Chapter 11 Plan Third-Party Release Provisions:...

Chapter 11 Plan Third-Party

Release Provisions: Structuring

or Objecting to NonDebtor Releases

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TUESDAY, DECEMBER 16, 2014

Presenting a live 90-minute webinar with interactive Q&A

James M. Lawniczak, Partner, Calfee Halter & Griswold, Cleveland

Karen Skomorucha Owens, Director, Ashby & Geddes, Wilmington, Del.

Philip Sasser, Attorney, Sasser Law Firm, Cary, N.C.

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Chapter 11 Plan Third-Party Release Provisions Structuring or Objecting to Non-Debtor Releases

Karen Skomorucha Owens [email protected]

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THIRD PARTY RELEASES

• Are They Permitted? • What Does it Mean to Consent? • Standards for Approval of Non-Consensual Releases • Case Studies

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Types of Third-Party Releases

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Types of Third-Party Releases Consensual

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Non-Consensual

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“Upon the Effective Date, in consideration for the obligations of the Debtors and Reorganized Debtors under the Plan . . . to be delivered in connection with the Plan, all Holders of Claims or Equity Interests that vote in favor of the Plan shall be deemed to unconditionally, forever release all claims . . . against any [(i) any individual serving on the Confirmation Date as an officer, director, or manager of any of the Debtors . . . (iii) the Prepetition Lenders . . . (v) the Plan Proponents . . . .]”

Non-Consensual

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“Upon the Effective Date, in consideration for the obligations of the Debtors and Reorganized Debtors under the Plan . . . to be delivered in connection with the Plan, all Holders of Claims or Equity Interests that vote in favor of the Plan shall be deemed to unconditionally, forever release all claims . . . against any [(i) any individual serving on the Confirmation Date as an officer, director, or manager of any of the Debtors . . . (iii) the Prepetition Lenders . . . (v) the Plan Proponents . . . .]”

Non-Consensual

“Upon the entry of the Confirmation Order, for good and valuable consideration . . ., to the fullest extent permitted under applicable law . . . each Holder of a Claim or Equity Interest that has received distribution(s) made under the Plan . . . shall be deemed to have . . . forever released . . . the Released Liabilities against [the Committee, the Pre-Petition Lenders, the Agent, Zohar, the D&Os, and the Debtors] . . . and forever covenanted . . . not to sue, assert any claim, causes of action, or liabilities against or otherwise seek recovery from any of the [Released Parties].”

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Are Third Party Releases Permitted?

No

• Fifth, Ninth, Tenth Circuits

Consent

Only

• D.C. Circuit

With or Without Consent

• Second, Third, Fourth, Sixth, Seventh Circuits

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Basis for Prohibition

11 U.S.C.§ 1141(d)(1)

• “[T]he confirmation of a plan . . . discharges the debtor from any debt that arose before the date of such confirmation. . . .”

11 U.S.C.§ 524(a)

• “A discharge . . . operates as an injunction against . . . an act, to collect, recover or offset any . . . debt as a personal liability of the debtor . . . .”

11 U.S.C.§ 524(e)

• “[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”

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Basis for Prohibition

11 U.S.C.§ 524(e)

• “[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”

11 U.S.C.§ 524(g)

• “[A] court that enters an order confirming a plan of reorganization under chapter 11 may issue, in connection with such order, an injunction in accordance with this subsection to supplement the injunctive effect of a discharge under this section.”

Resorts Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995); see also Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746 (5th Cir. 1995); Landsing Diversified Properties-II v. First Nat’l Bank & Trust (In re W. Real Estate Fund, Inc.), 922 F.2d 592 (10th Cir. 1990)

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Basis for Allowance

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Basis for Allowance

“[D]ischarge of a debt of the debtor does not affect the liability of any other entity on, or the property of

any other entity for, such debt.” 11 U.S.C. § 524(a) “[D]ischarge of a debt of the debtor”

In re Speciality Equip. Cos., 3 F.3d 1043 (7th Cir. 1993); accord In re Coram Healthcare Corp., 315 B.R. 321, 336 (2004); see also In re AOV Indus., 31 B.R. 1005 (D.D.C. 1983) (noting that the voluntary releases granted to third-parties by creditors did not implicate the debtors’ discharge), aff’d in part, rev’d on other grounds in part by 792 F.2d 1140 (7th Cir. 1986)

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Basis for Allowance

“[D]ischarge of a debt of the debtor does not affect the

liability of any other entity on, or the property of any other

entity for, such debt.” 11 U.S.C. § 524(a)

“[D]ischarge . . . of the debtor” 11 U.S.C. § 105(a) 11 U.S.C. § 1123(b)(6)

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Consensual

• What does it mean to consent?

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What Does It Mean To Consent?

Affirmative Voting to Accept or Reject the Plan and Failing to Opt-Out of Granting the Releases

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Affirmative Voting to Accept or Reject the Plan and Failing to Opt-Out of Granting the Releases

• Impaired But Fails to Vote and Opt Out of a Release; or

• Unimpaired Pursuant to the Plan and Therefore Deemed to Accept the Plan Pursuant to Section 1126(f) of the Bankruptcy Code

Failure to Return a Ballot Because:

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• Impaired creditors’ voting failure can be deemed consent if:

• adequate notice of the releases and detailed opt out instructions are provided

See, e.g., In re Indianapolis Downs, LLC, 486 B.R. 286 (Bankr. D. Del. 2013); In re Calpine Corp., No. 05-60200, 2007 WL 4565223 (Bankr. S.D.N.Y. Dec. 19, 2007); In re DBSD N. Am., Inc., 419 B.R. 179 (Bankr. S.D.N.Y. 2009)

• What is adequate notice?

• highlight the release provision in the plan and disclosure statement by using bold text.

• explain to voters on the ballot, in bold and CAPITALIZED text, the effect a failure to vote will have.

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Payment in Full

Release

In re Indianapolis Downs, LLC, 486 B.R. 286 (Bankr. D. Del. 2013) In re Spansion, Inc., 426 B.R. 114 (Bankr. D. Del. 2010)

Unimpaired Creditors Deemed to Accept

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In re Washington Mutual, Inc., 442 B.R. 314, 355 (Bankr. D. Del. 2011)

“Failing to return a ballot is not a sufficient

manifestation of consent to a third party release”

In re Genco Shipping & Trading Ltd., 513 B.R. 233, 270 (Bankr. S.D.N.Y. 2014)

“[S]imply classifying a party as unimpaired does not mean that they should be somehow automatically

deemed to grant a release . . . .”

Failure to Return a Ballot

Deemed to Accept

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Non-Consensual

• Standards for Approval • Case Studies

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Standards for Approval

Third Circuit

• Is the release necessary to the success of the reorganization?

•Have the releasees provided a critical financial contribution to the debtor’s plan?

•Is the releasees’ financial contribution necessary to make the plan feasible?

• Is the release fair to non-consenting creditors (i.e. whether the non-consenting creditors received reasonable compensation in exchange for the release)?

Second Circuit

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Third Circuit

• Is the release necessary to the success of the reorganization?

•Have the releasees provided a critical financial contribution to the debtor’s plan?

•Is the releasees’ financial contribution necessary to make the plan feasible?

• Is the release fair to non-consenting creditors (i.e., whether the non-consenting creditors received reasonable compensation in exchange for the release)?

Second Circuit

•Did the estate receive substantial consideration?

•Are the enjoined claims “channeled” to a settlement fund rather than extinguished?

•Would the enjoined claims indirectly impact the debtor’s reorganization by way of indemnity or contribution?

•Does the plan otherwise provided for the full payment of the enjoined claims?

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Sixth

Circuit

• Is there an identity of interests between the debtor and the third party, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate?

•Has the non-debtor contributed substantial assets to the reorganization?

• Is the injunction essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor?

•Has the impacted class overwhelmingly voted to accept the plan

•Does the plan provide a mechanism to pay for all, or substantially all, of the class affected by the injunction?

•Does the plan provide an opportunity for those claimants who choose not to settle to recover in full?

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Case Studies

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First Circuit

Notable cases: In re Charles Street African Methodist 499 B.R. 66 (2013)

Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973 (1st Circuit 1995)

In re Quincy Medical Center, Inc., 2011 WL 5592907 (Bankr.D.Mass.2011)

Philip Sasser [email protected]

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First Circuit

- Unsettled at the circuit level.

- Monarch Life Ins. Co. is an instance of the circuit court examining the issue but ultimately basing its ruling on grounds other than its allowing for third-party releases.

- Majority of districts allow for third-party, non-consensual, releases. In re Charles Street African Methodist 499 B.R. 66 (2013)

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First Circuit

• Factors considered: – “The Master Mortgage factors are useful

considerations in assessing the propriety of a release…These factors are neither exclusive nor conjunctive requirements. They are a useful starting point.” In re Charles Street African Methodist 499 B.R. 66 (2013).

– Circuit Court describes those cases that allow for third-party releases as occurring in “extraordinary circumstances.” Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973 (1st Circuit 1995)

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Second Circuit

Notable Cases: In re Genco Shipping & Trading Limited. 513 B.R. 233 (Bankr. S.D.N.Y. 2014)

Deutsche Bank AG v. Metromedia Fiber Network, Inc. 416 F.3d 136 (2nd Cir. 2005)

In re Adelphia Commc’nc. Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007)

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Second Circuit

• Circuit Court stated in Metromedia that releases were not a matter of “facts and prongs”.

• In re Adelphia Commc’nc. Corp states that non-debtor releases “are permissible under some circumstances, but not as a routine matter.”

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Second Circuit

• Occasions for allowing releases from In re Genco Shipping & Trading Limited: – Release is important to a debtor’s plan; – Claims are channeled to a settlement fund, rather than

extinguished; – Where the enjoined claims would indirectly impact the

debtor’s reorganization by way of indemnity or contribution;

– Where the released party provides substantial consideration;

– Where the plan otherwise provides for the full payment of the enjoined claims; or

– Where there creditors consent.

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Third Circuit

Notable Cases: In re Lower Bucks Hospital. 571 Fed.Appx. 139. (3d Cir. 2014).

In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000).

In re Spansion, Inc., 426 B.R. 114 (Bankr.D.Del. 2010).

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Third Circuit

• In re Lower Bucks Hospital concerns itself primarily with the importance of a plan clearly disclosing its releases. It does, however, restate decisions made in In re Continental Airlines and In re Spansion, Inc. about the underlying circumstances where releases are appropriate.

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Third Circuit

• In re Continental Airlines is careful not to establish its own rule regarding the conditions under which non-debtor releases are appropriate, but it does align itself with other circuits that allow for releases in certain circumstances. It specifically identifies “fairness, necessity to the reorganization, and specific factual findings to support these conclusions” as being the “hallmarks of such non-consensual releases.” – “Such an injunction is a dramatic measure to be used

cautiously.”

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Fourth Circuit

Notable Cases: Behrmann v. National Heritage Foundation 663 F.3d 704 (4th Cir. 2011)

In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989)

In re Railworks Corp. 345 B.R. 529 (Bankruptcy Court Maryland 2006)

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Fourth Circuit

• A.H. Robins Co., concerned a mass tort suit and was an early statement from the circuit court level that section 524(e) was not a blanket denial of the court’s equitable powers to release a guarantor.

• National Heritage Foundation: “non-debtor releases in this context should be granted cautiously and infrequently.”

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Fourth Circuit

• The Fourth Circuit in National Heritage Foundation appear to agree with the list of factors set out in the Dow Corning and Railworks Corp. cases that were cited by the debtor, but emphasized, in striking down the non-party releases, the absence of factual evidence that these factors were met by the debtor. It is one thing to cite the factors, the court seems to say, it is quite another to prove that the debtor has met them.

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Fifth Circuit

Notable Case: In re Zale Corporation. 62 F.3d 746 (5th Cir. 1995)

In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009)

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Fifth Circuit

• Zale begins with this broad and general rule: “Section 524 prohibits the discharge of debts of nondebtors. Accordingly, we must overturn a section 105 injunction if it effectively discharges a nondebtor.”

• It then provides exceptions for:

– Temporary injunctions; – Permanent injunctions where, like in the Drexel and Manville cases

(both 2nd Cir.), the enjoined claimants are channeled to allow recovery from separate assets. (The injunction in Zale did not provide any alternative means of recovery.); or

– In “unusual circumstances” such as when (1) the nondebtor and the debtor enjoy such an identity of interests that the suit against the nondebtor is essentially a suit against the debtor, and (2) when the third-party action will have an adverse impact on the debtor’s ability to accomplish reorganization.

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Fifth Circuit

• In re Pacific Lumber acknowledges the hard-line approach of Zale, maintains that line, and further states that many of the cases used to assert non-debtor releases are best understood as arising from the mass tort context and are inappropriate in any other context.

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Sixth Circuit

Notable Case: In re Dow Corning, 280 F.3d 648 (6th Cir. 2002)

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Sixth Circuit

• Dow Corning outlines a Seven Factor Test for releasing non-debtor parties: 1. There is an identity of interests between the debtor and the third party,

usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suite against the debtor or will deplete the assets of the estate;

2. The non-debtor has contributed substantial assets to the reorganization; 3. The injunction is essential to reorganization, namely the reorganization

hinges on the debtor being free from indirect suits against parties who would have indemnity or contributions claims against the debtor;

4. The impacted class, or classes, has overwhelmingly voted to accept the plan;

5. The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction;

6. The plan provides an opportunity for those claimants who choose not to settle to recover in full; and

7. The bankruptcy court made a record of specific factual findings that support its conclusions.

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Seventh Circuit

Notable Cases: In re Airadigm Communications, Inc., 519 F.3d 640 (7th Cir. 2008)

In re Ingersoll, Inc., 562 F.3d 856 (7th Cir. 2009)

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Seventh Circuit

• The Seventh Circuit stated in Airadigm Communications that “section 524(e) does not purport to limit the bankruptcy court’s powers to release a non-debtor from a creditor’s claims.” This enables the court to approve for consensual releases. But what about non-consensual releases?

• The Airadigm court rules that section 105 enables it to approve non-consensual releases when the release is “necessary for the reorganization and appropriately tailored.” – “Appropriately tailored” seems to mean that the release is

not “blanket immunity for all times, all transgressions, and all omissions.”

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Seventh Circuit

• In In re Ingersoll, Inc. the Seventh Circuit again examined non-debtor releases and restated both their validity and that they should be used only sparingly and without “blanket immunity.”

• Further, releases should be: – an essential component of the plan,

– The fruit of long-term negotiations,

– And achieved by the exchange of good and valuable consideration by the released party that will enable unsecured creditors to realize distribution in the case.

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Seventh Circuit

• Ingersoll extends the scope of non-debtor releases from what it ruled in Airadigm because, here, not only is the released party a nondebtor, the enjoined party is not a creditor of the debtor! – The Court explains: “We don't think [the fact that the enjoined party is

not a creditor to the debtor] is dispositive when the party whose claim was extinguished received fair notice and an opportunity to object. And there is nothing in the bankruptcy code that tells us otherwise. Yet, it is important to note in all this what we are not saying. We are not saying that a bankruptcy plan purporting to release a claim like [the non-party creditor] is always—or even normally—valid. In the unique circumstances of this case, however, we believe it is. We go no further than to apply the rule we adopted in Airadigm to the facts at hand. In most instances, releases like the one here will not pass muster under that rule. Bankruptcy litigants should keep that in mind when they sit down at the negotiating table.”

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Eighth Circuit

Notable Cases: In re Master Mortgage Investment Fund, Inc., 168 B.R. 930 (Bankr.Ct.WDMO) 1994.

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Eighth Circuit

• Master Mortgage cites these five factors, along with the familiar warning that “equities must be weighed” and that lists of factors are ultimately ineffective at reaching the correct result every time: 1. There must be an identity of interest between the debtor and the

third party such that a suit against the third party is, in essence, a suit against the debtor or will deplete assets of the estate;

2. The third party must contribute “substantial assets” to the reorganization;

3. The injunction is essential to reorganization. Without it, there is little likelihood of success.

4. A substantial majority of the creditors agree to such injunction, specifically, the impacted class, or classes, has overwhelmingly voted to accept the proposed plan treatment.

5. The plan must provide for payment of all or substantially of the claims of the classes affected the third party release.

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Ninth Circuit

Notable Cases: Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985)

American Hardwoods, Inc. 885 F.2d 621 (9th Cir. 1989)

In re Lowenschuss 67 F.3d 1394 (9th Circ. 1995)

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Ninth Circuit

• The Ninth Circuit in Underhill v. Royal held that non-party releases were not valid, even with the consent of creditors. – “When a bankruptcy court discharges the debtor, it

does so by operation of the bankruptcy laws, not be consent of the creditors.”

– “The payment which effects a discharge is not consideration for any promise by the creditors, must less for one to release non-party obligors.”

– “The court has no power to discharge the liabilities of a non-debtor pursuant to the consent of creditors as part of a reorganization plan.”

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Ninth Circuit

• Ten years later, in 1995, the Ninth Circuit again shut the door to third-party releases in the Lowenschuss case. – “In American Hardwoods we explicitly rejected the

argument—advanced by Lowenschuss today—that the general equitable powers bestowed upon the bankruptcy court by section 105(a) permit the bankruptcy court to discharge the liabilities of non-debtors. Noting that “section 105 does not authorize relief inconsistent with more specific law,” we concluded “the specific provisions of section 524 displace the court's equitable powers under section 105to order the permanent relief [against a non-debtor] sought by [the debtor].” Id. at 625–26.

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10th Circuit

Notable Cases: In re Western Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1991)

Abel v. West, 932 F.2d 898 (10th Cir. 1991)

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10th Circuit

• Abel v. West and Western Real Estate Fund. follow the 9th Circuit ruling in American Hardwoods, Inc. v. Deutsche Credit Corp. in prohibiting third-party releases.

• “A temporary injunction may be appropriate during the development and evaluation of a reorganization plan, but it would not be appropriate post-confirmation in the form of a permanent injunction.” Abel v. West.

• “It is the debtor, who has invoked and submitted to the bankruptcy process, that is entitled to its protections; Congress did not intend to extend such benefits to third-party bystanders.” Western Real Estate Fund.

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11th Circuit

Notable Case: Matter of Munford, 97 F.3d 449 (11th Cir. 1996)

In re Mercedes Homes, Inc. 431 B.R. 869 (Bankr.Ct. SDFL) 2009.

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11th Circuit

• The 11th Circuit has not ruled on the issue directly, although the court in Munford skirted the issue in a way that suggests a general agreement with the majority of circuits. – In Munford, the 11th Circuit affirmed a district court

ruling that section 105 authorized a bankruptcy court to permanently enjoin non-settling defendants from asserting contributions and indemnification claims against a defendant consulting firm when the permanent injunction was integral to the debtor’s settlement .

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Summary

• Circuits that allow non-debtor releases under certain circumstances:

2nd 3rd 4th 6th 7th 8th

Circuits that do not allow non-debtor releases under any circumstance 9th 10th 5th (probably) Untested Circuits 1st 11th

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Most Cited Cases

• In re Dow Corning, 280 F.3d 648 (6th Cir. 2002)

• Deutsche Bank AG v. Metromedia Fiber Network, Inc. 416 F.3d 136 (2nd Cir. 2005)

• In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000)

• In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989)

• In re Zale Corporation. 62 F.3d 746 (5th Cir. 1995)

• In re Master Mortgage Investment Fund, Inc., 168 B.R. 930 (Bankr.Ct.WDMO) 1994.

2014 STRAFFORD PUBLICATIONS SEMINAR

CHAPTER 11 PLAN THIRD PARTY RELEASE PROVISIONS

Structuring and Objecting to Third Party Releases

December 16, 2014

By James M. Lawniczak

CALFEE, HALTER & GRISWOLD LLP The Calfee Building

1405 East Sixth Street Cleveland, Ohio 44114-1607

(216) 622-8364 [email protected]

www.calfee.com

© 2014 James M. Lawniczak All Rights Reserved

Speaker Bio

• James M. Lawniczak has more than 30 years experience representing clients in complex corporate reorganizations and bankruptcy and creditors’ rights, as well as commercial business and finance matters. Senior Counsel, formerly partner, at Calfee, Halter & Griswold LLP in Cleveland, Ohio, and a nationally respected bankruptcy advisor, Jim has been recognized in Ohio Super Lawyers, Best Lawyers in America and Chambers USA as a leader in his field. He is a contributing author to the 16th Edition of Collier on Bankruptcy - the leading national treatise on bankruptcy law - and is the author of the bankruptcy and related chapters of Lexis’s Asset Based Financing, Business Organizations with Tax Planning, Franchising and Debtor-Creditor Law treatises. Jim is a featured online contributor to the “LexisNexis Expert Commentaries” series, providing insight on significant, high-profile bankruptcy cases and has been a featured panelist in Financier Worldwide.

• He can be reached at: • 216.622.8364 • [email protected]

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STRUCTURING NONDEBTOR RELEASES -- OUTLINE

• I. Incorporation into the Plan

• II. Incorporation into the Disclosure Statement

• III. The Ballot and the Election to Give a Third

Party Release

• IV. Use of Orders Approving the Disclosure

Statement and Ballot and Setting Plan

Confirmation Procedures

• V. The Confirmation Order

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I. Incorporation Into the Plan Initial Considerations

• Check the Law in Your Circuit as to Third Party Releases. See generally 12 Business Organizations with Tax Planning § 157.02[5][c][i] (Lexis 2014) (citing the Circuit Court of Appeals cases on Third Party Releases); Note, “Nondebtor Releases in Chapter 11 Reorganizations: A Limited Power,” 38 Fordham Urb. L.J. 821 (2011).

• Determine Who is to Be Released. • Determine the Scope of the Releases. Be Certain

that the Releases Are Narrowly Tailored and Limited to Matters Related to the Reorganization.

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I. Incorporation Into the Plan

Initial Considerations (Cont.)

• Will the Third Party Releases Be Consensual Only or Apply to Everyone if the Plan is Confirmed? – What are the chances of an objection if the

releases are not consensual?

– Note that the terms of a onfirmed plan are generally binding even if they contain provisions that are objectionable. See Trulis v. Barton, 107 F.3d 685, 691 (9th Cir. 1995); Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1051-53 (5th Cir. 1987).

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I. Incorporation Into the Plan Initial Considerations (Cont.)

• Can the Plan Be Confirmed Even if there Is an Objection, Perhaps by Resolving the Objection?

– Consider having a “savings clause” in the plan itself that limits the proposed releases “to the extent permitted by applicable law,” so that the releases can be removed or limited upon objection. See In re Chemtura Corp., 439 B.R. 561, 609-10 (Bankr. S.D.N.Y. 2010).

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I. Incorporation Into the Plan Initial Considerations (Cont.)

• Consider Making Creditor Receipt of Consideration Under the Plan Conditional upon Consensual Approval of the Releases.

– See Food Lion, Inc. v. S.L. Nusbaum Ins. Agency, Inc., 202 F.3d 223, 228 (4th Cir. 2000); In re Envirodyne Indus., Inc., 174 B.R. 955, 963 (Bankr. N.D.Ill. 1994); In re Orlando Invs., L.P., 103 B.R. 593 (Bankr. E.D. Pa. 1989).

– But see Underhill v. Royal, 769 F.2d 1426 (9th Cir. 1985) (suggesting that where the release is not truly voluntary, the release might not even be effective against creditors accepting the plan).

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I. Incorporation into the Plan (Cont.) Drafting the Provisions

• The Third Party Releases Must Be Specifically Provided for in the Proposed Plan.

– Clearly explain who is being released.

– Clearly identify the scope of the releases, what is being released.

– Generally separate out releases related to postpetition conduct for parties involved in the chapter 11 case from releases for other parties such as asset purchasers or equity infusors.

– Be as concise as possible yet detailed as necessary.

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II. Incorporation into the Disclosure Statement

• The Proposed Releases Must Be Clearly and Fully Described in the Disclosure Statement as Required by Fed. R. Bankr. P. 3016(c) (requiring use of “bold, italic, or underlined text”). – The description should be conspicuous thus not buried in

boilerplate language, it should surely be in the executive summary of the plan and in the ballot as well (see below). See Bank of N.Y. v. Becker (In re Lower Bucks Hosp.), 488 B.R. 303, 318 (E.D. Pa. 2013), aff’d by unpublished opinion, 571 Fed. Appx. 139 (3d Cir. 2014) (affirming decision that third party releases were inadequately disclosed where they were “obscured” because “embedded, without any emphasis, in the boilerplate release of [other] claims”).

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II. Incorporation into the Disclosure Statement (Cont.)

– If the releases are not appropriately described, they are subject to being stricken from the plan (that’s what happened in the bankruptcy court in the Lower Buck’s Hosp. case)

• Also Describe Whether the Releases Are Consensual or Nonconsensual. – If the releases are consensual, detail how a party is to

opt in or opt out of the release. – If the releases are nonconsensual, describe in detail

the necessity for the releases, focusing on the law of the applicable circuit as to when nonconsensual releases are allowed.

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III. The Ballot and the Election to Give a Third Party Release

• Carefully Prepare the Ballot for Voting on the Chapter 11 Plan to Ensure that It Clearly Explains How a Creditor Elects to Consent to a Third Party Release. – Determine and provide whether failure to vote is consent. – Determine and provide if voting yes but failing to elect is or is not consent. – Compare In re Washington Mut., Inc., 442 B.R. 314, 352 (Bankr. D. Del. 2011) (Judge

Walrath) (nonconsensual releases must be by specific consent either by contract or in the ballot used for voting on the plan) with In re Indianapolis Downs, LLC, 486 B.R. 286, 305-06 (Bankr. D. Del. 2013) (Judge Shannon) (taking a more “flexible approach in evaluating whether a third party release was consensual,” so that creditors who “were provided detailed instructions on how to opt out” but did not were consensually bound by the releases); In re DBSD N. Am., Inc., 419 B.R. 179, 218-19 (Bankr. S.D.N.Y. 2009), aff’d addressing other issues, 2010 U.S. Dist. LEXIS 33253 (S.D.N.Y. 2010), aff’d in part and rev. in part, addressing other issues, 634 F.3d 79 (2d Cir. 2011) (consent implied by voting yes or by abstaining and failing to opt out); In re Conseco, Inc., 301 B.R. 525, 528 (Bankr. N.D. Ill. 2003) (consensual release bound only those creditors who voted for the plan or failed to opt out of the release). See generally Hesse, “Silence as Deemed Consent to Voluntary Third-Party Releases in a Chapter 11 Plan,” 30-2 Am. Bankr. Inst. J. 50 (2011).

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IV. Use of Orders Approving the Disclosure Statement and Ballot and Setting Plan

Confirmation Procedures • Prepare the Orders Approving the Disclosure

Statement and Ballot and Setting the Plan Confirmation Procedures Carefully to Approve the Method of Consenting to the Releases.

• Make Sure the Orders Correspond with the Disclosure Statement and Ballot.

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V. The Confirmation Order

• Make Sure the Confirmation Order Precisely Describes the Releases in Conformity with the Plan, the Disclosure Statement, the Disclosure Statement Orders and the Ballot.

• The Confirmation Order Should Be the Document that Actually Grants the Releases.

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OBJECTING TO NONDEBTOR RELEASES -- OUTLINE page 1

• I. Carefully Review the Enabling Documents in

Particular the Orders Approving the Disclosure

Statement and Ballot and Setting Confirmation

Hearing Procedures.

• II. Review Case Law on Third Party Releases in

the Relevant Circuit and By the Bankruptcy Judge

• III. Narrowly Tailor the Objection.

• IV. Combine with Related Objections such as to a

Proposed Sale or Capital Infusion.

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OBJECTING TO NONDEBTOR RELEASES -- OUTLINE page 2

• V. Negotiate with Plan Proponent.

• VI. Prepare for Confirmation Hearing.

• VII. Watch Out for the Equitable Mootness

Doctrine when Considering any Appeal.

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I. Carefully Review the Enabling Documents in Particular the Orders Approving the Disclosure Statement and Ballot and Setting Confirmation

Hearing Procedures • Obtain All the Operative Documents such as the

Plan, the Disclosure Statement, the Ballot and all Orders Approving Same and Setting Voting and Objecting Procedures.

• Comply Completely with All Objection Requirements.

• Consult with the U.S. Trustee as to the Position the U.S. Trustee Is Going to Take.

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II. Review Case Law on Third Party Releases in the Relevant Circuit and By the Bankruptcy

Judge

• Because the Law Varies from Circuit to Circuit, Find and Review the Relevant Law in the Applicable Circuit.

• Determine Any Positions Previously Taken by the Bankruptcy Judge Who Has the Case as to Third Party Releases.

• Determine What Position the U.S. Trustee Is Likely to Take and Consider Structuring the Releases to Avoid a U.S. Trustee Objection.

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III. Narrowly Tailor the Objection

• Craft the Objection Carefully and Focus on the Problems with the Proposed Third Party Releases, Relating Those Problems to the Factors Governing Third Party Releases in the Relevant Circuit.

• Remind the Court that in General Nonconsensual Third Party Releases Are Only Granted in “Exceptional Circumstances.” See, e.g., Nat’l Heritage Found., Inc. v. Highbourne Found., 760 F.3d 344, 351 (4th Cir. 2014), cert. applied for, No. 14-481 (Oct. 23, 2014). Apply the Facts to that Law.

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IV. Combine with Related Objections such as to a Proposed Sale or Capital Infusion

• The Objection Can Be More Effective if Combined with Other, Valid Objections to the Plan, Such as that a Proposed Sale Is Inappropriate and Inadequate.

• The Objection Will Have a More Favorable Impact if It Can Be Shown that the Plan Itself Is Unfair and Inappropriate.

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V. Negotiate with Plan Proponent

• It is Best if Negotiations With the Plan Proponent Could Have Begun Even Before the Plan Confirmation Process Came into Place, Such as After Submission of the Plan and Disclosure Statement Initially for Approval, or Even Earlier if Possible.

• Find Out Exactly What the Client Seeks to Achieve and Negotiate with that in Mind.

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VI. Prepare for Confirmation Hearing

• Begin Preparation for the Confirmation Hearing Well In Advance.

• Review the Case Law Carefully to Understand the Factors that Go into Approval of Third Party Releases.

• Locate and Prepare Witnesses to Support a Factual Finding that the Factors Have Not Been Met.

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VII. Watch Out for the Equitable Mootness Doctrine when Considering Any Appeal

• Every Circuit Has Adopted an Equitable Mootness Doctrine

When Appeals Are Taken from Confirmation Orders. See Search Mkt. Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327, 1337–38 (10th Cir. 2009) (citing cases from each of the other 11 circuits).

• The Doctrine Applies to Appeals from Unstayed Orders When the Plan Has Been Substantially Consummated, Defined in Bankruptcy Code § 1101(2) as (A) Transfer of All or Substantially All of the Property Proposed by the Plan to Be Transferred; (B) Assumption by the Debtor or its Successor of the Business; and (C) Commencement of Distributions under the Plan. See generally 12 Business Organizations With Tax Planning § 157.02[7][c] (Lexis 2014).

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– A losing objecting party can seek a stay pending appeal, but in a large case, the amount of any required bond may be prohibitive, particularly when compared to the amount at stake for the objector. See In re Tribune Co., 477 B.R. 465, 482-83 (Bankr. D. Del. 2012) (granting stay of confirmation order conditioned on posting of a supersedeas bond in the amount of $1.5 billion); ACC Bondholder Grp. v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 361 B.R. 337, 368 (S.D.N.Y. 2007) (granting stay on condition of posting of a $1.3 billion bond).

VII. Watch Out for the Equitable Mootness Doctrine when Considering any Appeal (Cont.)

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