee and certain other parties (collectively, the "objectors") opposed the proposed settlement. Among other things, the objectors argued that the prohibition in Purdue of nonconsensual third-party releases in chapter 11 plans also applies to section 363 sales. The bankruptcy court overruled the objections and approved the settlement. In doing so, the court found that the debtor had satisfied the standard for the approval of a settlement under Rule 9019 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules) and relevant case law. The court also made detailed findings that the sale of the insurance policies back to the settling insurers satisfied the standard for approval of an asset sale under section 363 of the Bankruptcy Code. 

The objectors appealed the order approving the settlement and sale, and moved for a stay pending resolution of the appeal. 

The Bankruptcy Court's Ruling 

The bankruptcy court denied the motion for a stay pending appeal. 

U.S. Bankruptcy Judge Keith L. Phillips explained that, in accordance with Bankruptcy Rule 8007 and relevant case law, to obtain a stay pending appeal, a party must show: (i) a likelihood of success on the merits; (ii) irreparable injury in the absence of a stay; (iii) the absence of harm to other parties if a stay were granted; and (iv) the public interest would be served by the issuance of a stay. Hopeman, 667 B.R. at 105 (citing Long v. Robinson, 432 F.2d 977, 979 (4th Cir. 1970)). 

According to Judge Phillips, the objectors failed to demonstrate that they were likely to prevail on the appeal because their reliance on Purdue as erecting a bar to third-party injunctions in connection with sales free and clear of liens under section 363 was misplaced. The bankruptcy court rejected the "novel" argument that, because in the aftermath of Purdue, the propriety of granting an injunction against third parties or a release to the seller in a section 363 sale is an issue of first impression in the Fourth Circuit, the court should stay its ruling until it could be reviewed by an appellate court. 

Injunctions and releases, Judge Phillips explained, have long been a feature of "free and clear" bankruptcy asset sales, and the power to grant such relief is inherent within the bankruptcy court's authority to authorize such sales. Although section 363(f) of the Bankruptcy Code expressly provides that a proposed sale satisfying one of the specified conditions is free and clear of any competing interest in the sold asset, Judge Phillips wrote, "an actual injunction barring creditors from suing a purchaser of estate assets is sometimes necessary and appropriate to give the 'free and clear' aspect of § 363(f) meaning." Id. at 106. The source of the court's authority to grant such injunctive relief, the court emphasized, is section 105(a) of the Bankruptcy Code, which gives a bankruptcy court the power to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." 

The bankruptcy court also noted that a debtor's liability insurance policies are property of its bankruptcy estate that may be sold under section 363 with court approval. Judge Phillips explained that in mass tort bankruptcy cases, debtors and their insurers often enter into settlement agreements characterized as "buyback" transactions to provide funding for the payment of tort claimants, and that such a buyback, followed by termination of the policy, is considered a "sale" of the policy by the debtor to the insurer that can be approved under sections 363(b) and 363(f) and/or pursuant to Bankruptcy Rule 9019 as a settlement. Id. (citing In re Chemtura Corp., 2009 WL 10806754 (Bankr. S.D.N.Y. Oct. 29, 2009); In re Boy Scouts of Am. and Delaware BSA, LLC, 642 B.R. 504, 569–70 (Bankr. D. Del. 2022) (supplemented by Case No. 20-10343 (LSS), 2022 WL 20541782 (Bankr. D. Del. Sept. 8, 2022)); In re USA Gymnastics, No. 18-09108-RLM-11, Doc. No. 1776 at 16 (Bankr. S.D. Ind. Dec. 16, 2021) (plan confirmation order)). 

If a creditor were allowed to independently pursue its claim against the debtor's property after it had been sold under section 363, Judge Phillips wrote, it "would have a chilling effect on the sale of assets in bankruptcy." Id. at 107.  

The bankruptcy court noted that the propriety of enjoining claims against the purchaser/settling insurer in connection with a buyback sale and settlement with insurers was recognized in at least two recent (post-Purdue) court decisions. See In re Roman Cath. Diocese of Rockville Centre, 665 B.R. 71, 74 (Bankr. S.D.N.Y. 2024); In re Bird Global, Inc., No. 23-20514-CLC (Bankr. S.D. Fla. Aug. 2, 2024), aff'd sub nom. Wright v. Bird Global, No. 24-CV-23086-RAR (S.D. Fla. Aug. 21, 2024).  

In Bird, the debtor filed an emergency motion to stay a chapter 11 plan confirmation order that contained an insurance settlement provision similar to the one proposed in Hopeman. The bankruptcy court in Bird denied the motion. In so ruling, it concluded that Purdue did not preclude the issuance of releases or injunctions in connection with negotiated settlements governed by Bankruptcy Rule 9019 or the sale of a debtor's insurance policies under section 363. In Rockville Centre, the bankruptcy court similarly approved a settlement agreement containing releases and injunctions after rejecting the argument that Purdue applied in the context of a section 363 sale, as distinguished from confirmation of a chapter 11 plan. 

According to the court in Hopeman, the Supreme Court in Purdue specifically cabined its holding to nonconsensual third-party releases in chapter 11 plans, and "[n]othing in the opinion suggests that the protections afforded a buyer under § 363, including the ability of the purchaser to obtain the asset free of the claims of the debtor's creditors, were intended to be abrogated." Hopeman, 667 B.R. at 108. 

Therefore, the bankruptcy court ruled that the objectors had failed to demonstrate a likelihood of success on the merits of its appeal: 

Presenting a legal position that no other court has accepted but no court in the presiding court's jurisdiction has rejected may remotely create an issue of first impression. However, if the position has little merit, there is no "likelihood of prevailing." Here, based on the law, the language of Purdue, and current precedent, [the objectors have] failed to establish that [they are] likely to succeed on appeal, and [they have] therefore failed to satisfy the first requirement for a stay. 

Id. at 109. The court also noted that, despite the purported importance of the issue and the lack of controlling precedent, the objectors never sought to appeal the ruling directly to the Fourth Circuit. Id. at 105 n.7.  

The bankruptcy court found that the objectors also failed to satisfy the other requirements for a stay pending appeal. Specifically, the objectors did not present any evidence that they would be irreparably harmed absent a stay, whereas the debtor would be substantially harmed if the proposed settlement/sale were scrapped, and litigation costs associated with contesting the issues settled would diminish the amount available for distribution to creditors. In addition, the court concluded, "public policy is best served by preserving the finality of sales in bankruptcy." Id. at 110.  

Outlook 

Although Hopeman involved a request for a stay pending appeal, the bankruptcy court's ruling regarding the movants' failure to demonstrate a likelihood of success on the merits of the appeal is significant. The decision (and two other recent rulings on which the court relied) limit the reach of the Supreme Court's holding in Purdue to preclude nonconsensual third-party releases or injunctions in chapter 11 plans. According to all three courts, in keeping with the strong bankruptcy policy of finality and certainty in free-and-clear bankruptcy estate sales, Purdue does not prohibit injunctive relief or releases protecting a purchaser in a bankruptcy asset sale under section 363. 

The aftermath of Purdue has been a flurry of court rulings, principally from bankruptcy courts, interpreting and applying the Supreme Court's decision. Most of these cases address whether proposed releases or injunctions in a chapter 11 plan are consensual and therefore not barred by Purdue. See, e.g., In re Lavie Care Centers, LLC, 2024 WL 4988600, at *11 (Bankr. N.D. Ga. Dec. 5, 2024) (ruling that a chapter 11 plan's opt-out mechanism created a consensual release permitted by Purdue and noting "an overwhelming majority of cases find that a creditor's vote to accept a plan containing a third-party release (like the Plan) makes the release consensual"); In re Smallhold Inc., 665 B.R. 704 (Bankr. D. Del. 2024) (ruling that a non-debtor release in a chapter 11 plan was consensual and that a creditor would be bound by the release if the creditor voted on the plan but did not opt out, but that a creditor that did not vote would not be bound); In re Robertshaw US Holding Corp., 662 B.R. 300 (Bankr. S.D. Tex. 2024) (concluding that Purdue did not change prevailing Fifth Circuit law and holding that consensual third-party releases in a liquidating chapter 11 plan were appropriate and afforded affected parties constitutional due process, where creditors were given detailed notice about the plan and the plan objection and voting deadlines, ballots gave creditors the opportunity to opt out, the third-party release language was specific enough to put releasing parties on notice of the types of claims released, and the third-party release was an integral part of the plan and a condition of related settlements). 

Hopeman illustrates that the debate is far from over regarding the ramifications and scope of Purdue. Nevertheless, the decision is clearly a positive development for parties to bankruptcy asset sales as well as other stakeholders for whom such sales provide funding to pay creditors or facilitate the confirmation of a plan.  

Jones Day represented the Roman Catholic Diocese of Rockville Centre in its chapter 11 case.