How Nonconsensual Third-Party Releases Can Be Useful in Chapter 11 Bankruptcy Cases

Nonconsensual third-party releases are provisions in Chapter 11 bankruptcy plans that release non-debtor parties from liability to creditors without the consent of all potential claim holders. These releases can be a useful tool for debtors in a number of situations.

The common purpose of nonconsensual third-party releases is to protect directors and officers from liability for claims arising from the debtor’s pre-bankruptcy conduct. This can be especially important when the debtor’s directors and officers are facing personal liability for claims such as breach of fiduciary duty or negligence. These releases can also be used to protect other non-debtor parties, such as sureties and insurers. For example, a debtor may seek to include a nonconsensual third-party release in its plan in order to protect a guarantor from liability on a pre-bankruptcy debt.

In addition, these releases can be used to facilitate complex corporate transactions, such as mergers and acquisitions. For example, a debtor may wish to release the shareholders of an acquired company from liability for the acquired company’s pre-bankruptcy debts.

While nonconsensual third-party releases can be a useful tool for debtors, some critics argue that they are unfair to creditors, who are forced to give up their claims against non-debtor parties without their consent. Another criticism is that releases can be abused by debtors who are trying to shield themselves and their affiliates from liability for wrongdoing.

However, courts generally recognize that nonconsensual third-party releases are valid if they are found to be necessary for the debtor’s reorganization. To make that finding, courts will consider a number of factors, including the following:

• The debtor’s financial condition
• The nature of the claims against the non-debtor parties
• The degree of likelihood that the creditors will be able to collect on their claims against the non-debtor parties
• The potential impact of the releases on the debtor’s reorganization plan

Courts require that nonconsensual third-party releases be as narrowly tailored as possible. This means that the non-debtor parties are released only from the specific claims that are being asserted against them in relation to the debtor’s bankruptcy. The court will also consider the impact of the release on the creditors and may impose conditions to protect the creditors’ interests.

An experienced Chapter 11 bankruptcy lawyer can help you to determine whether nonconsensual third-party releases are appropriate for your case and can help you to draft them in a way that is likely to be approved by the bankruptcy court.

Based in Beverly Hills, the Law Offices of Michael Jay Berger represents clients in Chapter 11 bankruptcy proceedings throughout Southern California. Call our firm at 310-271-6223 or contact us online to arrange a consultation.