Under Title 11 of the United States Code (the “Bankruptcy Code”), a debtor will generally be released or discharged from certain liabilities. In addition, a plan confirmed under Chapter 11 of the Bankruptcy Code may provide for a “third-party release,” pursuant to which a non-debtor, like a senior officer or shareholder, may be released from certain liabilities by creditors. There is currently a split between United States Courts of Appeals regarding the scope of who can be bound by a release by creditors: some courts permit such a release in the plan where each creditor has affirmatively consented to the release, while others approve nonconsensual third-party releases.
For authority to grant nonconsensual releases, bankruptcy courts generally rely on Section 105(a) of the Bankruptcy Code which provides that:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
This memorandum analyzes the split among the United States Courts of Appeals and what factors each Court of Appeals considers in deciding whether to approve a nonconsensual third-party release. Today, the dispute among circuit courts can be attributed to each circuit’s perspective on the statutory relationship between section 524(e) and section 105(a) of the Bankruptcy Code. Section 524(e) provides that a “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debts.” Courts in the Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits hold the majority view and consistently agree that section 524(e) is not an explicit limitation on the courts’ section 105(a) equitable powers. Whereas the Fifth, Ninth, and Tenth Circuits hold the minority view that the statutory language of section 524(e) provides a strict prohibition against third-party releases. This Circuit split is not new, but rather has been afflicting the federal circuit courts since the early 1980s. However, recently with the public outrage surrounding the Purdue Pharma bankruptcy, and specifically the Sackler family’s role in effectuating the opioid crisis, there is suddenly much publicity and controversy surrounding nonconsensual third-party releases as a matter of law and public policy.