Delaware and New York District Courts Split on Permissibility of Non-Debtor Releases
Upholding confirmation of the Boy Scouts’ chapter 11 plan, the district judge in Delaware disagreed with his counterpart in New York who found no statutory power to impose non-consensual, non-debtor third-party releases.
District Judges in New York and Delaware disagree about the ability of a debtor to confirm a chapter 11 plan with non-consensual, non-debtor third-party releases.
In September, the bankruptcy court in Delaware confirmed the chapter 11 plan for Boy Scouts of America containing non-consensual, non-debtor third-party releases. In a 155-page opinion on March 28, District Judge Richard J. Andrews upheld confirmation, observing that the Third Circuit “and other courts have repeatedly recognized the statutory authority of bankruptcy courts to issue nonconsensual third-party releases under appropriate circumstances.”
Coming out the other way, District Judge Colleen McMahon of New York vacated confirmation of the Purdue Pharma LLP chapter 11 plan in December 2021, holding that the bankruptcy court has no statutory power to impose non-consensual releases of creditors’ direct claims against non-debtor third parties. In re Purdue Pharma LP, 635 B.R. 26 (S.D.N.Y. Dec. 16, 2021). To read ABI’s report on Purdue, click here.
The debtor appealed to the Second Circuit. Oral argument was held on April 29, 2022. The appeal remains sub judice.
The Biggest Ever
Judge Andrews said that the “global resolution” of the BSA case created “the largest sexual abuse compensation fund in the history of the U.S.” The product of mediation, the trust created by the plan will have not less than $2.6 billion in cash and property plus insurance rights that could be worth another $4 billion.
All sexual abuse claims are “channeled” into the trust. In addition to the debtor, the plan affords releases to related entities not in bankruptcy, local Boy Scout councils and other organizations, and entities covered by insurance policies issued by insurers who settled with the debtor.
More than 80,000 claims were filed, making the case “extraordinary,” according to Judge Andrews. The plan was accepted by about 85% of abuse claimants, along with “every estate fiduciary and nearly every organized creditor group,” the judge said.
Not settling, several insurance companies filed objections to the plan and appealed confirmation. Clients of two law firms also appealed confirmation.
Established Law Permits Releases
The appellants raised a multitude of allegations of error en route to plan confirmation. We shall focus on the non-debtor releases that were designed to protect, among others, local scout groups, insurance companies and individuals.
The appellants contended there is no statutory authority for a plan to include non-consensual releases. “They are wrong,” Judge Andrews said, citing In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000). For 20 years after Continental Airlines, he said that the Third Circuit and courts within the circuit have “permitted nonconsensual third-party releases in narrow circumstances where the releases are fair and necessary to the reorganization.
Like the bankruptcy judge who was reversed in Purdue, Judge Andrews found statutory power through a combination of Sections 105(a), 1123(a)(5) and 1123(b)(6). Citing U.S. v. Energy Res. Co., 495 U.S. 545, 549 (1990), he said that those sections gave the court “residual authority” to confer “relief not specifically authorized elsewhere in the Bankruptcy Code.”
With regard to the New York district judge’s belief that there is no power in the statute, Judge Andrews said that her “decision departs from existing Second Circuit precedent, which, like the Third Circuit, holds that bankruptcy courts are authorized to enjoin and release third-party claims against non-debtors where such releases are integral to the debtor’s reorganization.”
Also in distinction to the New York district judge, Judge Andrews said that Section 524(g), permitting non-debtor releases in asbestos cases, “does not render such releases impermissible in non-asbestos cases.” He supported his conclusion about implications from Section 524(g) by quoting legislative history to the effect that the addition of the section does not impair or supersede any other authority for the issuance of injunctions.
Having found no blanket prohibition for non-debtor releases, Judge Andrews proceeded to rule that the BSA plan and the bankruptcy court’s findings satisfied the “hallmarks” required by Continental Airlines. Finding that the injunctions were necessary to the reorganization and were fair, he upheld confirmation.
Note: Objectors filed a motion in district court for a stay pending appeal, to prevent the appeal from becoming moot by consummation of the plan.