Supreme Court Discusses Discharge of Non-Debtor Parties in Bankruptcy Claims

Bankruptcy is an important tool that allows people to regain control of their finances and alleviate overwhelming debt obligations that they are unable to pay. Not all claims are dischargeable in bankruptcy, however. For example, the United States Supreme Court recently held that judgments against non-debtor cannot be discharged. If you are mired in debt, you may be able to seek relief by filing for bankruptcy, and it is smart to confer with a California bankruptcy lawyer.

Factual and Procedural History

It is alleged that the owner-family, known for their ownership of the debtor drug company, significantly influenced the company’s strategy and the development of OxyContin, a drug initially touted as having a low risk of addiction. However, mounting evidence of widespread abuse led to extensive legal battles involving individuals, state governments, and federal agencies suing the debtor. In 2004, the debtor board entered into a sweeping Indemnity Agreement to shield its directors and officers from financial liabilities arising from these lawsuits, providing broad protection even beyond their tenure, albeit with exceptions for bad faith actions. Beginning in 2007, the owner-family preemptively shielded assets in anticipation of personal litigation. By 2019, the debtors faced severe financial strain, prompting the debtor family to resign from the company’s board.

Reportedly, simultaneously, the Department of Justice (DOJ) filed criminal and civil charges against the debtor, resulting in a 2020 plea agreement that prioritized DOJ claims in the debtor’s bankruptcy proceedings. The agreement included a $2 billion forfeiture judgment, with $1.775 billion potentially released if certain conditions were met. While the debtors declared bankruptcy in 2019, the owner-family did not, temporarily halting litigation against both parties. The debtor’s estate was valued at approximately $1.8 billion, yet claims against the debtor and the owner-family exceeded $40 trillion.

It is alleged that the U.S. Bankruptcy Court for the Southern District of New York approved a proposed bankruptcy plan which included a “shareholder release” effectively barring certain third-party claims against the debtor. The bankruptcy court’s decision was challenged in the U.S. District Court for the Southern District of New York, which overturned the confirmation. However, the U.S. Court of Appeals for the Second Circuit later reversed this decision, ruling that the Bankruptcy Code allowed for the approval of the plan and affirmed the bankruptcy court’s decision, enabling the release of certain claims against the debtor. The United States Trustee filed an application for stay, which the United States Supreme Court treated as a writ of certiorari.

Discharge of Non-Debtor Parties in Bankruptcy Claims

The Supreme Court held that bankruptcy courts lack the authority under the Bankruptcy Code to extinguish claims held by non-debtors, such as opioid victims, against other non-debtors, like the owner-family, without the consent of those claimants.

The Court highlighted that the owner-family had not agreed to fully disclose their assets for the benefit of opioid victims, a requirement akin to what a bankrupt debtor must do to obtain relief from liability. Moreover, the release granted by the bankruptcy court went beyond what the Bankruptcy Code allows for debtors, erasing almost all claims against the owner-family, including allegations of fraud, willful injury, and wrongful death, all without the consent of the claimants involved. The Court stressed that neither the text nor the history of the Bankruptcy Code supports or permits such relief.

However, the Court clarified that its decision did not challenge consensual third-party releases that are part of a bankruptcy reorganization plan. It refrained from defining what constitutes a consensual release or adjudicating on a plan that fully satisfies claims against a third-party non-debtor.

Talk to a Skilled California Bankruptcy Attorney

If you have substantial debt obligations that you are unable to meet, you should talk to an attorney about whether you may be able to regain financial stability by filing for bankruptcy. Matthew D. Roy is a skilled California bankruptcy lawyer who can advise you of your options and aid you in seeking the best legal outcome possible. To set up a consultation with Mr. Roy, please use our online form or call us at (916) 361-6028.