Do Non-Debtors Get Releases In A Chapter 11 Bankruptcy?
When you file for Chapter 11 bankruptcy, as part of the reorganization, the company and many of its officers are often provided releases—that is, they are held harmless from liability for debts, or lawsuits, that arise before the bankruptcy was filed.
This is obvious—a potential lawsuit against you or your company is a liability, and liabilities get discharged in bankruptcy (or reorganized, in Chapter 11).
But often, the releases of liability go beyond the debtor, and also extend to companies that fund the reorganization plan or offer to work with the debtor in some way to facilitate the reorganization plan. For example, what if Company A wants to make sure that its suppliers, subsidiaries, associates, or related entities are also given the same releases and protections that the debtor itself has?
What if the company needs another company to give it millions of dollars to help it reorganize—but that donor company wants to make sure it is released from the same liabilities that the debtor company is getting released from in Chapter 11?
Recent Case Tests Non-Debtor Releases
This is what happened in a recent case, when the Sackler family offered $4.5 billion to help a pharmaceutical company reorganize in Chapter 11 bankruptcy.
The catch was that understandably, the family didn’t want to be on the hook for any lawsuits, debts, or liabilities that the company would have had (but would be discharged from, since the company is the debtor that is reorganizing in the Chapter 11). The debts that the family was seeking to be released from are lawsuits largely stemming from a multitude of opioid lawsuits (which the company would be released from in the reorganization).
Problems With Non-Debtor Releases
The problem is twofold. On the one hand, only the debtor is supposed to get a release. If you allow non debtors, people funding reorganization plans, or related companies to get releases, you are cutting off the right to sue companies that never actually filed for reorganization through bankruptcy.
Critics say that rich and powerful people and companies end up getting releases without having to go through the difficulties or negatives of a Chapter 11 bankruptcy, the way the bankruptcy debtor does. It seems like an “end run” to get around the court system—give some money to a reorganizing debtor, and you are excused from paying or being liable for lawsuits.
On the other hand, these third party companies (or here, the Sackler family), can be essential for reorganization—nobody is going to give money to help a company reorganize if they are making themselves liable for the company’s debt or potential lawsuits.
Release Isn’t Valid-For Now
In this recent case, the lower court held that the release was not valid and not allowable under bankruptcy law, although in other federal court bankruptcy jurisdictions, these releases have been allowed. The pharmaceutical company says it will be taking the case to the US Supreme Court.