Slamming The Backdoor On Non-Consensual Third-Party Releases

• Published date: 14 May 2025
• Law Firm: Proskauer Rose LLP
• Author: Mr Daniel Desatnik, Maximilian Greenberg and George LePage

Non-Consensual Third-Party Releases are Not Permissible in Section 363 Sales or Rule 9019 Settlements, Regardless of the Suggestions of Some Bankruptcy Courts

Key Takeaways:

• In Harrington v. Purdue Pharma L.P. ("Purdue"), the Supreme Court held that the Bankruptcy Code does not authorize the practice of forcing creditors to release non-debtor third-parties under a chapter 11 plan of reorganization without their consent.
• Recent decisions by Bankruptcy Courts, however, appear to open a "backdoor" to obtaining non-consensual third-parties releases by suggesting that Purdue's prohibition of non-consensual third-party releases is limited to plan confirmation and does not extend to 363 sales and negotiated settlements.
• As detailed below, it would be folly to read Purdue's prohibition on non-consensual third-party releases as limited to chapter 11 plan confirmation because the Bankruptcy Code does not authorize the practice in any context (outside of asbestos cases), and if it did, such practice would be unconstitutional.

The Issue:

The Supreme Court held in Purdue that "the bankruptcy code 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" (i.e. non-consensual third-party releases where the claims are not fully satisfied).¹ In so holding, the Supreme Court expressly confined the scope of its ruling to the practice of non-consensual releases in the chapter 11 context, and deliberately left open (i) what may qualify as a consensual release and, (ii) what could be deemed full satisfaction of claims against a third-party.²

In the quest to find a workaround for Purdue's prohibition on non-consensual third-party releases, lawyers have attempted to seize on the perceived narrowness of Purdue's holding, arguing that it is limited to a plan of reorganization under chapter 11, and does not apply to asset sales free and clear of liens of interests under Bankruptcy Code section 363 or settlements under Bankruptcy Rule 9019. Three recent Bankruptcy Court decisions appear, at first blush, to embrace these arguments by overruling objections based on Purdue grounds to sales and settlements. On closer inspection, however, the cases did not implicate true non-consensual third-party releases at issue in Purdue, and any suggestion that non-consensual releases are permitted outside of the plan context is incorrect.³ As discussed in this article, the reasoning of Purdue is equally applicable outside of the chapter 11 plan context: non-consensual releases are barred in all contexts (except for asbestos cases under section 542(g)), and to the extent not barred, they would be unconstitutional.⁴

Purdue's Holding Applies to Assets Sales and Negotiated Settlements:

Following the Purdue decision, three Bankruptcy courts appear to have found its central ruling inapplicable to third-party releases in certain situations.⁵ In In re Hopeman Brothers, Inc. 2025 WL 297652 (Bankr. E.D. Va. Jan. 24, 2025) ("Hopeman") the Bankruptcy Court for the Eastern District of Virginia rejected a motion to stay pending appeal of an order approving a settlement between the debtor and certain of their insurance carriers.⁶ Under the settlement agreement, the insurers agreed to pay a "sum certain" to the debtor to establish a liquidation trust, which would be used to pay holders of asbestos-related claims.⁷ In return, the insurers would be allowed to buy back their policies from the debtor under section 363 of the Code.⁸ The agreement also contained an injunction which "would operate to prevent all persons who hold or assert, or may in the future hold or assert, any claim against the Debtor or the Certain Settling Insurers[.]"⁹ Certain parties argued this injunction violated Purdue's restriction on non-consensual third-party releases.¹⁰

The court disagreed.¹¹ First, the court noted the "power to enjoin creditors from pursuing the purchasers" of assets sold under 363 is an "inherent . . . authority."¹² Specifically, the court reasoned that an injunction barring suit against a purchasing-creditor is necessary to uphold the "free and clear aspect" of section 363 sales.¹³ The court further found the sale satisfied section 363 of the Code because the claimants being enjoined could be compelled to accept money in satisfaction for their interests.¹⁴ The court mused that it "has not found, and has not been pointed to, any decision extending Purdue's decision to § 363 sales" and that Purdue was "limited to the issue before it, i.e. whether non-consensual non-debtor releases may be included in chapter 11 plans."¹⁵ It concluded, therefore, that the sale was proper under section 363, and not subject to Purdue's limitations.¹⁶

Properly understood, however, this case does not implicate Purdue or demonstrate that non-consensual third-party releases are permitted in a section 363 sale. Purdue concerned the release of direct claims that creditors of the estate held against the Sackler family.¹⁷ The claims were not derivative of the debtors' claims, nor were they against property of the estate.¹⁸ Unlike Purdue, the claims implicated here were against the debtors, who held insurance coverage for such claims.¹⁹ The insurance policies themselves are property of the estate,²⁰ and there were no direct claims or privity between the estates' creditors and the insurer. Selling the insurance policies, as property of the estate, back to the insurers, and enjoining claimants from separately pursuing the insurance carrier was an appropriate disposition of estate assets and does not trigger Purdue's restriction. The third-party claims were derivative of the debtors' claims against its insurer, and it is the debtors' prerogative to determine the disposition of its property: here, a value maximizing sale. As a result, enjoining creditors from pursuing claims against the purchaser that are derivative of, or attached to, the estate property being sold is an appropriate application of section 363, as is channeling those claims to a trust formed to hold the sale proceeds. This practice is distinct from non-consensual third-party releases based on independent third-party claims. As the dissent observed in Purdue, "when the debtor settles with the non-debtor third-party, that settlement also extinguishes the creditors' derivative claims against the non-debtor. And the creditors' consent is not necessary to do so."²¹

The Hopeman court also found the debtor met the requirements for approval of a settlement agreement under Rule 9019, which requires a court to determine whether the proposed settlement provision falls below the lowest point in the "range of reasonableness."²² The court distinguished between bar orders enforcing approved settlement agreements and the "type[] of non-consensual, third-party releases disallowed by Purdue."²³ The court concluded Purdue's holding does not reach orders enforcing negotiated settlement agreements under the Code.²⁴

While the Hopeman court is correct that Purdue did not prevent the settlement, it is not because Purdue is limited to the chapter 11 context. Rather, it is because the settlement does not provide a non-consensual third-party...