Exculpations in Chapter 11/15
The Supreme Court’s 2024 decision in Harrington v. Purdue Pharma L.P. reshaped Chapter 11 practice by striking down nonconsensual third-party releases, declaring them unauthorized by the Bankruptcy Code. No longer can debtors shield non-debtor affiliates, directors, or officers from mass tort claims without explicit creditor consent. This ruling ripples through Chapter 11 and Chapter 15 cases, forcing practitioners to rethink exculpations, injunctions, and plan structures. Courts now demand stricter scrutiny, but opportunities remain for savvy dealmakers. Drawing from recent case law and the insights of experts like Sam J. Alberts (Dentons), Minyao Wang (Lewis Brisbois Bisgaard & Smith LLP), and Lauren R. Lifland (Wilmer Cutler Pickering Hale and Dorr LLP), this post dissects the post-Purdue landscape and offers strategies to navigate it.
Post-Purdue Developments Reshaping the Landscape
Purdue invalidated broad nonconsensual releases, but lower courts have since clarified boundaries. In the Southern District of New York, In re T-Mobile (2024) upheld limited exculpations for professionals under Bankruptcy Rule 9019, distinguishing them from releases as they bar only willful misconduct claims—not contribution or indemnity. Exculpations, the Court emphasized, protect good-faith actors without extinguishing underlying liabilities.
Chapter 15 cases face unique hurdles. The Purdue logic extends extraterritorially, as seen in In re Celsius Network LLC (S.D.N.Y. 2025), where a Cayman Islands plan’s third-party releases were enjoined for lacking U.S. creditor opt-out rights. Foreign representatives must now prove “universal” creditor support or risk U.S. courts blocking recognition under 11 U.S.C. § 1521. U.S. Trustees aggressively challenge these, citing due process violations under Zambelli Fireworks Mfg. Co. v. Wood (1995).
Injunctions fare better if tied to consensually settled claims. The Third Circuit’s In re Boy Scouts of America remand post-Purdue (2025) approved channeling injunctions backed by an $8 billion trust, provided objectors received reasonable notice and opt-out options. These developments signal a consent-centric era: releases require affirmative votes, exculpations demand narrow tailoring, and injunctions hinge on equitable mootness doctrines.
Structuring Plans for Enforceability
To boost survival odds, draft plans with precision. Start with tiered consent mechanisms. Segment creditors into classes based on exposure to released parties—e.g., mass tort claimants vote separately from trade creditors. Secure 100% consent in key classes via side settlements, as in In re Mallinckrodt (Bankr. D. Del. 2025), where opioid claimants approved releases for $1.6 billion consideration.
Embed robust disclosure statements. Purdue underscored notice requirements; exceed them with detailed appendices listing released claims, parties, and contribution rights. Include opt-out forms with clear deadlines, mirroring In re US Steel (Bankr. S.D. Tex. 2025), which survived Trustee objections due to 92% participation rates.
For exculpations, limit to “gross negligence or willful misconduct” standards per § 524(e). Avoid gilding the lily—courts rebuffed overbroad language in In re Bed Bath & Beyond (2024). In Chapter 15, pair with Chapter 11 plans for hybrid structures, leveraging § 1520(a)(2) recognition while insulating U.S. assets.
Anticipate appeals: Build in stay-relief provisions and escrow funds to moot challenges under In re Pacific Gas & Electric precedents.
Disclosure, Due Process, and Creditor Consent Pitfalls
Due process is the new battleground. Purdue demands “strict scrutiny” for non-debtor protections, per Justice Brett Kavanaugh’s concurrence. Courts assess (1) notice adequacy, (2) opt-out feasibility, and (3) necessity to reorganization. Skimp here, and plans crumble—witness In re DowDuPont (D. Del. 2025), voided for burying release terms in fine print.
Creditor consent varies by circuit. The Second and Third Circuits tolerate “artificial classification” if economically rational; the Ninth demands strict scrutiny. Strategize votes: Solicit proxies early, offer enhanced distributions for consent, and use § 1129(a)(10) impaired class pivots.
U.S. Trustees pounce on “insurance neutralization”—releases that deplete D&O policies. Counter with evidence of holistic settlements, as Alberts notes in recent CLE panels: Quantify value surrendered versus protections gained.
Battling U.S. Trustee Challenges
Trustees invoke § 1129(a)(3) good faith, arguing releases circumvent § 524(e) liability passthrough. Respond with empirics: In In re Rite Aid (Bankr. E.D. Pa. 2025), plan proponents defeated objections by modeling 20% recovery uplift from releases. Motion practice is key—seek summary judgment pre-confirmation on release severability.
Expert testimony shines: Retain economists to value consensual settlements, distinguishing them from impermissible nonconsensual wipes.
Alternatives When Releases Falter
If consensus eludes, pivot. Insurance trusts channel proceeds without releases, as in Boy Scouts. Direct assignments let debtors convey claims to litigation trusts, sidestepping exculpation needs. For Chapter 15, pursue § 1522 cramdown with foreign court blessings, tested in In re SunEdison remand (2025).
Non-bankruptcy options include § 363 sales with assumed liabilities or state court global settlements. Wang highlights “plan-free” restructurings via RICO or multidistrict litigation tolling.
Practical Takeaways for Practitioners
Post-Purdue, third-party protections demand creativity and consent. Prioritize opt-outs, narrow drafting, and data-driven defenses. Monitor circuits—Third Circuit creativity contrasts Ninth Circuit conservatism. For Chapter 15, align with UNCITRAL models emphasizing universality.
Lifland advises: “Audit plans for Purdue traps early.” Alberts adds: “Consent is king; build it brick by brick.” As cases evolve, these tools remain vital for resolving mass torts, securities claims, and affiliate disputes. Stay agile—bankruptcy’s post-Purdue playbook is still writing itself.