Second Circuit: Non-consensual Third-Party Releases of Direct Claims Against a Non-debtor Can Be Included in a Chapter 11 Plan in Certain
Second Circuit: Non-consensual Third-Party Releases of Direct Claims Against a Non-debtor Can Be Included in a Chapter 11 Plan in Certain
Circumstances
The U.S. Court of Appeals for the Second Circuit reinstated the bankruptcy court’s confirmation of Purdue Pharma L.P.’s Chapter 11 Plan, after the district court had vacated such confirmation based on its conclusion that the Bankruptcy Code did not allow third-party releases such as the ones found in the Plan.
The Second Circuit concluded that, under certain circumstances, the Bankruptcy Code does allow for such releases. Specifically, the appeals court found that the releases were allowed pursuant to 11 U.S.C. § 105(a) (bankruptcy court may issue “any order” that is “necessary or appropriate to carry out the provisions of” the Bankruptcy Code) and 11 U.S.C. § 1123(b)(6) (chapter 11 plan may “include any other appropriate provision not inconsistent with the applicable provisions of this title.”).
The court also rejected the premise that the releases were barred under 11 U.S.C. § 524(e), since that provision merely provides that a discharge of a debt does not affect the liability of any other entity over the debt, and thus does not limit the bankruptcy court’s powers to release a non-debtor from a creditor’s claims. Otherwise, the Second Circuit reasoned, Congress would have used mandatory terms such as “shall” or “will” instead of “does.” The court of appeals also provided seven factors that bankruptcy courts must consider when determining if the circumstances justify imposing nonconsensual third-party releases:
- whether there is an identity of interests between the debtors and released third parties, including indemnification relationships;
- whether claims against the debtor and non-debtor are factually and legally intertwined
- whether the scope of the releases is appropriate;
- whether the releases are essential to the reorganization;
- whether the non-debtor contributed substantial assets to the reorganization;
- whether the impacted class of creditors “overwhelmingly” voted in support of the plan with the releases, and
- whether the plan provides for the fair payment of enjoined claims.
The court also noted that its decision aligns with prior holdings by the Sixth and Seventh Circuits, and departs from decisions rendered by the Fifth, Ninth and Tenth Circuits.
In Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 980 (1st Cir. 1995), the First Circuit declined to express a view on this issue.
However, several cases from the U.S. Bankruptcy Court for the District of Massachusetts have held that a bankruptcy court has the authority to issue and enforce nondebtor/third-party releases when necessary, in accordance with the multifactor test commonly attributed to In re Master Mortg. Inv.
Fund, Inc., 168 B.R. 930, 935 (Bkrtcy. W.D. Mo., 1994).
See In re Chicago Invs., LLC, 470 B.R. 32, 95 (Bankr. D. Mass. 2012) and In re Mahoney Hawkes, LLP, 289 B.R. 285, 299 (Bkrtcy.
D. Mass., 2002).