Virginia Bankruptcy Court Finds Purdue Pharma Inapplicable as Against Asset Sales Under Bankruptcy Code Section 363 and Settlement Agreements Under Bankruptcy Rule 9019
On January 24, 2025, the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”), in a matter of first impression, held that the United States Supreme Court’s decision in Harrington v. Purdue Pharma, L.P.[1] barring third-party releases is inapplicable to asset sales conducted pursuant to the Bankruptcy Code[2] and settlement agreements entered into pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). The Bankruptcy Court’s decision in In re Hopeman Brothers, Inc.[3] limits the Supreme Court’s landmark ruling while ensuring asset purchasers continue to be protected against future claims from a debtor’s creditors.
Hopeman Brothers, Inc (the “Debtor”) was in the business of contracting with shipbuilders to outfit the interior of ships up until its cessation of operations in the 1980s. Though no longer operational for nearly 40 years, the Debtor maintained its corporate existence for the purpose of defending against and settling nearly 126,000 asbestos-related personal injury claims asserted against it over that period. In furtherance of its defense and settlement of these claims, the Debtor purchased asbestos-related insurance from various insurers, which, under differing agreements, would pay all or a portion of claims asserted against the Debtor.
After filing for chapter 11 protection, on July 24, 2024, the Debtor filed a motion requesting the Bankruptcy Court approve a settlement agreement (the “Settlement Agreement”) that it negotiated with its remaining insurers (the “Settling Insurers”) for the “buyback” of the related insurance policies. Under the Settlement Agreement:
- The Settling Insurers would pay a sum certain to the Debtor;
- The debtor would establish a liquidation trust with the funds for distribution to holders of asbestos-related claims;
- The Settling Insurers would be released and discharged from all claims related to the insurance policies, including from third-party claimants; and
- The insurance policies would be deemed to have been sold back to the Settling Insurers pursuant to Bankruptcy Code section 363 as if they had never been issued in the first instance.
In addition, the Settlement Agreement contained a provision that prevented any holder of an asbestos-related claim against the Debtor or Settling Insurers from asserting the same, thus releasing the Settling Insurers from any liability or obligation on any such claims. The Settlement Agreement, and transactions contemplated therein, were approved by an Order of the Bankruptcy Court on December 19, 2024 (the “Settlement Order”).
Huntington Ingalls Industries, Inc. (“HII”) and several other individuals appealed the Settlement Order, and HII simultaneously filed a motion requesting a stay of the Settlement Order pending the resolution of the appeal. HII relied heavily on the Supreme Court’s decision in Purdue Pharma to argue that the third-party release in favor of the Settling Insurers was improper. In that case, the Supreme Court held “that the [B]ankruptcy [C]ode does not authorize the release and injunction that, as part of a plan of reorganization under Chapter 11, effectively seeks to discharge claims against a nondebtor without the consent of affected claimants.”[4] In support of its request for a stay pending appeal, HII argued that the bar against third-party releases articulated in Purdue Pharma applied with equal force to sales conducted pursuant to Bankruptcy Code section 363 and, as an issue of first impression, the Settlement Order should be stayed until reviewed by a higher court.
At the outset, the Bankruptcy Court noted that entitlement to a stay pending appeal requires a primary showing from the requesting party “that he will likely prevail on the merits of the appeal . . . .”[5] Further, the Bankruptcy Court noted that because the subject insurance policies were property of the Debtor’s estate, they may be sold with court approval pursuant to Bankruptcy Code section 363. Of note, section 363(f) allows a debtor to sell its property “free and clear of any interest in such property” if: (i) applicable nonbankruptcy law permits such a sale free and clear; (ii) the interest holder consents; (iii) the subject interest is a lien, and the sale price of the property is greater than the aggregate of all liens on the property; (iv) the interest is subject to a bona fide dispute; or (v) the interest holder could be compelled to accept a money satisfaction of its interest.[6]
The Bankruptcy Court further noted that third-party releases have long accompanied “free and clear” sales under Bankruptcy Code section 363, particularly as related to “buyback” transactions with insurance companies like that set out on the Settlement Agreement, including in many high-profile mass-tort bankruptcy cases. Furthermore, including an injunction against third-party claims against an asset purchaser fin an order approving a bankruptcy sale furthers the “free and clear” aspect of sales conducted pursuant to Bankruptcy Code section 363.
The Bankruptcy Court explained that the Supreme Court’s decision in Purdue Pharma was explicit in that it was limited to a narrow issue: “whether non-consensual non-debtor releases may be included in chapter 11 plans.”[7] In contrast, Purdue Pharma did not intend to abrogate the protections afforded to a purchaser of assets in a sale conducted pursuant to Bankruptcy Code section 363, particularly that such sale is free and clear of claims of the debtor’s creditors. Rather, such claims attach to the proceeds of the sale, which is exactly what happened pursuant to the Settlement Agreement.
The Bankruptcy Court further referenced a recent decision by the United States Bankruptcy Court for the Southern District of Florida in In re Bird Global, Inc.,[8] wherein that court acknowledged that Purdue Pharma had no bearing on settlement agreements governed by Bankruptcy Rule 9019 or asset sales under Bankruptcy Code section 363. Finally, the Bankruptcy Court noted that absent the ‘free and clear” protections provided by Bankruptcy Code section 363(f), insurance companies, like the Settling Insurers, would have little to no incentive to settle or otherwise monetize these insurance policies for the benefit of all of debtor’s creditors.
As HII would clearly have little to no chance of prevailing on appeal given the fact that Purdue Pharma was inapplicable to the Settlement Agreement and the “buyback” of the subject insurance policies under Bankruptcy Code section 363, the Bankruptcy Court held that HII was not entitled to a stay pending the appeal of the Settlement Order.
Purdue Pharma was, by every measure, a landmark decision in the age of mass-tort bankruptcy litigation. However, its scope is limited and insolvency practitioners would be well-served to be familiar with those limits in order to avoid needless motion practice based on a misunderstanding of the scope of the Supreme Court’s decision.
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[1] 603 U.S. 204, 144 S.Ct. 2071 (2024).
[2] 11 U.S.C. § 101, et seq.
[3] No. 24-32428, 2025 WL 297652 (Bankr. E.D. Va. Jan. 24, 2025).
[4] 603 U.S. at 206.
[5] 2025 WL 297652, at *2 (quoting Long v. Robinson, 432 F.2d 977, 979 (4th Cir. 1970)). The Bankruptcy Court articulated additional elements that must be satisfied as well. However, as HII failed to satisfy the first element, a discussion of the remaining elements is unnecessary for purposes of this alert.
[6] 11 U.S.C. § 363(f).
[7] 2025 WL 297652, at *4.
[8] Case No. 23-20514-CLC (Bankr. S.D. Fla.).
