Last November we wrote about the Fifth Circuit Court of Appeals’ decision in Highland Capital Management, L.P., where the court reversed the bankruptcy court’s approval of a plan’s exculpation clause for non-debtors and limited the universe of parties covered by that provision. Relying on Bank of New York Trust Co., NA v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (2009), the Fifth Circuit held that the plan’s exculpation provision was overly broad and violated section 524(e) of the Bankruptcy Code.
Earlier this month the reorganized debtor filed a petition for a writ of certiorari, asking the Supreme Court to resolve what it characterized as an acknowledged and long-standing conflict among the Circuits concerning the effect and reach of section 524(e) of the Bankruptcy Code. According to the reorganized debtor, the majority approach – followed by the Second, Third, Fourth, Sixth, Seventh, Ninth and Eleventh Circuits – holds that section 524(e) permits bankruptcy courts to confirm plans containing non-debtor exculpations or third-party releases. In contrast, only two Circuits – the Fifth and Tenth – hold that section 524(e) prohibits confirmation of plan that exculpates or releases non-debtors. The reorganized debtor argues that this disparity conflicts with the policy objective of uniformity and encourages forum shopping.
Importantly, the reorganized debtor asked the Supreme Court to consider only whether section 524(e) prohibits non-debtor exculpations and did not ask the Court to consider whether non-debtor releases are permitted under section 524(e). As acknowledged in the petition, non-debtor releases “raise a host” of questions beyond the reach of section 524(e), including, most notably, constitutional and jurisdictional issues. We note that the decision of the United States Court of Appeals for the Second Circuit in the Purdue Pharma case concerning the permissibility of third-party non-debtor releases — which has been pending since April 2022 — remains eagerly awaited.
We will continue to keep our readers informed on this very important case.