By: David Cook, Lynn Harrison and Sam J. Alberts, Dentons US LLP¹

On June 27, 2024, the United States Supreme Court ruled 5-4 that the Bankruptcy Code does not authorize any non-consensual third party releases (other than regarding asbestos liabilities). Harrington v. Purdue Pharma L.P., 144 S.Ct. 2071 (2024).

Less than a month after Purdue was decided, the United States Bankruptcy Court for the Southern District of New York  released a decision in the Chapter 15 proceeding of Americanas S.A., which endorsed through Chapter 15 of the Bankruptcy Code, a Brazilian bankruptcy plan that permitted nonconsensual third party releases and, in turn, a potential work around to limitations in Purdue. See Decision and Order Giving Force and Effect To the Brazilian RJ Plan, In re Americanas S.A., Case No. 23-10092-MEW, Docket No. 75 (Bankr. S.D.N.Y. Jul. 22, 2024).

The Brazilian matter came before the Bankruptcy Court on motion of the Foreign Representative of the Debtors, who sought comity under Chapter 15 of the Bankruptcy Code from the Bankruptcy Court with respect to the Debtors’ plan of reorganization (the “Brazilian RJ Plan”), which was proposed in, and approved by, the 4th Business Court of Rio De Janeiro.

The Brazilian RJ Plan contained a framework whereby creditors who agreed to grant releases to the Debtors, and certain non-debtor parties including current and former directors, officers, and affiliates of the Debtors (the “Releases”), were entitled to significantly higher recoveries than creditors who declined to grant the Releases. Specifically, creditors who agreed to grant the Releases, and who elected to be paid in a combination of equity in the reorganized company and new debentures, were entitled to promptly issued recoveries equal in value to approximately 80% of their claims. Creditors who elected to receive payment in cash were not required to grant the Releases, but were entitled to payment in the amount of just 30% of their claims at a point 15 years in the future.

Creditors who failed to make any election were deemed to have not granted the Releases, and were entitled to payment in cash in an amount of just 20% of their claims at a point 20 years in the future. The Debtors characterized the disparities as “incentives” in connection with the Releases. The Bankruptcy Court granted full force and effect to the Brazilian RJ Plan, finding that the terms thereof were “not manifestly contrary to U.S. public policy. . . .”

Although the Bankruptcy Court noted that some creditors in Brazil complained that the releases were coercive as a result of the disparities, the Brazilian court overruled those objections. In addition, there were no objections from creditors challenging the disparate recoveries in the United States. In a Chapter 15 proceeding, whether a United States bankruptcy court would confirm a plan with such “coercive” releases may be irrelevant. Section 1506 of the Bankruptcy Code merely provides that “[n]othing . . . prevents the [bankruptcy] court from refusing to take an action . . . if the action would be manifestly contrary to the public policy of the United States.”

The decision in Americanas S.A. may be a preview of coming attractions in cross-border restructurings. For years non-consensual third party releases have been an important arrow in the quiver of debtors, affording them a powerful incentive to grant third parties in exchange for a substantial financial contribution to the estate. In fact, Purdue may not be the last act in the long history of approving such releases in United States bankruptcy proceedings, particularly when it comes to sanctioning releases in Chapter 15 proceedings.

1. Dentons US LLP is a member of Dentons, the largest law firm in the world with 160+ offices in 80+ countries (including Brazil).↩