When Can Chapter 11 Plans Include Nonconsensual Third-Party Releases?
Nonconsensual third-party releases are clauses in a Chapter 11 reorganization plan that discharge certain non-debtor parties — such as the debtor’s officers, directors, shareholders, insurers, sureties or affiliates — from liabilities owed to creditors. These releases are nonconsensual because they bind creditors who do not consent to them, extinguishing their claims against these third parties.
Such releases can be used to facilitate corporate transactions within the Chapter 11 case, 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.
The Bankruptcy Code does not explicitly authorize courts to approve or to enjoin nonconsensual third-party releases. As a result, courts in different jurisdictions have adopted diverse approaches. Some allow these releases under specific conditions, emphasizing their necessity for the debtor’s reorganization and the substantial contributions of the released parties to the plan. Other courts permit such releases only in exceptional circumstances where they are deemed essential to the reorganization.
Courts assess multiple factors when evaluating whether to allow inclusion of nonconsensual third-party releases in a Chapter 11 plan, such as:
- Necessity to reorganization — Courts are less likely to approve releases If the reorganization can proceed successfully without them.
- Fairness and equity — Courts examine whether the creditors receive adequate consideration or compensation in exchange for the release of their claims.
- Substantial contribution — Third parties seeking release must have made a substantial contribution to the debtor’s reorganization effort, such as by providing financial support.
- Creditor support — A high level of support for the plan among the creditor body can influence the court’s decision, although unanimous consent is not required.
- Opportunity to opt-out — Some courts consider whether creditors had the opportunity to opt out of the release provisions, though this is not a universal requirement.
Courts approving nonconsensual third-party releases require that they be tailored as narrowly as possible. The non-debtor parties should be 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 affected 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 in your case and can draft your reorganization plan 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.
