Purdue Pharma and the Future of Nonconsensual Third-Party Releases in Chapter 15 Cases

Although the Supreme Court’s decision puts an end to a long-standing circuit split over the permissibility of nonconsensual third-party releases in chapter 11 plans, it casts a spotlight on a separate legal question: Can a U.S. bankruptcy court grant comity to, and thus enforce, a non-consensual third-party release issued in a foreign restructuring proceeding? This is not a hypothetical question. With some limitations, third-party releases are legally permissible in the United Kingdom, Canada, and many other non-U.S. jurisdictions, and bankruptcy courts are occasionally asked to enforce orders entered in these proceedings under chapter 15 of the Bankruptcy Code.

Nonconsensual Third-Party Releases in Chapter 15 Cases
In contrast to a case under chapter 11 of the Bankruptcy Code, which centralizes a company’s restructuring efforts in the United States, a chapter 15 proceeding is an ancillary proceeding. When a U.S. bankruptcy court is presented with a chapter 15 petition, it is tasked with determining whether to recognize a foreign restructuring proceeding and grant comity to orders entered by the foreign court overseeing it. As such, the issues presented by third-party releases in chapter 15 cases have received a different analysis than in chapter 11 cases. Unlike in a chapter 11 case, the question is not whether the Bankruptcy Code authorizes nonconsensual third-party releases. The issue in chapter 15 cases is whether the bankruptcy court should recognize and enforce a foreign court’s order. Sections 1123(b) and 1141(d), which underpinned the Supreme Court’s analysis in Purdue, are not necessarily relevant to that question.

Instead, the question is governed by section 1521, which authorizes bankruptcy courts to grant “appropriate relief … where necessary to effectuate the purpose of [chapter 15],” and section 1507, which authorizes bankruptcy courts to “provide additional assistance” to foreign debtors. In deciding whether to grant appropriate relief or additional assistance under chapter 15, courts are guided by principles of comity and cooperation with foreign courts. Thus, the general rule is that an order entered by a foreign court should not be challenged in the United States if the foreign forum provides “a full and fair trial abroad before a court of competent jurisdiction … after due citation or voluntary appearance of the [parties in interest], and under a system of jurisprudence likely to secure an impartial administration of justice … and there is nothing to show either prejudice in the court, or in the system of laws under which it is sitting.”

Numerous bankruptcy courts have applied these principles to extend comity to foreign court orders approving nonconsensual third-party releases, especially when the foreign court sits in a common law jurisdiction. For example, in In re Avanti Communications Group plc, 582 B.R. 603 (Bankr. S.D.N.Y. 2018), Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York held that “schemes of arrangements sanctioned under UK law that provide third-party non-debtor guarantor releases should be recognized and enforced under chapter 15 of the Bankruptcy Code” because “proceedings under UK law in the UK courts afford creditors a full and fair opportunity to be heard in a manner consistent with US due process standards.”

In contrast, U.S. bankruptcy courts have declined to enforce third-party releases where there were troubling facts on the record or a lack of evidence that the foreign proceeding adhered to standards of procedural fairness on par with U.S. due process standards. For example, in In re PT Bakrie Telecom Tbk, 628 B.R. 859, 890 (Bankr. S.D.N.Y. 2021), the court denied a request to enforce a third-party release entered in an Indonesian proceeding where there was not “a rudimentary record in the foreign proceeding as to the basis for such releases and procedural fairness of the underlying process.” Similarly, in In re Vitro S.A.B. de C.V., 701 F.3d 1031, 1042 (5th Cir. 2012), the Fifth Circuit upheld a bankruptcy court’s decision declining to grant comity to third-party releases granted in a Mexican restructuring plan where the necessary creditor votes to approve the plan were only achieved by counting the votes of company insiders who would be beneficiaries of the releases. Insider votes are disregarded in counting votes in favor of a reorganization plan under the Bankruptcy Code.

Relevance of the Section 1506 Public Policy Exception
Section 1506 of the Bankruptcy Code authorizes bankruptcy courts to refrain from taking any actions that would be “manifestly contrary to public policy.” In prior cases, bankruptcy courts have rejected the notion that enforcing third-party releases is “manifestly contrary to public policy,” pointing to, among other things, the fact that “third-party releases are not categorically prohibited [in the United States].” See, e.g., In re Sino-Forest Corp., 501 B.R. 655 (Bankr. S.D.N.Y. 2013). That is, of course, no longer an accurate statement of law in light of Purdue.

Even so, the Supreme Court’s Purdue decision was not decided on public policy grounds. To the contrary, the Supreme Court carefully explained that “this Court is the wrong audience for … policy disputes.”

Conclusion
Although the Supreme Court did not directly address chapter 15 or comity, the Purdue decision and its impact, if any, on the comity analysis could become a focus of litigation in future chapter 15 cases.

(This is another in our series of client alerts related to international and cross-border insolvency issues.)