Bankruptcy law is often a balancing act between debtors seeking relief, creditors demanding fairness, and the broader public interest in accountability. One of the most contentious tools in this balancing act has been the use of third-party releases in Chapter 11 cases. These provisions attempt to release claims against individuals or entities who themselves are not in bankruptcy, often as part of a negotiated plan. While some see them as essential to achieving global settlements, others view them as a dangerous loophole that lets wealthy insiders escape liability.

The US Supreme Court’s 2024 ruling in Harrington v. Purdue Pharma L.P. placed this debate in the national spotlight. By rejecting non-consensual third-party releases, the Court reshaped the Chapter 11 landscape and left practitioners scrambling to adjust. Yet many questions remain unresolved.

As attorney Matt Christensen of Johnson May notes, “This is a fast-evolving area where even seasoned bankruptcy lawyers need to tread carefully. What was permissible in one circuit last year may no longer be an option today.”

What Are Third-Party Releases?

Third-party releases are plan provisions that extend the debtor’s discharge protections to others, such as corporate officers, directors, shareholders, or family members, who did not themselves file for bankruptcy. The rationale is often practical: these third parties may be contributing money or other value to the restructuring, and they want peace from future lawsuits.

There are two main types of third-party releases:

• Consensual Releases: Here, affected creditors agree, often by voting in favor of the plan or checking an opt-in box.
• Non-consensual Releases: Here, creditors are bound even if they object or abstain.

The statutory basis for these releases has always been shaky. Section 524(e) of the Bankruptcy Code says that a debtor’s discharge does not affect the liability of any other entity, which suggests limits on such releases. Section 1123(b)(6), a broad catch-all provision, has sometimes been cited to justify them, but courts have long disagreed about how far it stretches.

Permissibility of Third-Party Releases

For decades, courts across the country disagreed on whether third-party releases were permissible. The Second, Third, Fourth, Sixth, Seventh, and Eleventh Circuits had allowed them, often attracting large corporate bankruptcies to those venues. By contrast, the Fifth, Ninth, and Tenth Circuits rejected them outright. The First, Eighth, and DC Circuits had not taken a definitive stance.

This patchwork created an environment of ‘jurisdiction shopping.’ Debtors would pick and choose filing venues that offered the most favorable treatment. Matt Grimshaw of Grimshaw Law Group, P.C. explains, “Venue choice became a strategic weapon. Companies would file where third-party releases were most likely to fly.”

The Purdue Pharma Case as a Turning Point

Purdue Pharma’s bankruptcy was one of the most high-profile corporate cases of the decade, fueled by the opioid epidemic and the company’s marketing of OxyContin. The Sackler family, Purdue’s owners, proposed to contribute $6 billion over ten years to fund a settlement trust for victims and governments. In exchange, they demanded sweeping third-party releases from ongoing civil lawsuits.

The case traveled a long road: the bankruptcy court approved the plan, a district court overturned it, the Second Circuit reinstated it, and finally the Supreme Court weighed in. In June 2024, the Court ruled that non-consensual third-party releases are impermissible. Justice Gorsuch’s opinion emphasized that the Bankruptcy Code does not authorize binding non-debtors without their consent.

This landmark decision resolved a long-standing circuit split but left many practical questions unanswered. As Jonathan Friedland of Much Shelist P.C. points out, “The Court drew a hard line on non-consensual releases, but it left a wide gray zone when it comes to what counts as genuine consent.” As a result, strategic venue selection still matters, though the boundaries have shifted.

It is important to note that practitioners can achieve similar protections by creating settlement trusts that centralize claims, using independent agreements outside the Chapter 11 plan, and structuring provisions where creditors receive 100% payment in exchange for agreeing to releases. These strategies can provide meaningful protection without running afoul of the Court’s prohibition on non-consensual releases.

Consent: The New Battleground

Following the Purdue Pharma ruling, the concept of consent is now a critical pivot point for practitioners. Courts, debtors, and creditors must all ask: What does it mean to truly consent to a third-party release?

“If you want to rely on consent, make sure it’s crystal clear. Don’t assume silence will save you,” advises David Stein of Wilentz, Goldman & Spitzer, P.A. Stein’s advice here underscores the importance of not only drafting careful plan language but also ensuring creditors understand exactly what they are agreeing to.

Securing Consent

• Explicit Opt-In: The gold standard. When creditors actively check a box, sign a ballot, or otherwise affirmatively agree, courts are far more likely to uphold the release. This method leaves little room for ambiguity and strengthens the enforceability of the provision.
• Opt-Out: These provisions bind creditors unless they take action to reject. While attractive to debtors, they are far more vulnerable to challenge. Some courts have scrutinized opt-out releases closely, with inconsistent outcomes.
• De Facto Consent: Courts have considered whether a creditor’s acceptance of full payment, or voluntary participation in a settlement, can constitute implied consent. This may provide another pathway, but it is heavily fact-specific and carries risk if creditors later claim they did not understand the implications.

Going forward, practitioners may see more ballots with explicit consent boxes, clearer explanatory language in disclosure statements, and supplemental agreements designed to eliminate doubt. In this way, the battle over consent will likely play out in the fine print of Chapter 11 plans and in the evidence presented to show that creditors truly knew and agreed to what they were signing away.

Conclusion

Third-party releases have always occupied a legal gray area, and while the Supreme Court’s Purdue Pharma decision narrowed that area, it did not eliminate it. The ruling shut the door firmly on non-consensual releases, but it left many questions unanswered: How explicit must consent be? Can silence ever count? How will courts treat hybrid approaches, like opt-out combined with additional disclosures?

For debtors, the path forward involves designing plans that withstand scrutiny by focusing on clarity, transparency, and affirmative agreement. For creditors, vigilance is key: reviewing plan language carefully and understanding what rights may be waived is more important than ever.

The stakes are high. Billions of dollars often hinge on whether a release is valid. Beyond money, there is the broader question of fairness: whether bankruptcy should ever be used to shield individuals who have not sought its protection themselves. Ultimately, while third-party releases remain possible, they are no longer the easy fallback they once appeared to be. The post-Purdue landscape demands creativity, discipline, and caution from all sides.

To learn more about this topic, view The Nuts and Bolts of Third-Party Releases. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about Chapter 11.

This article was originally published here.

©2025. DailyDAC,^TM, LLC. This article is subject to the disclaimers found here.