Brief

2023

nondebtor releases, third-party releases, channeling injunctions, nondebtor discharge, the Erie doctrine, the Bankruptcy Power, the Bankruptcy Clause, federalism, separation of powers, Chapter 11 bankruptcy reorganizations, mass tort bankruptcies, mandatory settlement, no-opt-out settlement, the Butner doctrine, substantive canons of statutory interpretation, due process opt-out rights, Seventh Amendment jury trial rights

This amicus brief was filed in Harrington v. Purdue Pharma, 603 U.S. 204 (2024), which held that federal bankruptcy courts have no power to approve so-called nonconsensual nondebtor (or third-party) release provisions. Consistent with that holding, this brief argued that such provisions were illegitimate and unconstitutional.

Nonconsensual nondebtor releases extinguished creditors’ direct claims of liability against a nondebtor without the consent (and even over the objection) of creditors in precisely the same way that a bankruptcy discharge extinguishes a bankruptcy debtor’s debts. Such provisions frequently appeared in a Chapter 11 debtor’s proposed plan of reorganization. And in confirming a plan containing such a nondebtor-discharge provision, the court would typically enter an order permanently enjoining assertion of the released claims (commonly known as a “channeling” injunction), which replicated the effect of the Bankruptcy Code’s statutory discharge injunction (which is, of course, by its terms applicable to only the debtor’s discharged debts).

This brief argued that courts’ approval of such nondebtor-discharge provisions contravened the separation-of-powers limitation embedded in the Constitution’s Bankruptcy Clause, which gives Congress the exclusive power to authorize discharge of indebtedness and to prescribe the circumstances under which such a discharge is appropriate. The nonconsensual nondebtor-release jurisprudence of those courts permitting the practice was also an unconstitutional exercise of substantive federal common lawmaking, in violation of the federalism and separation-of-powers constraints established by Erie R.R. v. Tompkins. Moreover, the Supreme Court’s jurisprudence for interpreting the Bankruptcy Code directly incorporates those constitutional limitations, cogently elucidating why nothing in the Bankruptcy Code could plausibly be read to authorize nondebtor discharge.

The desire to facilitate settlement of complex mass torts could not justify nondebtor-discharge practice. With the nonconsensual nondebtor-release device, the federal courts manufactured out of whole cloth the unique, extraordinary (and unconstitutional) power to impose a mandatory no-opt-outs “settlement” of a nondebtor’s mass tort liability on unconsenting tort victims through the bankruptcy proceedings of a co-defendant. The process by which nonconsensual nondebtor releases were negotiated, proposed, and approved violated nonconsenting claimants’ constitutional due-process rights, both by denying them an adequate, unconflicted litigation representative, and by denying them any opportunity to exclude themselves from what was a mandatory no-opt-outs “settlement” process that was involuntarily imposed upon them. Moreover, nonconsensual nondebtor releases unconstitutionally abrogated nonconsenting claimants’ Seventh Amendment jury-trial rights, by extinguishing traditional private-rights damages actions against nondebtors for which claimants have constitutional rights to both jury trial and final judgment from an Article III judge.

Ralph Brubaker et al., Amicus Brief on Nonconsensual Nondebtor Releases in Chapter 11 Bankruptcy Reorganizations (Harrington v. Purdue Pharma), No. 23-124 (U.S. Sept. 27, 2023)

Bankruptcy

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