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In Harrington v. Purdue Pharma LP in June, the U.S. Supreme Court held that the U.S. Bankruptcy Code does not authorize nonconsensual releases of nondebtors as part of a Chapter 11 plan. The court narrowly read the Bankruptcy Code's language providing that a plan may "include any other appropriate provision not inconsistent with the applicable provisions of this title," understanding that language in light of its context to not extend to nonconsensual releases of parties who had not themselves become debtors. The court particularly emphasized bankruptcy's simple bargain: A debtor can win a discharge of its debts, but to do so, it must file a bankruptcy petition, making virtually all of its assets available for creditors.

Businesses debtors in bankruptcy often have relationships with directors, officers or affiliated business entities, who are themselves not debtors, and debtors often have stakes in claims brought against those related parties. Accordingly, Chapter 11 plans are not the only context in which a bankruptcy court may be asked to bar a suit against a nondebtor affiliate or insider of the debtor. For example, bankruptcy courts sometimes stay litigation against nondebtors where the litigation could undermine the debtor's reorganization. Does the authority to stay such litigation survive Purdue?

To continue reading Dan Lowenthal and Jonah Wacholder's article in Law360, please click here.