Document Type
Research Memorandum
Publication Date
2025
Abstract
(Excerpt)
Chapter 11 bankruptcy is a process that has allowed many corporations to "work with its creditors to develop a reorganization plan governing the distribution of the estate’s assets[.]" Under 11 U.S.C. §1141(a) once the bankruptcy court confirms the plan, that plan becomes legally binding on the debtor and all creditors—including those who may have not agree to it. "Some plan terms are mandatory, §1123(a); others are optional, §1123(b). [Terms permitting a third-party release] is a provision a debtor may include and a court may approve in a reorganization plan." By presenting a plan to the bankruptcy court as part of a chapter 11 filing, a third-party to the corporation could obtain injunctive relief against current and future litigation claims.
However, in Harrington v. Purdue Pharma L.P., the Supreme Court resolved a circuit split on non-consensual third-party releases by holding that bankruptcy courts cannot approve chapter 11 plans that release non-debtors from tort liability without the consent of the victims. While ruling out non-consensual third-party releases in approved chapter 11 plans, the Supreme Court limited its decision to non-consensual releases, providing little to no guidance on what is a consensual third-party release.
Amongst lower courts, there have been two methods to determining the consensual nature of a third-party release in a chapter 11 plan. Chapter 11 plans can either allow creditors to "opt-in" to being bound by a third-party release or can allow them to "opt-out" to being bound by a third-party release. Additionally, courts may still be able to grant third-party releases through section 363 sales or preliminary injunctions, as these mechanisms do not require creditor consent.
This article analyzes how third-party releases, can be structured moving forward as part of a confirmable chapter 11 plan. Part I of this article explains why opt-in agreements are considered consensual third-party releases. Part II of this article explores how courts assess opt-out agreements, determining whether they now qualify as consensual. Part III of this article outlines how other chapter 11 mechanisms traditionally conducted without creditor consent can provide for a third-party release.