by Justin Simms*

Perhaps the most pressing question in American bankruptcy law has been posed by the Purdue Pharma L.P. (“Purdue”) bankruptcy: do bankruptcy courts possess the authority to approve non-consensual releases of direct claims held by third parties against non-debtor affiliates as part of a Chapter 11 plan of reorganization? The complexity and practical import of this question, as well as the Bankruptcy Code’s ambiguity on the topic of non-consensual third-party releases, have caused a divide in the federal judiciary. After the Court of Appeals for the Second Circuit approved Purdue’s proposed plan of reorganization in May 2023, the United States Supreme Court granted certiorari. This Contribution argues that bankruptcy courts lack the authority to approve releases of direct claims held by third parties against non-debtor affiliates on statutory, jurisdictional, and constitutional grounds.

“Non-debtor releases,” also known as “third-party releases,” are orders put forth by a bankruptcy court that release claims against a non-debtor party, functionally serving as a bankruptcy discharge for non-debtor parties.1 Non-debtor releases are specifically authorized by the Bankruptcy Code in the asbestos context,2 but are often found in large Chapter 11 plans of reorganization outside of the asbestos context.3 The legality of non-debtor releases outside of the asbestos context is widely debated; circuit courts have been divided on this issue for decades4 and the mainstream media has even questioned whether individuals and corporations should be shielded from legal liability when they themselves have not declared bankruptcy and been subjected to the rigors of the bankruptcy process.5 No action of a bankruptcy court is authorized unless the action is made within (1) the statutory limits of the Bankruptcy Code, (2) the confines of federal jurisdiction, and (3) the scope of constitutional authority. Bankruptcy courts lack the authority to approve non-consensual releases of direct claims held by third parties against non-debtor affiliates as part of a Chapter 11 plan of reorganization on statutory, jurisdictional, and constitutional grounds.

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The Bankruptcy Code must be where the “ultimate authority for the imposition of nonconsensual releases of direct third-party claims against non-debtors is rooted,”6 and there exists no statutory authority for such releases within the Bankruptcy Code.

11 U.S.C. § 524(e) prohibits non-debtor releases, as “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”7 This contrasts with § 524(g), which authorizes non-debtor releases exclusively in cases involving injuries from asbestos, “[n]otwithstanding the provisions of § 524(e).”8 The Fifth, Ninth, and Tenth Circuits hold that § 524(e)’s express language that the debtor’s discharge “does not affect the liability of any other entity on, or the property of any other entity for, such debt” prohibits the release of third parties from liability.9 Effectively, these circuits view § 524(e) as the general rule, with § 524(g)’s language “[n]otwithstanding the provisions of § 524(e)” creating an exception to that rule and authorizing non-debtor releases only in the asbestos context. This appears to be the natural reading of the statute: why else would the word “notwithstanding,” which is synonymous with “in spite of,” be included in the statute?10

 “Courts must presume that a legislature says in a statute what it means . . . and when the words of a statute are unambiguous . . . [the] judicial inquiry is complete.”11 As such, since the text of § 524 is unambiguous, § 524’s legislative history should not factor into its interpretation. The aforementioned interpretation of § 524(g) is also supported by sound policy, as it is only debtors—not third-party bystanders—who invoke and submit to the bankruptcy process, subjecting themselves to invasive and difficult procedures. It follows that non-debtor parties should not reap the rewards of bankruptcy, like discharge.12

Even if § 524 does not prohibit non-debtor releases outside of the asbestos context, the Bankruptcy Code must provide statutory authorization for non-debtor releases to be proper. Section 105(a), which enables bankruptcy courts to “issue any order, process, or judgement that is necessary or appropriate to carry out the provisions of this title,”13 is commonly argued to confer statutory authorization for non-debtor releases.14 However, in exercising their authority to “carry out” the provisions of the Code, bankruptcy courts cannot take actions inconsistent with other Code provisions.15 Any equitable powers of the bankruptcy courts “must and can only be exercised within the confines of the Bankruptcy Code.”16 Likewise, § 105(a) does not allow bankruptcy courts “to create substantive rights that are otherwise unavailable under applicable law.”17 The language of § 105(a) “suggests that an exercise of § 105 power be tied to another Bankruptcy Code section and not merely to a general bankruptcy concept or objective.”18

Although the Fourth and Eleventh Circuits have approved non-debtor releases relying solely on § 105(a),19 this reasoning ignores the statute’s plain text requiring the court’s action to “carry out the provisions of this title,” which suggests that § 105(a) can only augment other Code provisions.20 Also, it overlooks that bankruptcy courts’ equitable powers only operate within the Bankruptcy Code, and that the Bankruptcy Code is intended to be “comprehensive.”21

Pursuant to § 1123(b)(6), a plan of reorganization may “include any other appropriate provision not inconsistent with the applicable provisions of this title.”22 In many ways, § 1123(b)(6) mirrors the substance of § 105(a), which enables bankruptcy courts to “issue any order, process, or judgement that is necessary or appropriate to carry out the provisions of this title.”23 As with § 105(a), which provides bankruptcy courts with the power to “implement rather than override,”24 just because bankruptcy proceedings are equitable “does not give the judge a free-floating discretion to redistribute rights in accordance with his personal views of justice and fairness, however enlightened those views may be.”25

Section 1123(a)(5) states that a plan of reorganization must “provide adequate means for [its] implementation,” and then provides a list of examples for what plans of reorganization can be included to ensure its implementation.26 It is incorrect to view § 1123(a)(5) as enabling courts to act in ways the Bankruptcy Code does not otherwise authorize, even if such actions would ensure a plan’s implementation, as proponents of non-debtor releases often assert.

Finally, even if § 524(e), or any other provision of the Bankruptcy Code, does not expressly prohibit non-debtor releases, statutory authority cannot be inferred from Congressional silence.27 Involuntarily releasing third-party claims against non-debtors is “an extraordinary thing . . . different . . . from what courts ordinarily do.”28 More than “simple statutory silence” is expected if Congress intends a major departure,29 and thus Congress would be expected to speak clearly to authorize non-debtor releases.

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28 U.S.C. § 1334 delineates federal courts’ bankruptcy subject matter jurisdiction. District courts have “original but not exclusive jurisdiction” over “civil proceedings arising under title 11, or arising in or related to cases under title 11.”30 District courts may refer all cases arising under, arising in, or related to cases under title 11 to the district’s bankruptcy judges.31

A proceeding “arise[s] under” title 11 if it clearly invokes substantive rights created by bankruptcy law.32 Direct claims held by third parties against non-debtors are not proceedings that “aris[e] under” the debtor’s bankruptcy case.33 This is because the released claims are not invoking substantive rights created by bankruptcy law such as exemption claims or avoidance actions.34

A proceeding “arise[s] under” a title 11 case if it could not exist outside of a bankruptcy case, but it is not a cause of action created by the Bankruptcy Code.35 A release being placed in a proposed Chapter 11 plan does not itself confer “arising in” jurisdiction over such proceedings.36 A bankruptcy court must have an independent statutory basis over third parties’ disputes to adjudicate them; a bankruptcy court could acquire “infinite jurisdiction” if a court could gain jurisdiction over any release included in a proposed Chapter 11 plan.37

Most non-consensual releases of direct claims against non-debtor parties are likely justified under “related to” jurisdiction pursuant to 28 U.S.C. § 1334. Whether or not “related to” jurisdiction exists is inherently a fact-dependent question. A proceeding is “related to” a title 11 proceeding if its outcome could “conceivably have any effect on the estate being administered in bankruptcy.”38 So long as the proceeding’s outcome could alter the debtor’s rights, liabilities, options, or freedom of action in any way, the proceeding need not be against the debtor or the debtor’s property for it to be “related to” a bankruptcy proceeding.39 Although Congress intended to grant bankruptcy courts “comprehensive jurisdiction” to promote efficiency and expediency, a bankruptcy court’s “related to” jurisdiction cannot be limitless.40 A bankruptcy court cannot release claims which have no connection to the property of the debtor’s bankruptcy estate or the bankruptcy proceeding’s administration.41 Furthermore, releases being exchanged for contributions to an estate is not itself a sufficient basis to confer “related to” jurisdiction, as neither parties’ consent nor a plan of reorganization can create subject matter jurisdiction over a dispute.42

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Even if bankruptcy courts possess statutory authority and jurisdiction to approve non-debtor releases, they lack constitutional authority to render a final decision approving the releases.

Bankruptcy judges are not appointed in accordance with the requirements of Article III of the Constitution; the President does not nominate bankruptcy judges, the Senate does not confirm bankruptcy judges, and bankruptcy judges do not receive life tenure.43 Since bankruptcy judges are not Article III judges, but rather are Article I judges, they may not exercise the “judicial power of the United States,” other than pursuant to some exception recognized by the Supreme Court.44

Jurisdictional statutes address the constitutional limitations on Article I bankruptcy courts by dividing the jurisdiction created by 28 U.S.C. § 1334 into “core” and “non-core” components.45 Bankruptcy courts are required to conduct a claim-by-claim analysis and classify whether claims are “core” or “non-core.”46 Per § 157(b), cases that “aris[e] under” or “aris[e] in” a title 11 case are considered “core” bankruptcy proceedings, and cases that are ”related to” title 11 proceedings are “non-core.”47

Bankruptcy courts lack the constitutional authority to enter a final judgement over a proceeding where only “related to” jurisdiction exists because these are “non-core” claims. The case most on point is Stern v. Marshall, in which the Supreme Court held that bankruptcy courts only may enter final judgement in proceedings that “stem[ ] from the bankruptcy itself or would necessarily be resolved in the claims allowance process.”48 Precedent that suggests a bankruptcy court may confirm a plan containing releases and injunctions because they are “integral to the restructuring of the debtor-creditor relationship,”49 misreads Stern and asks the wrong constitutional question.

For the avoidance of doubt, a bankruptcy court’s order extinguishing and enjoining a non-core claim without an adjudication on the merits “finally determines” that claim; it is equivalent to entering a judgement to dismiss the claim and provides res judicata claim preclusion.50

Bankruptcy judges approving non-debtor releases also poses separation of powers questions. Absent a non-debtor release, claims against the non-debtor party would be pursued in federal or state court—and would thus be adjudicated by an Article III judge, a member of the judicial branch. In Den Ex Dem. Murray v. Hoboken Land & Improvement Co., the Supreme Court held that Congress must “withdraw from judicial cognizance any matter which, from its nature, is the subject of a suit at common law, or in equity, or in admiralty.”51 If the released claims are subjects of suits at common law—for example, tort claims—bankruptcy judges deciding these issues is moving the resolution of these cases from the judicial branch into the legislative branch.

Finally, non-consensual third-party releases deprive plaintiffs of their fundamental right to maintain a lawsuit. In the 1823 case of Corfield v. Coryell, the court identified certain fundamental rights that Americans possess, one of which being the right “to institute and maintain actions of any kind in the courts of the state.”52 Non-debtor releases implicate this fundamental right: by releasing plaintiffs’ claims non-consensually, plaintiffs cannot maintain their action in the proper court.

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As the ubiquity of non-consensual non-debtor releases grows, the importance of a clear ruling on their legality does as well. Although these releases might be widely embraced by creditors in a given bankruptcy, and might very well be an ideal policy outcome, bankruptcy courts lack the authority to approve these releases on statutory, jurisdictional, and constitutional grounds. If Congress wishes to authorize these releases in specific circumstances, they can do so by speaking clearly in the Bankruptcy Code. Without this clarity, non-consensual non-debtor releases are not authorized, and debtors and creditors alike might suffer the consequences.

* Justin Simms is a J.D. Candidate (2024) at New York University School of Law. This Contribution is a commentary on the problem at the 2023 Duberstein Bankruptcy Moot Court Competition, hosted by St. John’s University School of Law. One of the questions presented asked whether a bankruptcy court has the authority to approve non-consensual releases of direct claims held by third parties against non-debtor affiliates as part of a Chapter 11 plan of reorganization. This Contribution distills one side of the argument, and the views expressed herein do not necessarily represent the author’s views.

1. Joshua M. Silverstein, A Revised Perspective on Non-Debtor Releases, 43 Bankr. L. Letter, no. 10, Oct. 2023, at 1.

2. See 11 U.S.C. § 524(g).

3. Adam J. Levitin, The Constitutional Problem of Nondebtor Releases in Bankruptcy, 91 Fordham L. Rev. 429, 430 (2022).

4. Compare In re W. Real Est. Fund, Inc., 922 F.2d 592, 600 (10th Cir. 1990) (prohibiting third-party releases outside of the asbestos context), with Nat’l Heritage Found., Inc. v. Highbourne Found., Inc., 760 F.3d 344, 350 (4th Cir. 2014) (holding that § 105(a) of the Bankruptcy Code itself authorizes third-party releases).

5. See Ralph Brubaker, Mandatory Aggregation of Mass Tort Litigation in Bankruptcy, 131 Yale L. J. Forum 960, 961–62 & n.7 (2022) (providing examples).

6. In re Purdue Pharma L.P., 69 F.4th 45, 72 (2d Cir. 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., 144 S. Ct. 44 (2023).

7. See 11 U.S.C. § 524(e).

8. See 11 U.S.C. § 524(g)(4)(a)(2).

9. See In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995), cert. denied, 517 U.S. 1243 (1996); see also In re W. Real Est. Fund, Inc., 922 F.2d 592, 600 (10th Cir. 1990) (noting that Congress did not intend to extend protections under the Bankruptcy Code to “third-party bystanders”); Bank of N.Y. Tr. Co., NA v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 252 (5th Cir. 2009) (“Section 524(e) only releases the debtor, not co-liable third parties.”).

10. Notwithstanding, Merriam-Webster Thesaurus (New Ed. 2022).

11. Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253–54 (1992).

12. See Green v. Welsh, 956 F.2d 30, 33 (2d Cir. 1992) (“Together, the language of these sections reveals that Congress sought to free the debtor of his personal obligations while ensuring that no one else reaps a similar benefit.”).

13. 11 U.S.C. § 105(a).

14. See Nat’l Heritage, 760 F.3d at 350; see also In re Seaside Eng’g & Surveying, 780 F.3d 1070, 1076–79 (11th Cir. 2015).

15. Law v. Siegel, 571 U.S. 415, 415 (2014).

16. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988).

17. New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 92 (2d Cir. 2003); see also In re Combustion Eng’g., Inc., 391 F.3d 190, 233 (3d Cir. 2004).

18. 2 Collier on Bankruptcy ¶ 105.01[1] (16th ed. 2022).

19. See Nat’l Heritage, 760 F.3d at 350; see also In re Seaside Eng’g, 780 F.3d at 1076–79.

20. See 11 U.S.C. § 105(a).

21. See Ahlers, 485 U.S. at 206; see also RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 645 (2012).

22. 11 U.S.C. § 1123(b)(6).

23. See 11 U.S.C. § 105(a).

24. In re Kmart Corp., 359 F.3d 866, 871 (7th Cir. 2004), cert. denied 543 U.S. 1056.

25. In re Chicago, Milwaukee, St. Paul & Pacific R.R., 791 F.2d 524, 528 (7th Cir. 1986).

26. See 11 U.S.C. § 1123(a)(5).

27. See RadLAX Gateway Hotel, 566 U.S. at 645 (noting that the Bankruptcy Code is designed to be “comprehensive”).

28. In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 723 (Bankr. S.D.N.Y. 2019).

29. Czyzewski v. Jevic Holding Corp., 580 U.S. 451, 465 (2017).

30. See 28 U.S.C. § 1334(b).

31. See 28 U.S.C. § 157(a).

32. Glinka v. Federal Plastics Mfg. (In re Housecraft Indus. USA, Inc.), 310 F.3d 64, 70 (2d Cir. 2002).

33. Cf. 28 U.S.C. § 1334(b).

34. In re Housecraft, 310 F.3d at 70.

35. In re Midway Gold US, Inc., 575 B.R. 475, 518 (Bankr. D. Colo. 2017).

36. Id. at 519.

37. Id.

38. Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984); see also SPV OSUS Ltd. V. UBS AG, 882 F.3d 333, 339–40 (2d Cir. 2018).

39. In re Gardner, 913 F.2d 1515, 1518 (10th Cir. 1990).

40. Celotex Corp. v. Edwards, 514 U.S. 300, 308 (1995) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (1984)).

41. Patterson v. Mahwah Bergen Retail Grp., Inc., 636 B.R. 641, 670 (E.D. Va. 2022).

42. See In re Combustion Eng’g., Inc., 391 F.3d 190, 228 (3d Cir. 2004), as amended (Feb. 23, 2005) (noting bankruptcy jurisdiction cannot be expanded to facilitate a particular reorganization); see also Binder v. Price Waterhouse & Co., LLP (In re Resorts Int’l, Inc.), 372 F.3d 154, 161 (3d Cir. 2004) (“The source of the bankruptcy court’s subject matter jurisdiction is neither the Bankruptcy Code nor the express terms of the plan. The source is . . . 28 U.S.C. §§ 1334 and 157.”); Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Del., Inc.), 335 F.3d 243, 256 (3d Cir. 2003) (“[I]t is not for us to substitute our view of . . . policy for the legislation which has been passed by Congress.”) (quoting United Parcel Serv., Inc. v. United States Postal Serv., Inc., 604 F.2d 1370, 1381 n.16 (3d Cir. 1979)).

43. Stern v. Marshall, 564 U.S. 462, 469 (2011).

44. Id.

45. See 28 U.S.C. § 157(b).

46. Patterson v. Mahwah Bergen Retail Grp., Inc., 636 B.R. 641, 668 (E.D. Va. 2022).

47. See 28 U.S.C. § 157(b).

48. 564 U.S. at 499.

49. In re Millennium Lab Holdings II, LLC., 945 F.3d 126, 138 (3d Cir. 2019).

50. See Stoll v. Gottlieb, 305 U.S. 165, 171 (1938) (holding that non-consensual third-party releases confirmed by final order are entitled to res judicata claim preclusion barring any subsequent action bringing a released claim).

51. Den Ex Dem. Murray v. Hoboken Land & Improvement Co., 59 U.S. 272, 284 (1855).

52. See Corfield v. Coryell, 6 F. Cas. 546, 551–52 (Cir. Ct., E.D. PA 1823) (“[T]hese expressions to those privileges and immunities . . . are, in their nature, fundamental . . . [including] to institute and maintain actions of any kind in the courts of the state . . . .”).