A Tale of 4 Cities: How Different Jurisdictions Recently Address Third-Party Releases
The ability of a chapter 11 going-concern debtor to be discharged from its prepetition liabilities is common place and not controversial. 11 U.S.C. § 1141(d). However, the ability of a debtor to release third-party non-debtors from their own liabilities has sparked much debate, because, among other things, the Bankruptcy Code does not clearly or explicitly provide for such releases. Nonetheless, through creative arguments, advocates have found ways to convince courts that third-party releases are implicitly permitted under the Bankruptcy Code in rare circumstances.
The debate over third-party releases will continue, as the Fifth and Tenth Circuits have strictly prohibited the use of such third-party releases, see, e.g., In re Pac. Lumber Co., 584 F.3d 229, 251-53 (5th Cir. 2009); In re W. Real Estate Fund, Inc., 922 F.2d 592, 600-02 (10th Cir. 1990), while other Circuits, in varying degrees, have allowed third-party releases. See, e.g., Blixseth v. Credit Suisse, 961 F.3d 1074, 1084 (9th Cir. 2020); In re Millennium Lab Holdings II, LLC, 945 F.3d 126, 139 (3d Cir. 2019); In re Seaside Eng’g & Surveying, Inc., 780 F.3d 1070, 1078 (11th Cir. 2015); Behrmann v. Nat’l Heritage Found., 663 F.3d 704, 712 (4th Cir. 2011); In re Metromedia Fiber Network, Inc., 416 F.3d 136, 143 (2d Cir. 2005); In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002).
Take, for example, the treatment of third-party releases by four different courts in New York, Delaware, Virginia and Texas with the past year. The divergent and robust opinions issued by these courts demonstrate how varied the approaches can be in adjudicating third-party releases, even in jurisdictions that have previously approved them.
New York Decision
In September 2019, facing a tsunami of litigation from private individuals and governmental authorities, Purdue Pharma L.P. and affiliates (collectively, “Purdue Pharma”) filed chapter 11 in the Southern District of New York. The litigation stemmed from allegations that Purdue Pharma was responsible for the opioid crisis in the United States by encouraging the over-prescription of highly addictive medications, including OxyContin. The intent of Purdue Pharma’s chapter 11 case was to achieve a “Manville-style” bankruptcy that would resolve both existing and future claims against the company.
After the commencement of the bankruptcy, the automatic stay halted all litigation against the Company and a court-ordered injunction halted litigation against non-debtor’s affiliated with the Company, namely the Sackler family, who had long-owned the privately-held Company. For two years, committees of various classes of creditors negotiated with Purdue Pharma and the Sackler family about the terms of a viable chapter 11 plan. Eventually, the parties crafted a chapter 11 plan that would afford billions of dollars for the resolution of both private and public claims, while funding opioid relief and education programs that could provide tremendous benefit to the consuming public at large. The Sackler family would be required to contribute $4.325 billion toward the plan, over a nine year period, pursuant to various plan settlements.
While the chapter 11 plan was eventually approved by supermajority of votes by each class of creditors, several parties objected to the plan because it provided broad nonconsensual, third-party releases to the Sackler family. Even though the presiding Bankruptcy Court limited the breadth of the third-party releases before confirming the plan, such releases still extended beyond “derivative claims” or claims that Purdue Pharma would have had a right to bring against the Sackler family.
On appeal of the confirmation order, while the objecting parties raised several arguments against the releases, Judge Colleen McMahon distilled the main issue in the appeal as being “whether the Bankruptcy Court – or any court – is statutorily authorized to grant such third-party releases.” Id. at 36. The Bankruptcy Court had concluded that it had statutory authority to issue the third-party-releases pursuant to 11 U.S.C. §§ 1129(a)(1), 1123(a)(5) & (b)(6), 105 and 524(e). In re Purdue Pharma L.P., No. 19-23649, 2021 WL 4240974, at *43 (Bankr. S.D.N.Y. Sept. 17, 2021). However, Judge McMahon concluded, after surveying a large body of law from the Second Circuit and other Circuits, that:
[T]he sections of the Code on which the learned Bankruptcy Judge explicitly relied, whether read separately or together, do not confer on any court the power to approve the release of non-derivative third-party claims against non-debtors, including specifically the Section 10.7 Shareholder Release [of the Purdue Pharma plan] that is under attack on this appeal.
In re Purdue Pharma, L.P., 635 B.R. 26, 90 (D.N.Y. 2021). According to Judge McMahon, “the Bankruptcy Code does not authorize such non-consensual non-debtor releases: not in its express text (which is conceded); not in its silence (which is disputed); and not in any section or sections of the Bankruptcy Code that, read singularly or together, purport to confer generalized or ‘residual’ powers on a court sitting in bankruptcy.” Id. at 38. And, she noted that “Second Circuit law is not contrary . . . .” Id. at 78.
However, Judge McMahon was only addressing the release of direct/particularized claims that could have been made by third parties directly against nondebtors, i.e., the Sacklers. See id. at 90. These types of claims are based on a particularized injury to a third party that can be directly traced to the nondebtor’s conduct. See id. One example cited in the Purdue Pharma case was an unfair trade practices claim that could have been brought directly against corporate management (i.e., the Sacklers) in numerous states. See id.
In contrast to direct/particularized claims, derivative claims are are those types that would impose liability on the company’s management based on Purdue Pharma’s actions. See id. Judge McMahon clarified that “[d]erivative claims in every sense relate to the adjustment of the debtor-creditor relationship, because they are claims that relate to injury to the corporation itself.” Id. Accordingly, Judge McMahon held that the Bankruptcy Court had authority to approve the release of the proposed derivative claims under Purdue Pharma’s plan. See id.
The confirmation of the chapter 11 plan in the bankruptcy of Mallinckrodt PLC and affiliates (“Mallinckrodt”) followed that of Purdue Pharma by several months, but the results were quite different.
Like Purdue Pharma, Mallinckrodt was forced into bankruptcy due to an onslaught of litigation by individuals and governmental authorities arising out of their production and sale of opioid medications and another drug called Acthar H.P. Gel. On October 12, 2020, Mallinckrodt finally elected to file for chapter 11 bankruptcy relief in the United States Bankruptcy Court for the District of Delaware.
Leading up the bankruptcy, Mallinckrodt had reached global settlements with opioid-related claimants, Acthar-related claimants and holders of Mallinckrodt’s long-term debt. Additional plan settlements were reached post-bankruptcy, including a settlement with the unsecured creditors committee. All of these plan settlement were eventually rolled into a second amended chapter 11 plan filed on September 29, 2021.
As part of the multiple plan settlements, the Mallinckrodt plan contained several third-party releases. Specifically, the plan contained two separate provisions releasing (a) a vast number of persons and entities beyond the debtors from opioid-related claims (the “Opioid Releases”) and (b) numerous non-debtors (including insiders) from any actions arising out of Mallinckrodt’s business (outside of opioid), restructuring efforts and any proposed purchase, sale or rescission of any security or indebtedness of the Debtor (“General Third-Party Releases”). The Court treated the Opioid Releases as being nonconsensual (because the opioid claimants did not vote for them), but treated the General Third-Party Releases as being consensual (because creditors could opt-out from the releases).
In discussing the Opioid Releases, the Court did not specifically cite to any supporting statutory authority, but rather relied heavily on two Third Circuit cases that support such releases in limited. See In re Millenium Lab Holdings II, LLC, 945 F.3d 126 (3d Cir. 2019); In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000).
In Millenium, the bankruptcy court approved a plan that provided releases to equity holders who had agreed to provide significant monetary contribution to the debtor in return for the releases. On appeal, the Third Circuit held that the releases in the plan were “integral to the debtor-creditor relationship,” because the funding was critical to the plan and without it the plan would have failed. Accordingly, the Third Circuit held that the bankruptcy court was acting within its statutory and constitutional authority in approving the releases. Millenium, 945 F.3d at 137.
In Continental, the Third Circuit considered the validity of a plan that released and permanently enjoined shareholder lawsuits against certain of Continental’s present and former directors and officers who were non-debtors. The Third Circuit recognized the more flexible approach used by the Second and Fourth Circuits in mass tort cases, but it ultimately refused to adopt a specific standard itself, because it did not believe that the Continental case presented an extraordinary case that warranted such releases. Continental, 203 F.3d at 212-13. The Court did, however, identify the hallmarks of permissible non-consensual releases’ as ‘fairness, necessity to the reorganization, and specific factual findings to support these conclusions.’“ Id. at 214.
In Mallinckrodt, the Debtor argued that without the Opioid Settlements, the global plan settlements would not have been possible and this would have resulted in Mallinckrodt having to sell its assets in a piecemeal manner. Mallinckrodt also argued that the Opioid Releases were fair to the opioid claimants, because (a) they brought in a substantial amount of plan funding, (b) they were approved by , and benefitted, numerous constituents besides the opioid claimants, (c) a futures representative was appointed to protect the interests of opioid claimants, (d) the opioid claimants would recover more money with the plan settlements, and (e) the Opioid Releases carved out standard exclusions for fraud, gross negligence and criminal conduct. See In re Mallinckrodt, 639 B.R. 837, 871 (Bankr. Del. 2022).
Based on significant evidence presented at the confirmation hearing and relying on Millenium and Continental, Judge Dorsey agreed that the Opioid Releases were fair and necessary and overwhelmingly supported by the creditor body. Id. at 873-74. He ultimately found that this was the type of extraordinary case endorsed by Third Circuit and was the only solution for Mallinckrodt, whose case resembled the other mass tort cases, like Manville, where third-party releases have commonly been approved. See id.
In doing so, Judge Dorsey rejected the U.S. Trustee’s argument that due process was being denied, reasoning that, among other extensive due process measures, noticing in Mallinckrodt had reached 91% of Americans and 82% of Canadians, with an average frequency of six times. See id. at 876.
Deemed Consensual Releases
The Mallinckrodt Court next addressed what it considered to be consensual releases, the General Third-Party Releases, which applied to, among others:
- holders of claims who voted to accept the plan;
- holders of unimpaired claims;
- holders of claims who abstained from voting and did not opt-out of releases;
- holders of claims or interest who voted, or deemed to reject the plan, and did not opt-out of the releases.
Mallinckrodt, 639 B.R. at 877. The General Third-Party Releases also protected, among others, the debtors, the reorganized debtors, non-debtor affiliates, and their respective officers, directors, employees and representative, as well as parties that supported the chapter 11 plan and plan settlements and their respective employees, agents, and advisors. Id.
Mallinckrodt argued that these releases were consensual because all releasing parties had an opportunity to opt out and to the extent they chose not to, their consent is manifested by their silence. Id. at 878. Mallinckrodt also argued that the opt-out forms contained conspicuous language that informed the claimant or interest holder of the proposed releases. Id. at 879.
While recognizing that some Delaware courts suggest that “consensual releases obtained through an opt out process may never be appropriate,” see, e.g., In re Emerge Energy Servs. LP, 2019 WL 7634308 (Bankr. D. Del. Dec. 5, 2019); In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011), Judge Dorsey relied on contrary Delaware opinions that have held that the failure to act, when presented with opt-out forms, constituted implied consent. See id. at 879-881 (citing Extraction Oil & Gas, Inc., Confirmation Hearing Tr. at 80-81 (Bankr. D. Del. Dec. 23, 2020) (Sontchi, J.); In re Insys Therapeutics, Inc., No. 19-11292 (KG), Confirmation Hr’g Tr. at 110 (Jan. 16, 2020) (D.I. 1121) (Gross, J.)). Thus, the General Third-Party Releases were considered consensual and were approved.
The Eastern District of Virginia, via Judge David Novak, adamantly took the opposite view of Judge Dorsey, during the bankruptcy case of Mahwah Bergen Retail Group, Inc. f/k/a Ascena Retail Group, Inc. and affiliates (“Ascena”). Ascena provided specialty retail apparel for females, operating approximately 2,800 stores, serving more than 12.5 million customers and employing nearly 40,000 employees.
On July 23, 2020, caused largely by massive store closures due to the COVID-19 pandemic, Ascena filed for chapter 11 relief in the Eastern District of Virginia. While Ascena had originally contemplated reorganizing, with the support of its secured lenders, it ultimately liquidated most of its business for the total sales price of $651.8 million. Given that Ascena had $1.6 billion in secured debt and $700-$800 million in unsecured debt heading into bankruptcy, few stakeholders would be satisfied, in full, as a result of the liquidation.
At issue in the case were the broad third-party releases to insiders provided in Ascena’s chapter 11 plan. These third party releases “cover[ed] any type of claim that existed or could have been brought against anyone associated with [Ascena] as of the effective date of the plan.” The releasing parties included ”all holders of Impaired Claims who abstained from voting on the Plan or voted to reject the Plan but did not timely opt out of or object to the applicable release; . . . all holders of Unimpaired Claims who did not timely opt out of or object to the applicable release; [and] all holders of Interests . . . .” The releases were ultimately challenged by the Securities & Exchange Commission, U.S. Trustee and lead litigation plaintiffs in a pending putative class action against Ascena’s management.
During the solicitation process, the Bankruptcy Court ordered that an opt-out form be sent to all potential class members in the putative class action, but not necessarily to other releasing parties, including current and former employees, professionals, affiliates, lenders or other interest holders. Throughout this process, Ascena sent notice of the third-party releases and the opt-out procedure to roughly 300,000 parties believed to be potential members in the putative class action. However, the record lacked any information about how many of the parties actually received the notice or any mention of efforts to determine the success of the attempts at notice regarding the securities fraud litigation. Id. In the end, Ascena had only received approximately 596 Release Opt-Out Forms — approximately 0.2% of those targeted by the notice.
While the lead plaintiffs in the securities litigation objected to the third-party releases and attempted to opt-out of the releases on behalf of the putative class members, the bankruptcy court denied those requests and confirmed Ascena’s chapter 11 plan. The lead securities plaintiffs appealed those denials and were joined by the US Trustee.
On the merits of the appeal, Judge Novak first held that, based on Stern v. Marshall, 564 U.S. 462, 503 (2011), the Ascena bankruptcy court lacked jurisdiction to resolve state law claims, including granting releases of such claims, notwithstanding whether such claims would confer “core” bankruptcy jurisdiction. Id. at 668. According to the District Court:
[B]y granting the Third-Party Releases, the Bankruptcy Court took jurisdiction over and extinguished the liability of an extraordinarily vast range of claims held by an immeasurable number of individuals against a broad range of potential defendants. However, before doing so, the Bankruptcy Court took no steps to determine if it had the power to extinguish the liability on any particular claim. Indeed, the only extinguished claims that the Bankruptcy Court considered were the securities fraud claims against the [two] Individual Defendants . . ., and it ignored all of the other potential claims that it terminated by approving the releases. In so doing, the Bankruptcy Court failed to take the proper steps to ensure that it had the authority to grant the releases.
Mahwah, 636 B.R. at 668. Judge Novak also rejected Ascena’s argument that the plan confirmation process constituted a core proceeding conferring proper bankruptcy jurisdiction, reasoning that an ‘independent statutory basis must exist for the bankruptcy court to exercise jurisdiction over the claims.” Id. at 671. He further found no in rem jurisdiction over estate property, because the third-party releases implicated property owned by non-debtors, not debtors. Id. at 671-72.
Judge Novak next addressed whether the opt-out forms signified consent by the putative securities class members and other claimants affected by the broad releases. Based on the Supreme Court’s post-Stern opinion in Wellness International Network, Ltd. v. Sharif, 575 U.S. 665, 685 (2015), the District Court found that “the key inquiry is whether the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case before the non-Article III adjudicator.” Applying this standard, Judge Novak held that “it becomes clear that the Bankruptcy Court erred as a matter of law in finding that failure to return the opt-out form could constitute consent to Article I adjudication.” Mahwah, 636 B.R. at 674. The Court reasoned that the inaction on the part of releasing claimants could rarely–if at all–constitute implied consent under Supreme Court precedent. Id. at 675.
The District Court also found that neither contract law nor class action law supported Ascena’s argument that the non-opt out members implied consent to the third party releases, because (a) silence generally does not manifest assent to be bound by a contract and (b) Federal Rule of Civil Procedure 23 has due process protections for absent class members, like typicality, adequate representation and equitable treatment, that are not present when a bankruptcy court is confirming a chapter 11 plan with third-party releases. Mahwah, 636 B.R. at 685-88.
In light of deeming the third-party releases nonconsensual, the District Court held that the Bankruptcy Court erred in failing to apply the prevailing standard set in the Fourth Circuit for nonconsensual releases. Id. at 688-89. This standard is set forth in Behrmann National Heritage Foundation, 663 F.3d 704, 711-12 (4th Cir. 2011), where the Fourth Circuit held that the following seven factors must be present to enjoin non-consenting creditor claims against a non-debtor:
- 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 suit against the debtor or will deplete the assets of the estate;
- The non-debtor has contributed substantial assets to the reorganization;
- 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 contribution claims against the debtor;
- The impacted class, or classes, has overwhelmingly voted to accept the plan;
- The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction;
- The plan provides an opportunity for those claimants who choose not to settle to recover in full; and
- The bankruptcy court made a record of specific factual findings that support its conclusions.
Judge Novak emphasized that these factors are necessary for meaningful appellate review, given the “dramatic effect of third party releases” and given that “they are to be approved in unique circumstances.” Mahwah, 636 B.R. at 689 (citing Behrmann, 663 F.3d at 712).
Finally, Judge Novak issued a special procedure for adjudicating all third-party releases in the future. He stated:
[T]he Court pauses for an observation about the procedure for the handling of third-party releases by bankruptcy courts going forward. Due to the substantial constitutional issues at play with the use of this perilous tool, it seems preferable for a bankruptcy court to submit any third-party releases to the district court for approval via a Report and Recommendation in the rare and exceptional case that warrants the use of third-party releases. The Report and Recommendation should identify with specificity the claims and individuals released and provide detailed proposed findings of fact and conclusions of law to ensure that the released claims are truly integral to the reorganization.
Mahwah, 636 B.R. at 676.
Fifth Circuit Decision
The Fifth Circuit recently took a look at a very similar issue in the bankruptcy case of Highland Capital Management, L.P. (“Highland Capital”) filed in the Northern District of Texas. In re Highland Capital Management, L.P., No. 21-10449, 2022 WL 4093167 (Fifth Cir. Sept. 7, 2022) (Duncan, J.). While the case involved limited third-party releases (commonly referred to as exculpations) and other similar protections, the Fifth Circuit nonetheless took the opportunity reaffirm its position in Pacific Lumber, where it held that section 524(e) of the Bankruptcy Code forbids any type of third-party releases of nondebtors. See In re Pacific Lumber Co., 584 F.3d 229, 251-53 (5th Cir. 2009).
Highland Capital, a Dallas-based investment firm, managed billion-dollar, publicly traded investment portfolios for nearly three decades. By 2019, however, a myriad of unpaid judgments and liabilities forced Highland Capital to file for chapter 11 bankruptcy. This resulted in a nasty breakup between Highland Capital and its co-founder and leader. Under those trying circumstances, the bankruptcy court successfully mediated with the largest creditors and ultimately confirmed a chapter 11 plan amenable to most of the remaining creditors.
Highland Capital’s chapter 11 plan (the “Plan”) essentially winds down Highland Capital’s estate over approximately three years, through a claimants trust, which is charged with the task of liquidating assets and making distributions to claimants. As a part of this wind-down, Highland Capital vests its ongoing servicing agreements with Reorganized Highland Capital, which continues to manage collateralized loan obligations and other investment portfolios. HCMLP GP, LLC was formed to be the sole general partner of Reorganized Highland Capital and a litigation sub-trust was formed to resolve all pending claims against Highland Capital.
The whole operation is overseen by a claimant trust oversight board, comprised of four creditors and one restructuring advisor. The claimant trust owns the limited partnership interests in Reorganized Highland Capital, HCMLP GP LLC and the litigation sub-trust. The claimant trust will eventually dissolve when it has completed the wind-down and made distributions to creditors.
Anticipating continued litigation by Highland Capital’s ousted co-founder and leader, the Plan shields Highland Capital and the bankruptcy participants from lawsuits though an exculpation provision, which is enforced by an injunction and gatekeeper provision. See id. The exculpated parties include:
- Highland Capital;
- Highland Capital’s employees;
- Highland Capital’s CEO;
- Strand Advisors, Inc., Highland Capital’s former general partner;
- Reorganized Highland Capital;
- HCMLP GP LLC, Reorganized Highland Capital’s general partner;
- the independent directors of Highland Capital who were appointed after the bankruptcy commenced;
- the unsecured creditors’ committee (the “Creditor’s Committee”) and its members;
- professionals retained by Highland Capital and the Creditors’ Committee; and
- all related persons.
The Plan exculpates these parties from claims based on their participation in the bankruptcy and implementation of the Plan, but it excludes acts or omissions that constitute bad faith, fraud, gross negligence, criminal misconduct, or willful misconduct.
The Plan also provides that all creditors, interest holders or parties who appeared in the bankruptcy, including the former Highland Capital co-founder, are enjoined “from taking any actions to interfere with the implementation or consummation of the Plan” or filing any claim related to the Plan or proceeding against the above exculpated parties, plus the claimant trust, the oversight board and the litigation sub-trust.
The Plan further provides that should a party seek to bring a claim against the above protected parties regarding the administration of the bankruptcy or implementation of the Plan, it must go to the bankruptcy court to “first determin[e], after notice and a hearing, that such claim or cause of action represents a colorable claim of any kind.” The Plan also reserves for the bankruptcy court the exclusive right to adjudicate any colorable claim over which it has jurisdiction.
Highland Capital’s former co-founder and certain affiliated advisors, funds and trusts objected to these and other Plan provisions at the confirmation hearing, and, when the bankruptcy court denied such objections, they appealed the confirmation order directly to the Fifth Circuit. The Fifth Circuit ultimately struck down the exculpatory provision as being too broad and approved the injunction and gatekeeping provisions, as modified.
With respect to the exculpatory provision, the appellants argued that this provision violated section 524(e), in contravention of Pacific Lumber, because it released various non-debtors from breach of contract and negligence claims. Highland Capital, 2022 WL 4093167 at *10. Highland Capital countered that such provisions are commonplace, appropriate under the circumstances (given the litigious nature of the ousted co-founder), and did not implicate section 524(e) but merely provided a heightened standard of care. See id.
While Highland Capital further tried to distinguish between general non-debtor releases (which are all encompassing) and exculpatory provisions (which are limited to post-petition conduct), the Fifth Circuit previously “rejected the parsing between limited exculpations and full releases that Highland Capital now requests.” Id. at 11 (citing Pacific Lumber).
According to the Court, under Pacific Lumber, section 524(e) proscribes all types of third party releases, including exculpatory provisions, absent another source of authority under the Bankruptcy Code. See id. The Fifth Circuit also held that, in keeping with its precedent, section 105, which grants general powers to the bankruptcy court to issue orders, and section 1123(b)(6), which allows a chapter 11 plan to include any other appropriate provisions not inconsistent with the Code, do not provide requisite statutory authority for third party releases. See id.
However, the Fifth Circuit did find that its precedent and section 524(e) does allow exculpatory releases to a (a) debtor, (b) a creditors’ committee and its members for conduct within the scope of their duties and (c) trustees within the scope of their duties. See id. at 11-12. Accordingly, the Fifth Circuit modified, and limited, the exculpatory releases in the Plan to (a) Highland Capital, (b) the Creditors’ Committee and its members and (b) the independent directors of Highland Capital (who were appointed as trustees). See id.
Injunction & Gatekeeper Provision
The injunction and gatekeeper provisions under the Plan appear to have been modified by the Fifth Circuit’s prior ruling on exculpation, because the Court changed the exculpated parties entitled to additional protections by the injunction and gatekeeper provisions. Highland Capital, 2022 WL 4093167 at *13 (“Appellants’ primary contention—that the Plan’s injunction “is broad” by releasing non-debtors in violation of § 524(e)—is resolved by our striking the impermissibly exculpated parties.”)
With respect to the injunction, as modified, the Fifth Circuit found that it did not exceed the bankruptcy court’s post-confirmation jurisdiction nor was unlawfully overbroad or vague. See id. at *13. On the latter contested issue, the Court found that Plan sufficiently defined the enjoined conduct proscribed, e.g., interference with the implementation of the Plan. See id.
With respect to the gatekeeping function, the appellants argued that such provision extended to unrelated claims over which the bankruptcy court lacked post-confirmation jurisdiction. See id. However, the Fifth Circuit held that its precedent allowed the bankruptcy court sufficient leeway to determine what “implementation or execution of a plan” meant. See id. Based on the Barton doctrine, which has been adopted by the Fifth Circuit, the Court also held that the Court has historically allowed the bankruptcy court to serve as a gatekeeper for claims against bankruptcy fiduciaries, like trustees or court-appointed officers. See id. (citing Villegas v. Schmidt, 788 F.3d 156, 159 (5th Cir. 2015)).
The Fifth Circuit thus affirmed the injunction and gatekeeping provisions in the Plan, as modified.
Over 400 pages of recent opinions in the above New York, Delaware, Virginia and Fifth Circuit cases illustrate how courts are struggling with approving non-consensual third-party releases. One of the initial challenges is to determine whether the releases are consensual or non-consensual. Consensual releases or releases of derivative claims (which affect debtor-creditor relations) appear less controversial. In contrast, nonconsensual releases cause potential due process concerns, as well as textual concerns.
As the Highland Capital case illustrates, some jurisdictions are simply adamant that there is no statutory basis for nonconsensual releases. As demonstrated by the Purdue Pharma and Mahwah cases, even in Circuits who have authorized nonconsensual third-party releases, courts are still grappling with how much authority they have to grant such relief.
There is also the practical aspect of third-party releases that may need to be further explored. As the Mallinckcrodt case illustrates, mass tort cases, like asbestos or opioid cases, would be ruined without the ability to offer third-party releases as a plan settlements. Manville serves as a stark reminder that, even before statutory authority existed for third-party releases in asbestos cases, parties came up with unique arguments to justify this type of relief.
This is all to say that, unless Congress amends the Bankruptcy Code–which happens infrequently– the debate over third-party releases should continue in the near future. But, the highlighted cases provide thorough discussions for all parties to consider.