Third-Party Releases After Purdue Pharma: What Small Business Owners Should Know
- Melissa A. Youngman
- 5 hours ago
- 8 min read
Melissa Youngman, PA and Winter Park Estate Plans & ReOrgs represent businesses in Chapter 11 and Subchapter V cases before the United States Bankruptcy Court for the Middle District of Florida, including the Orlando, Jacksonville, Tampa, and Fort Myers divisions, with a primary practice footprint in Orange, Seminole, Osceola, Volusia, Lake, and Brevard counties.
A Supreme Court ruling issued in June 2024 fundamentally changed what a Chapter 11 reorganization plan can do for the people who stand behind a debtor business. The decision, Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), holds that a bankruptcy court cannot approve a plan that releases claims against non-debtors, such as business owners, insiders, or co-signers, without the consent of the claimants whose rights would be extinguished. For large public-company restructurings, the ruling generated enormous commentary. For small business owners in Orlando, Winter Park, Maitland, and the surrounding communities considering Subchapter V bankruptcy, it has a practical consequence that receives far less attention.
The consequence is this: a Subchapter V plan can reorganize the debts of the business, but it cannot, by itself, wipe out the personal liability of the owner who signed a personal guarantee on that same debt. That personal liability was never discharged by a confirmation order before Purdue Pharma. After Purdue Pharma, any plan term that purports to release it without creditor consent is now expressly off limits. Understanding what the ruling actually says, what it leaves open, and how it interacts with Subchapter V plan confirmation is a threshold issue for any small business owner in the Middle District of Florida planning to use the process.
This post explains the Purdue Pharma decision in plain terms, traces its application to Subchapter V cases, and identifies the options that remain available to debtors who want to address the personal liability of insiders or co-debtors through a reorganization plan.
What a Third-Party Release Does in a Bankruptcy Plan
Section 1123(b) of the Bankruptcy Code lists things a Chapter 11 plan "may" do. Subsection (6) allows a plan to include "any other appropriate provision not inconsistent with the applicable provisions of this title." For years, many Chapter 11 practitioners read that language to permit a plan to include a release of claims against non-debtors, meaning parties who did not themselves file for bankruptcy, provided the release was otherwise fair and supported by consideration.
The practical appeal for business owners is obvious. A closely held company typically operates on a foundation of personal guarantees. The owner personally guaranteed the SBA loan. The owner personally guaranteed the commercial lease. The owner co-signed the equipment financing. The business files Subchapter V and reorganizes its balance sheet. Without some mechanism to address the personal guarantees, the creditors simply pivot from the reorganized business entity to the owner personally, collecting from the business under the plan while simultaneously pursuing the owner's personal assets outside of it.
Third-party releases were the tool some debtors used to close that gap, at least in circuits that permitted them. The Supreme Court in Purdue Pharma put a hard limit on how that tool can be deployed.
What the Supreme Court Decided
Section 1123(b)(6), read in the context of the Bankruptcy Code as a whole, does not authorize a court to approve a plan that discharges claims against a non-debtor without the consent of the claimants who hold those claims. That is the core holding of Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), decided June 27, 2024, in a 5-to-4 decision.
The background involved Purdue Pharma's Chapter 11 reorganization plan, which proposed to release opioid-related civil claims against members of the Sackler family in exchange for a financial contribution to the settlement fund. The Sackler family members had not filed for bankruptcy themselves. Opioid claimants who had not consented to the release objected. Lower courts approved the plan, finding the releases appropriate under § 1123(b)(6). The Supreme Court reversed.
The majority concluded that § 1123(b)(6) permits "appropriate" provisions, but that a provision extinguishing the claims of non-consenting creditors against parties who have not subjected themselves to the jurisdiction of the bankruptcy court is not "appropriate" within the meaning of the statute. Other Code provisions, including § 524, limit the discharge of debts to debtors who actually file for bankruptcy and obtain a discharge. A non-debtor cannot obtain the equivalent of a discharge through a plan provision that wipes out creditor claims against them, absent consent.
The dissent, written by Justice Sotomayor, disagreed with the statutory analysis and would have affirmed the lower courts. But four Justices is not a majority, and the holding stands: nonconsensual third-party releases of this kind are not permitted under the Code as currently written.
How Harrington Applies to Subchapter V
Subchapter V is a procedural track within Chapter 11, codified at 11 U.S.C. §§ 1181 through 1195. The provisions of Section 1123 (with the exception of Section 1123(a)(8) and (c)) governs the contents of a Chapter 11 plan in Subchapter V cases because it is not expressly excluded by § 1181(a). Harrington's interpretation of § 1123(b)(6) therefore applies directly to Subchapter V plan confirmation.
The upshot for a Subchapter V debtor in the Middle District of Florida is practical and specific. A Subchapter V plan can accomplish a great deal. It can reorganize secured debt, treat unsecured creditors to less than full payment over a three-to-five year period, allow the owner to retain equity through the § 1191(b) nonconsensual cramdown mechanism, and discharge the business entity's obligations upon completing plan payments. What it cannot do, after Purdue Pharma, is include a plan term that releases a non-consenting creditor's claim against the business owner personally, or against any other insider or co-debtor who has not filed for bankruptcy.
Section 1191(b) modified the absolute priority rule for SubV debtors, which was a genuine breakthrough for small business reorganization. That modification runs in favor of the debtor entity's equity holders. It is not a mechanism for releasing non-debtor liability. The § 1191(b) cramdown allows a debtor to confirm over a dissenting class; but it does not provide for release of third party guarantees. Purdue Pharma clarified that this boundary holds for any Chapter 11 plan, including Subchapter V plans.
Consensual Releases: What Remains Available
Purdue Pharma addressed nonconsensual releases. The majority opinion was careful to say that it was not addressing consensual third-party releases, a point noted by both the majority and the dissent.
A consensual release is one where the affected claimant agrees to release claims against a non-debtor as part of the plan. If a creditor votes to accept a plan that contains a clear, explicit third-party release provision, and if that vote constitutes informed consent to the release rather than merely acceptance of the distribution the plan offers, the release may be enforceable. Courts are still working through what exactly constitutes consent in the plan-voting context, and practitioners should expect continued litigation on that question in the post-Harrington period.
For a Subchapter V debtor who wants to address personal guarantee exposure, the practical implication is that a negotiated, creditor-specific release remains possible. A lender who receives full payment on its secured claim may agree to release the personal guarantee as part of a global settlement incorporated into the plan. An unsecured creditor who votes to accept the plan and is presented with a clear release provision may be found to have consented. The architecture of the agreement matters enormously, and drafting a release provision that will survive post-confirmation challenge requires attention to what the affected claimant actually agreed to, not just what the plan says.
Guarantors and Insiders in Subchapter V Practice
The Central Florida small business that comes to a Subchapter V consultation typically has at least one, often several, personal guarantee obligations running alongside its business debts. The SBA 7(a) program requires it. Commercial landlords on Park Avenue in Winter Park or on International Drive in Orlando routinely require it. Equipment lenders almost always require it.
When the business reorganizes under Subchapter V, those guarantee obligations do not disappear simply because the business's debt is being restructured. A confirmed plan discharges the business entity's obligation to the extent provided in the plan; the personal guarantee is a separate contractual obligation running from the guarantor to the creditor. Unless the creditor consensually releases the guarantee as part of the plan or in a side agreement, the creditor retains its right to pursue the guarantor personally.
After Purdue Pharma, the planning question for a Subchapter V debtor whose owner holds personal guarantee exposure is which creditors are most important to reach a consensual resolution with, and what consideration can the plan or an ancillary settlement offer to obtain that release? In some cases, a lender will release a guarantee in exchange for a lump-sum payment above what the plan otherwise provides. In others, the guarantee obligation will survive confirmation, and the owner will need to address it separately, whether through a subsequent personal bankruptcy, a workout with the individual creditor, or simply ongoing payment under the original guarantee terms.
There is no one-size answer. The analysis is creditor-by-creditor, guarantee-by-guarantee, and depends on what leverage the business plan actually gives the debtor in that negotiation.
Central Florida Subchapter V After Purdue Pharma
The Purdue Pharma decision did not change what Subchapter V can accomplish for a qualifying small business debtor in the Middle District of Florida. The core advantages remain and include no absolute priority rule barrier, no separate disclosure statement, a 90-day plan deadline, a Subchapter V trustee whose primary role is to facilitate a consensual plan, and a path to discharge for the business entity.
What the ruling changed is the calculation around personal guarantee exposure. Business owners in Orlando, Maitland, Lake Mary, Oviedo, and Kissimmee who are weighing a Subchapter V filing need to understand, before they file, which of their personal guarantees are likely to survive confirmation and what tools are available to address them. That analysis belongs in the pre-petition planning process, not as an afterthought once the plan is already drafted.
Melissa Youngman, PA represents businesses in Chapter 11 and Subchapter V cases throughout the Middle District of Florida. For a foundational overview of Subchapter V eligibility and the reorganization process, see our cornerstone guide on what Subchapter V bankruptcy is and how it works.
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Melissa Youngman is licensed to practice law in the State of Florida and regularly represents debtors, creditors, and other parties in interest in the United States Bankruptcy Court for the Middle District of Florida. This blog addresses issues under federal bankruptcy law and Florida state law; the outcome of any specific matter depends on its particular facts and on statutes, rules, and case law that may have changed after the date of publication.
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