First and foremost, bankruptcy courts are courts of equity.[1] As courts of equity, they are allowed some discretion to impose exceptions to general rules when adjudicating bankruptcy cases.[2] When a debtor files a Chapter 11 case, the process, also known as restructuring or reorganization, is intended to benefit three parties: the debtor, creditors and third parties.[3] In the ideal scenario, the debtor is allowed to maintain its business and employees keep their jobs.[4] The creditors receive payment for their claims against the debtor.[5] Third parties, or non-debtors, are incoming creditors ready to provide the debtor with new financing to continue operations, benefitting from interest on principal in a “buy-low” market.[6] However, this scheme becomes very complicated in the context of mass tort bankruptcies.[7]
Generally, a mass tort occurs when “a single act, transaction, or product”–often resulting from a company’s negligent conduct–causes injuries to potentially hundreds, or even thousands of victims.[8] If the company decides its liability is too high or that it’s inefficient to defend against claims across country, it may seek bankruptcy protection to establish a single forum for resolving those claims.[9] Unlike the tort system, which often struggles to address the claims of mass tort victims, bankruptcy offers a “unique opportunity to compel the participation of all [affected parties] . . . in a single forum to facilitate a viable and equitable settlement.”[10] These tort victims become creditors (claimants) in the bankruptcy case.[11] Since the number of tort claimants may reach the thousands, the amount of money the debtor may need to fund the bankruptcy process increases proportionally to the number of creditors seeking judgment against the debtor.[12] Because bankruptcy is a system of scarcity, it is difficult for debtors to obtain financing from third-parties unless there is a guarantee that they will be compensated for their services.[13] Therefore, a debtor must carefully plan how to ensure that the Chapter 11 bankruptcy process benefits all parties involved. This Article will focus on how recent case law has limited certain methods that a debtor may use to negotiate an equitable allocation of capital from third parties in exchange for indemnification and will propose solutions to preserve the debtor’s business while providing funds to creditors who deserve the payout.
A “shining example of the bankruptcy system at work”[14] was the 2024 reorganization plan (“The Plan”) in Harrington v. Purdue Pharma, L. P., (“Purdue”); a mass tort bankruptcy addressing the opioid epidemic.[15] Like most bankruptcy cases, the debtor in Purdue proposed the Plan, which required court and creditor approval.[16] The Plan was nothing short of a miracle because “victims unequivocally [sought] approval of [it]”[17] and “all 50 state Attorneys General signed on to the plan—a rare consensus.”[18] Even though most affected creditors “fervently support[ed] the Plan, the Supreme Court rejected it.[19]
The Plan included provisions that released or “voided” any past or future judgments on the discharged debt and functioned as an injunction, preventing creditors from attempting to collect or recover the debts owed to them (“Non-Debtor Release”).[20] In other words, a non-debtor release prevents creditors from pursuing claims against third parties.[21]Here, the Non-Debtor Release guaranteed the victims $5.5 to $6 billion dollars from the Sacklers, the owners of Purdue Pharma.[22] The Purdue Court addressed a circuit split over whether a debtor could confirm a plan containing non-debtor releases without obtaining the consent of all affected creditors.[23] Writing for the majority, Justice Gorsuch held that it may not, concluding that the Bankruptcy Code does not authorize nonconsensual third-party releases.[24] The nonconsensual third-party release, which had served as a key restructuring tool for debtors for more than four decades, was effectively eliminated by the Court’s decision.[25] However, the Purdue Court explicitly declined to provide a test on what constitutes consent, leading to another circuit split less than two years later.[26] Despite being a court of law and equity, the Purdue decision showed a chilling iciness to victims of opioid addiction throughout the United States. After the Purdue Court clarified its holding, it remanded the case so the debtor could negotiate a new plan.[27]
During renegotiations, many assumed it was inevitable that opioid victims were going to perish, losing the ability to be compensated for the harm done to them.[28] In an unexpected move, the Sacklers proposed to pay almost $7 billion over the next 15 years.[29] However, it is not common for a debtor to obtain more funds after its plan is rejected. The Purdue decision created much uncertainty in how debtors could finance their reorganization, making it more important than ever for debtors to navigate the post-Purdue landscape.[30]
When a debtor faces the risk of closure due to a lack of liquidity, it may seek debtor-in-possession (DIP) financing.[31] DIP financing provides capital to distressed debtors and allows them to continue meeting near-term obligations, such as operating expenses and to fund the general costs of a bankruptcy case.[32] A DIP financing package approved often determines “the range of restructuring options and the ultimate distribution of value.”[33] The survival of the company benefits the economy[34] and ensures the “value-maximizing settlement” that victims deserve.[35] Essentially, DIP financing “is a way for debtors to obtain post-[bankruptcy filing][36] loans to help them effectively emerge from Chapter 11 bankruptcy.”[37] Especially in mass tort bankruptcies, DIP financing is crucial to the survival of debtors; it is often one of the most consequential early events in a Chapter 11 case.[38]
In many cases, the debtor’s primary source of DIP financing is the same lender that provided loans before the bankruptcy filing (pre-petition lender).[39] Debtors often rely on this lender because the debtor’s going-concern value can deteriorate quickly during the bankruptcy case, leaving little time to locate alternative sources of financing.[40] A preexisting lender already understands the debtor’s business model and can respond sooner.[41] By contrast, a new lender without a prior relationship with the debtor might charge higher rates once they learn that the debtor—now in bankruptcy because it can’t consistently pay its debts as they come due—requests another loan. Unlike the pre-petition lender, a new lender may incur additional costs to verify the debtor’s financial condition and assess credit risk.[42]
At this point, one may wonder why a lender would assume the risk of extending credit to a debtor that may default on the loan. Lenders may be willing to provide DIP financing to distressed debtors because Chapter 11 offers protections unavailable outside bankruptcy.[43] For example, section 364 of the Bankruptcy Code allows a debtor to obtain post-petition financing without pledging assets as collateral, and the DIP lender’s claim will generally be paid before other claims.[44] Furthermore, pre-petition lenders may request a “DIP roll-up,”[45] which converts their pre-petition claim into a post-petition claim.[46] DIP financing agreements are especially useful for addressing mass tort bankruptcies.[47] Even so, these protections are only as effective as the DIP agreement negotiated by the parties.[48]
Some lenders are incentivized to invest more capital into an organization.[49] Other third parties, like directors, officers and insurance companies may have additional concerns, including the possibility of plaintiffs seeking retribution against them.[50] These third parties seek to contribute capital in exchange for protection through indemnification or non-debtor releases in the reorganization plan.[51] The benefits are clear: the debtor can provide more assets to pay out victims and have the backing of financiers or other third-parties to allow them to continue their business as usual.
As stated above, while non-consensual releases were not challenged by the Supreme Court for decades,[52] some bankruptcy districts nevertheless opted to require some form of affirmative consent.[53] An example of consent in the absence of objection is In re Arsenal Intermediate Holdings, LLC, where Delaware Bankruptcy Judge Goldblatt held that a creditor who does not object to a provision in a reorganization plan has therefore consented, regardless of whether they received a box to “opt-out”[54] or if they had to object at the fairness hearing.[55] The ideology of ”objecting or consenting” was ultimately abrogated by Judge Goldblatt in a future opinion post-Purdue; determining the more appropriate standard of consent should be the akin to contract law consent.[56] The contract model sets the standard for affirmative consent, akin to contract law. The contract model requires a creditor to receive “clear and conspicuous” notice of the release—they must receive a box to opt-out—or affirmatively vote for or against the plan.[57]
Post-Purdue, Judge Goldblatt created reconcilable tension in mass tort bankruptcies. The affirmative consent rule now requires all creditors to know their rights and affirmatively consent.[58] A class member sitting in the “passenger seat”[59] of a class action will continue to receive notice of the third-party release[60] and they may not acknowledge it because it puts no money immediately in their pocket.[61] Under an affirmative consent model, creditors now have standing to sue for lack of consent.[62] This may lead to longer Chapter 11 negotiations and DIP financing because financiers either seek a higher interest rate, or are hesitant to provide any funds.[63] The reward might not be worth the risk. Additionally, it may pressure non-financiers, like the Sacklers, to drag their feet, reducing the likelihood that creditors (victims) will recover on their claims.
So, what can debtors do? First, they can negotiate consensual releases[64] by utilizing a hybrid-default model. The hybrid-default model relies on notice that follows procedural safeguards similar to class actions under Fed. R. Civ. P. 23.[65] A debtor that 1) alerts a creditor throughout all stages of a bankruptcy proceeding that a third-party release may be needed; 2) provides clear and conspicuous notice of the rights relinquished; 3) allows a creditor to opt-out via ballot or other convenient form; and 4) reminds a creditor of the voting deadline and that a vote for or against the plan may constitute consent should suffice as consent.[66] A class member must receive notice of a class action if they qualify, and failure to opt out binds members who fail to opt-out of the class, and any judgment it may receive, good or bad.[67] Class action is frequently utilized in mass tort litigation—it is a tool that can consolidate thousands of putative class members, or plaintiffs with similar claims against the defendant, into one action. Moreover, third-party releases were created to aid specifically in mass tort bankruptcies. Therefore, relying on the notice standard of class actions, a hybrid-default model would benefit the debtor and achieve both goals of bankruptcy procedure with victims guaranteed the “value maximizing settlement” they seek and deserve.[68]
[1] Marcia S. Krieger, “The Bankruptcy Court Is a Court of Equity”: What Does That Mean?, 50 S. C. L. Rev. 275, 275 n. 1–2 (1999).
[2] Anthony Casey & Joshua Macey, Purdue Pharma and the New Bankruptcy Exceptionalism, 2024 Sup. Ct. Rev. 365, 370–71 (2024) (citing Henry E. Smith, Equity as Meta Law, 130 Yale L.J. 1050, 1057-58 (2021) and Samuel L. Bray, The System of Equitable Remedies, 63 UCLA L. Rev 530 (2016).
[3] See Lykes Bros. Steamship Co., Inc. v. Hanseatic Marine Serv. (In re Lykes Bros. Steamship Co., Inc.), 207 B.R. 282, 284 (Bankr. M.D. Fla. 1997) (“A clear purpose of Chapter 11 is to benefit all parties, including the debtor and its creditors, by providing a breathing space to enable a debtor to reorganize.”); In re TGP Commc'ns, LLC, 662 B.R. 795, 804–05 (Bankr. S.D. Fla. 2024) (“Policy goals supporting chapter 11 bankruptcy relief include preservation of the economy and prevention of harm to innocent third parties, like employees and third party creditors.”); Baroni v. Seror (In re Baroni), 36 F.4th 958, 966 (9th Cir. 2022) (“One of the primary purposes of Chapter 11 is to allow a debtor facing financial hardships to continue business operations so that it ‘may be restructured to enable it to operate successfully in the future’ because the business may be ‘more valuable’ as a going concern than if it were liquidated.”). See also Legal Information Institute, Chapter 11 Bankruptcy, Cornell L. Sch., https://www.law.cornell.edu/wex/chapter_11_bankruptcy (describing the Chapter 11 bankruptcy process) [https://perma.cc/SDL8-6WWS]; Chapter 11 - Bankruptcy Basics, U.S. Cts., https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-11-bankruptcy-basics (explaining that “[a] Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time”) [https://perma.cc/4KC6-3Z56]; Internal Revenue Manual (“IRM”), § 5.17.10, (providing a “legal reference guidance for revenue officers”) [https://perma.cc/TQF6-4D3U].
[4] TGP Commc’ns, supra note 3.
[5] 11 U.S.C. § 101(5).
[6] Julian S.H. Chung & Gary L. Kaplan, An Overview of Debtor in Possession Financing, Fried, Frank Harris, Shriver & Jacobson LLP 120 (2020).
[7] Jane Kim, Good Faith: What Recent Mass Tort Bankruptcy Decisions Tell Us, XLIII ABI Journal 3, 12 (Mar. 2024). See also Jeff Neal, Waltzing Across Texas, Harv. L. Today (Feb. 6, 2024) (discussing the “Texas Two-Step,” where a company facing a mass tort splits into two companies under Texas law; one with all their assets, and one with all mass tort liability to send to bankruptcy) https://hls.harvard.edu/today/expert-explains-how-companies-are-using-a-controversial-bankruptcy-maneuver-to-handle-mass-tort-claims/ [https://perma.cc/MLR7-5UR2].
[8] Alan N. Resnick, Bankruptcy as a Vehicle for Resolving Enterprise-Threatening Mass Tort Liability, 148 U. Pa. L. Rev. 2045, 2045 (2000); Jeffrery Ferriell & Edward J. Janger, Understanding Bankruptcy 1017 (5th ed. 2026); William Organek, Mass Tort Bankruptcy Goes Public, 77 Vand. L. Rev. 723, 769 (2024).
[9] See Ferriell, supra note 8, at 1018.
[10] Kim, supra note 7, at 53 (quoting In re LTL Mgmt. LLC, 637 B.R. 396, 410 (Bankr. D.N.J. 2022); In re Federal-Mogul Global, 684 F.3d 355, 359 (“Bankruptcy has proven an attractive alternative to the tort system for corporations because it permits a global resolution and discharge of current and future liability, while claimants' interests are protected by the bankruptcy court's power to use future earnings to compensate similarly situated tort claimants equitably.”) (citing S. Elizabeth Gibson, Fed. Judicial Ctr., Judicial Management of Mass Tort Bankruptcy Cases 1-2 (2005)).
[11] 11 U.S.C. § 101(5).
[12] Ferriell, supra note 8, at 1021.
[13] Infra note 43.
[14] Harrington v. Purdue Pharma L. P., 603 U.S. 204, 228 (2024) (Kavanaugh, J., dissenting). In pertinent part, the plan included the Sackler’s discharge of all claims held against them by Purdue Pharma and opioid victims in exchange for ~5.8 billion dollars returned back to the estate. See id. at 211–13.
[15] Id. at 209.
[16] Id. at 214; 11 U.S.C. §§ 1121–25.
[17] Purdue, 603 U.S. at 230 (Kavanaugh J., dissenting) (emphasis in original).
[18] Id. (emphasis added).
[19] Id. at 228.
[20] Id. at 215.
[21] See Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 141 (“’a court may enjoin a creditor from suing a third party, provided the injunction plays an important part in the debtor's reorganization plan.‘ While none of our cases explains when a nondebtor release is “important” to a debtor's plan, it is clear that such a release is proper only in rare cases.”) (quoting SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285, 293 (2d Cir. 1992).
[22] Purdue, 603 U.S. at 230 (Kavanaugh J., dissenting).
[23] As the Supreme Court stated: “[t]he question we face thus boils down to whether a court in bankruptcy may effectively extend to nondebtors the benefits of a Chapter 11 discharge usually reserved for debtors.” Id. at 215. See also Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203, 211 (“At issue in this appeal is a provision releasing and permanently enjoining Plaintiffs' actions against the [debtor’s directors and officers] who have not formally availed themselves of the benefits and burdens of the bankruptcy process.”). But see Casey & Macey, supra note 2, at 367 (“the question before the Supreme Court was not whether a bankruptcy court could approve the releases, but whether an Article III court hearing bankruptcy cases could.”).
[24] Purdue, 603 U.S. at 224–26. Professor Anthony Casey suggests that Justice Gorsuch’s decision may have been influenced by his formalistic approach, which reflects a distrust of judicial discretion exercised by non-Article III judges. Casey & Macey, supra note 2, at 369 n.18.
[25] Committee of Asbestos-Related Litigants v. Johns-Manville Corp. (In re Johns-Manville Corp.), 60 B.R. 612, 613 (Bankr. S.D.N.Y. 1986); Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694, 702 (2nd Cir. 1989); Airadigm Communications, Inc. v. FCC (In re Airadigm Communications, Inc.), 519 F.3d 640, 657 (7th Cir. 2008).
[26] Purdue, 603 U.S. at 226; see infra note 47.
[27] Purdue, 603 U.S. at 226–27.
[28] Id.
[29] Purdue Pharma’s Plan is Confirmed With Opt-In Releases of Sacklers, California Lawyers Association, https://calawyers.org/business-law/purdue-pharmas-plan-is-confirmed-with-opt-in-releases-of-sacklers. (citing Disclosure Statement for Thirteenth Am. Joint Plan etc. [U.S.B.C. No. 7:19-bk-23649, ECF No. 7637, at 9 and 124-125] (the Disclosure Statement) [https://perma.cc/K7CT-GFRA].
[30] Krieger, supra note 1.
[31] 11 U.S.C. §364 (governing DIP financing standards).
[32] Jarrod B. Martin et al., Freefalling with a Parachute That May Not Open: Debtor-in-Possession Financing in the Wake of the Great Recession, 63 U. Miami L. Rev. 1205, 1205 (2009); Chung & Kaplan, supra note 6; Practical Law Bankruptcy & Restructuring, What's Market: DIP Financing Terms, Westlaw Practice Note w-030-4660 (2026); Will Kenton, Debtor-in-Possession (DIP) Financing: Definition and Types, Investopedia, https://www.investopedia.com/terms/d/debtorinpossessionfinancing.asp; Even when a debtor does not need additional financing to continue operating, it may still obtain a credit line to signal to other parties that payment will be made. Douglas G. Baird, The Elements of Bankruptcy 252 (7th ed. 2022).
[33] Id. at 34.
[34] A corporation with a major share of the market will create an inevitable void that will need to be filled. For example, albeit not a bankruptcy, during the mass tort activity against Abbott Laboratories in 2022, it shut down its Michigan plant and recalled several brands of its powder formula. Abbott had a 43% share of the market, leading to the most tragic baby formula shortage in the United States. During that time, competitors Nestlé SA and Mead Johnson stepped in to help alleviate the pressures faced during the shortage. Vandana Singh, Third Largest Player in Baby Formula Jumps in to Ease Shortage in US, Benzinga (May 18, 2022), https://finance.yahoo.com/news/third-largest-player-baby-formula-194751935.html.
[35] Marshall S. Huebner & Marc J. Tobak, Please Don’t Forget the Victims: Mass Torts, Third Party Releases and the U.S. Bankruptcy Code, 3 Harv. Bankr. Roundtable (Dec. 12, 2022) https://hlsbankruptcyr.wpengine.com/wp-content/uploads/2023/01/2022.12.12-Final-Third-Party-Release-Article.pdf.
[36] In bankruptcy terminology, actions occurring before the bankruptcy filing are known as pre-petition, while those occurring after the filing are known as post-petition. See Chung & Kaplan, supra note 6 (explaining that “DIP financing arrangements allow the debtor to obtain post-petition (i.e., after the bankruptcy filing) credit”).
[37] Martin, supra note 32. Prior to the Great Recession, debtors often found it relatively easy to secure DIP financing during a Chapter 11 reorganization. Id. at 1207. At the time, DIP financing was a profitable, low-risk investment because lenders who provided such financing were typically among the first creditors to be repaid. Id.
[38] See Anish K. Bachu, Unsecured Creditors’ Committee’s Influence on Modern DIP Financing, XLV ABI Journal 4, 32 (Apr. 2026).
[39] Barry E. Adler, et al., Baird and Jackson’s Bankruptcy: Cases, Problems, and Materials 514 (6th ed. 2025).
[40] Id.
[41] Id.
[42] Id.
[43] Chung & Kaplan, supra note 6.
[44] 11 U.S.C. §364.
[45] A “DIP roll-up” is an agreement where the debtor obtains DIP financing from its existing pre-petition lender and agrees to repay the lender’s pre-petition debt as part of the new financing arrangement with the DIP funds. Practical Law Bankruptcy & Restructuring, supra note 36, § 2. DIP roll-up claims are controversial because they are also paid out first, resulting in other creditors recovering less on similar pre-petition claims. See Id.
[46] Bachu, supra note 38, at 33.
[47] Practical Law Bankruptcy & Restructuring, supra note 36, § 6.
[48] See Kristin C. Wigness, DIP Financing, Practical Law Practice Note (Westlaw) (discussing strategies creditors may use when negotiating DIP financing agreements with DIP lenders and other lenders); Adler et al., supra note 39, at 512, 514.
[49] Chung & Kaplan, supra note 6.
[50] See MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89, 90 (2nd Cir. 1988) (channeling injunction for insurance companies). For directors and officers specifically, the risk is minimized if the debtor specifically indemnifies the companies. See Purdue, 603 U.S. 204 at 228 (Kavanaugh, J., dissenting). If they do, the claims against the directors and officers are “in essence, a suit against the debtor.” Id. (quoting Purdue, 69 F.4th 45, 78 (2nd Cir. 2023)).
[51] See Purdue, 603 U.S. 204 at 228 (Kavanaugh, J., dissenting).
[52] Johns-Manville, 60 B.R. at 613; A.H. Robins., 880 F.2d at 702; Airadigm Communications, Inc. v. FCC (In re Airadigm Communications, Inc.), 519 F.3d 640, 657 (7th Cir. 2008).
[53] See also Blixeth v. Credit Suisse, 961 F.3d 1074, 1083 (9th Cir. 2020) (reaffirming that “’[t]his court has repeatedly held, without exception, that § 524(e) precludes bankruptcy courts from discharging the liabilities of non-debtors’”) (quoting Resorts Int'l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401 (9th Cir. 1995)); In re Western Real Estate Fund, Inc., 922 F.2d 592, 601–02 (10th Cir. 1990), modified on other grounds, Abel v. West, 932 F.2d 898, 899 (10th Cir. 1991) (holding that although a temporary stay prohibiting a creditor’s suit against a nondebtor during bankruptcy may be permissible, such a stay may not be extended post-confirmation as a permanent injunction that effectively relieves the nondebtor of its own liability in violation of § 524(e)). But see In re Robertshaw US Holding Corp., 662 B.R. 300, 323 (Bankr. S.D. Tex. 2024) (explaining that “[h]undreds of chapter 11 cases have been confirmed in this District with consensual third-party releases with an opt-out”); In re GOL Linhas Aéreas Inteligentes S.A., 672 B.R. 129, 169–70 (Bankr. S.D.N.Y. 2024), rev’d, 675 B.R. 125, 132 (S.D.N.Y. 2025).
[54] Omar J. Alaniz, Opt-Outs: Dead or Alive?, XLIV ABI Journal 5, 25 (2025) (explaining the factors courts may consider in assessing an opt-out process).
[55] In re Arsenal Intermediate Holdings, LLC, No. 23-10097, 2023 WL 2655592, at *6 (Bankr. D. Del. Mar. 27, 2023).
[56] In re Smallhold, Inc., 665 B.R. 704, 708 (Bankr. D. Del. 2024).
[57] Id. at 723–24.
[58] Id. at 720.
[59] Matt R. Hansen, Third Party Releases in Mass Tort Bankruptcies, The Hybrid-Default Model of Consent 33 (Apr. 16, 2026) (unpublished manuscript) (on file with author).
[60] Patterson v. Mahwah Bergen Retail Group, Inc., 636 B.R. 641, 660 (E.D. Va. 2022) (concluding that Due Process was violated when not all releasing parties were given a release form and the opportunity to opt out).
[61] Some creditors might not even find it worth their time to object or even fill out the form due to their pro rata share of a settlement and thus, may be deemed to not consent if they don’t return the form. See Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1312 n. 15 (3d Cir. 1993).
[62] Smallhold, 665 B.R. at 723.
[63] Adler et al., supra note 39, at 512, 514.
[64] Id.
[65] Fed. R. Civ. P. 23(c)(2)(B).
[66] Hansen, supra note 59 at 43.
[67] Id.; see also Am. Pipe & Constr. Co. v. Utah, 414 U.S. 538, 549 (1974) (after receiving notice, class members may either opt out or be bound by the final judgment).
[68] Huebner & Tobak, supra note 35 at 3.