The Supreme Court term that ended just three weeks ago was one of the most consequential terms in recent years. I’ve previously written about a significant decision in the financial services / debtor-creditor world, in which Justice Thomas unexpectedly saved the CFPB. Although many were surprised by the Court’s final decision, on presidential immunity, that almost seems like a lifetime ago given the news of recent weeks.
It was, however, a big year for bankruptcy at the Supreme Court, with three significant cases.
Insurers as Parties in Interest
The final bankruptcy case to be argued—Truck Insurance Exchange v. Kaiser Gypsum Co., Inc.—was the first of three to be decided, in a turnaround of just 79 days. On June 6, 2024, Justice Sotomayor wrote for an essentially unanimous court (Justice Alito did not participate) that insurers have standing to object to a Chapter 11 plan of reorganization. Even if a proposed plan doesn’t purport to affect an insurer’s liability or its policy rights, the insurer is still a party in interest under 11 USC 1109(b) that “may raise and may appear and may be heard on any issue” in the case.
Retroactivity of Trustee Fees
On June 14, 2024, 157 days after oral argument, a 6-3 court handed down the decision in Office of the US Trustee v. John Q. Hammons Fall 2006, LLC. This case followed the Court’s 2022 Siegel v. Fitzgerald decision which invalidated a two-tier structure for fees paid by Chapter 11 debtors to the United States Trustee (“UST”). Two states, Alabama and North Carolina, operate under a Bankruptcy Administrator program instead of the United States Trustee program. When Congress increased UST fees, those two states were exempted because debtors in those states don’t pay such fees. The Siegel court held that that violated the uniformity requirement of the Constitution’s Bankruptcy Clause.
It followed that some debtors sought to recover the unconstitutional fees they had paid while the two-tier structure was in effect, which resulted in this term’s John Q. Hammons Fall 2006, LLC case. Justice Jackson wrote the majority opinion, denying the attempts to recoup the unconstitutional fees. She wrote that Siegel’s goal was to “remedy the disparity,” as the violation was one of uniformity, not high fees. It was not necessary to refund millions of dollars in fees. Justice Gorsuch dissented, joined by Thomas and Barrett, arguing that the fees should be reimbursed. The first two lines of his dissent summed up his position: “What’s a constitutional wrong worth these days? The Court’s answer today seems to be: not much.”
Release of Third Parties in Corporate Bankruptcy
The third and final bankruptcy decision, which took the Court 188 days to decide, came on June 28, 2024, on the eve of the end of the term. It also received the most press coverage and will have major consequences for mass-tort litigation that ends up in bankruptcy. In Harrington v. Purdue Pharma, LP, the Court held that the Bankruptcy Code does not authorize non-consensual third-party releases.
In an unexpected 5-4 split, Justice Gorsuch, joined by Thomas, Alito, Barrett, and Jackson, wrote that a plan of reorganization cannot extinguish claims held by nondebtors against nondebtor third parties without the claimants’ consent. This is significant because the Sackler family, which made billions off the opioid crisis but had never filed for bankruptcy protection, sought to extinguish claims in Purdue Pharma’s corporate bankruptcy without a) filing bankruptcy themselves or b) obtaining the consent of the claimants.
The dissenting justices (Kavanaugh, joined by Roberts, Sotomayor, and Kagan) argued that the claimants basically had identical claims against the Sacklers and the corporate entities, and that this was an effective way to resolve the matter and to get money in the hands of claimants. The Sacklers had contributed to the pot for distribution, and claimants were relying on that money.
As evidenced at a recent American Bankruptcy Institute webinar, distinguished scholars disagree strongly on this decision’s reach and long-term effect. The bottom line, however, is that the Sacklers are again facing hundreds of claims, and claimants will have to wait for any distribution.
They may not be the most glamorous, controversial, or publicized cases of the term, but each of these decisions will have a significant impact on future bankruptcies.
