The last installment of this column covered two recent opinions from Delaware and Colorado Bankruptcy Courts addressing whether a bankruptcy court has subject matter jurisdiction and constitutional authority to approve non-consensual third-party releases as part of a plan confirmation process. See Corinne Ball, “Decisions Consider Bankruptcy Court’s Authority to Approve Third-Party Releases,” NYLJ (Oct. 26, 2017). Those two opinions—In re Millennium Lab Holdings II, Case No. 15-12284 (LSS), 2017 WL 4417562 (Bankr. D. Del. Oct. 3, 2017) and In re Midway Gold US, Case No. 15-16835 (MER), 2017 WL 4480818 (Bankr. D. Colo. Oct. 6, 2017)—suggested different approaches to determining whether the bankruptcy court has jurisdictional or constitutional authority to approve the releases. The Delaware Bankruptcy Court, on remand from the District Court to determine whether it had constitutional authority, once again confronted the continuing objection from claimholders who did not want to release non-debtors and concluded that dealing with claims purportedly released by a plan brings the matter within the subject matter jurisdiction and constitutional authority of the bankruptcy court, because the inquiry is made in the context of confirming a plan, which is a core proceeding. The Delaware Bankruptcy Court was addressing claims for which the debtor had exposure through indemnity obligations, thus giving rise to some “conceivable effect” on the estate. The Colorado Bankruptcy Court, on the other hand, held that while the releases were included within a proposed Chapter 11 plan, and “confirmation of plans” are expressly made a core proceedings, the court could not “permit third-party non-debtors to bootstrap their disputes into bankruptcy case in this fashion.” In this case, the potentially released claims did not arise under the Bankruptcy Code, and were not otherwise connected to the debtors, the property of the debtors’ estates or the administration of the Chapter 11 cases. The court further reasoned that the fact that the non-debtor released parties “may have contributed financially” to the proposed Chapter 11 plan was “insufficient alone for the Court to find it [could] exercise ‘related to’ jurisdiction” over the potentially released claims.
On Nov. 8, 2017, the Bankruptcy Court for the Southern District of New York revisited the issue, considering whether the court had subject matter jurisdiction to approve non-consensual non-debtor releases proposed by SunEdison as part of their plan of reorganization. In re SunEdison, 576 B.R. 453 (Bankr. S.D.N.Y. 2017). Judge Stuart M. Bernstein, presiding over SunEdison’s bankruptcy proceedings, denied the releases, concluding, inter alia, that the court lacked subject matter jurisdiction over the proposed releases, thus never reaching the question of constitutional authority. Judge Bernstein was constrained by (1) questions of jurisdiction due to what he identified as a lack of evidentiary support for “related to” jurisdiction for each of the third-party claims purportedly being released, and (2) for those released parties as to which subject matter jurisdiction arguably existed, the failure of the proposed releases to meet the standards established in Drexel and clarified by Metromedia.
The SunEdison Decision
On July 28, 2017, the SDNY Bankruptcy Court confirmed SunEdison’s plan of reorganization. The plan, however, contained broad third-party releases in favor of numerous non-debtors by releasing parties that included creditors who were entitled to vote but elected not to do so. Although none of the affected claimholders objected to the releases, the court questioned their validity sua sponte and reserved its decision on that issue. The plan was nevertheless confirmed. Over three months later, on Nov. 8, 2017, after supplemental briefing from the debtors, the court ruled that such releases were non-consensual third-party releases, and, on the record presented, the Bankruptcy Court lacked subject matter jurisdiction in respect of many of the purportedly “released parties,” a failure that was further exacerbated by the broad scope of such releases. Additionally, to the extent jurisdiction arguably did exist for some released parties, because a limited number of released parties held indemnity claims against the debtors, the record did not support the proposed releases as meeting the rare and extraordinary circumstances required for approval, observing that the plan did not provide for channeling such claimholders to a fund or source established to pay such claims and only provided a 3 percent return to such claimholders. Moreover by virtue of the willingness of the parties to proceed through confirmation without such releases, the Bankruptcy Court could infer that the releases were not integral to the plan.
The court described the proposed plan as imposing on nonvoting creditors a release for “largely unidentifiable group of non-debtors from liability based on pre-petition, post-petition and post-confirmation (i.e., future) conduct occurring through the Plan’s future Effective Date that related in any way to the claims or these bankruptcy cases subject to the usual exceptions for fraud, willful misconduct, or gross negligence.”
As an initial matter, Judge Bernstein considered whether the non-voting releasers consented to the releases. The debtors contended that the “conspicuous warning” in the disclosure statement and on the ballots was sufficient to find “deemed consent.” The court found the argument unpersuasive, stating that absent a duty to speak, a party’s silence cannot be translated into consent, and the debtors failed to identify the source of any duty to speak by the non-voting releasors. Having found that the releases were non-consensual, the court turned to the related issue of whether it had subject matter jurisdiction to approve the non-consensual releases proposed by SunEdison’s plan. The court framed the jurisdictional inquiry not as whether the court has jurisdiction “over the settlement that incorporated the third-party release,” but rather “the attempts to enjoin the creditors’ unasserted claims against the third party.” Thus, similar to the Midway Gold court, Judge Bernstein considered the issue of subject matter jurisdiction in the context of the pool of potential claims it would be releasing, rather than considering the releases in the context of plan confirmation.
The court contended that whether jurisdiction exists rests on whether the outcome of the non-debtor’s claim might have any “conceivable effect” on the bankruptcy estate. The court noted, however, as did the Colorado Bankruptcy Court in Midway Gold, that financial contribution to the estate by the releasee, without more, did not confer subject matter jurisdiction. In general, the court noted, third-party releases are proper only in “rare and unique circumstances.”
Similar to the debtors in In re Millennium Lab Holdings, the SunEdison debtors cited the various indemnification obligations they may owe to the released parties in order to justify the non-debtor releases. Judge Bernstein acknowledged that “[w]here a third party claim may give rise to a potential indemnification or contribution claim against the estate, the third party claim will have a conceivable effect on the estate, and accordingly, the Court has the jurisdiction to enjoin it,” but found the SunEdison releases to be much broader than the indemnification obligations the debtors contended supported them. Specifically, the court characterized the proposed releases as extinguishing “claims that relate in any way to the [d]ebtors or their bankruptcy cases and that arose from the beginning of time to an unspecified date in the future” when the plan went effective. The plan further did not limit the releases to the potential indemnified parties listed by the debtors, rather including a broad range of entities, professionals and their various agents.
Global A&T Pre-Packaged Plan
Following SunEdison, Judge Robert Drain, a U.S. Bankruptcy Judge for the Southern District of New York, was presented with a pre-packaged Chapter 11 plan of reorganization which was in many respects centered upon a settlement of pending litigation with noteholders and included releases of non-debtors. In re Global A&T Electronics, Case No. 17-23931 (Bankr. S.D.N.Y. Dec. 17, 2017). In confirming the proposed plan and approving the third-party release provisions, Judge Drain entered his Findings of Fact and Conclusions of Law, most of which focused on the claims being released, the necessity of the releases to settle major pending litigation, the settlement being the central feature of the plan and the overwhelming support of creditors affected by the proposed release. In re Global A&T Electronics, Case No. 17-23931 [ECF No. 62] (Bankr. S.D.N.Y. Dec. 22, 2017). He further expressly ruled that the Metromedia standards were met.
Investors Beware: Releases Remain Controversial
The Millennium Lab Holdings decision is again on appeal. Unlike Millennium, where the challenge to releases was raised by creditors that wished to preserve and prosecute their claims against the proposed released parties, in SunEdison, the question was raised sua sponte. It appears that in addition to concerns regarding the scope of the proposed releases, Judge Bernstein was not convinced that the 3 percent return contemplated by the plan to the very creditors who would be enjoined from seeking further recovery from the purported released parties was adequate or meaningful to the plan’s confirmation. Indeed, despite putting the releases into question as early as the initial hearing on the disclosure statement, it appears that little was done to address the concerns expressed or otherwise establish that what appeared to be “boilerplate” language was integral to the plan. The SunEdison decision suggests that there must be a record establishing that each release proposed by the plan meets the rigorous standards of Metromedia. Judge Bernstein did not reach the constitutional authority issue considered by Judge Silverstein of the Delaware Bankruptcy Court in Millennium, but, like Judge Ramero of Colorado Bankruptcy Court, Judge Bernstein’s analysis of subject matter jurisdiction focused on the claims and parties that are being released, rather than subsumed in the operative proceeding before the court. Judge Drain of the SDNY Bankruptcy Court adopted the same focus in overruling the objection to the proposed releases by one party who was involved in the exchange offers which were the subject of the litigation and settlement that were the focal point of the Global A&T plan. Like Millenium, Global A&T is on appeal.
After SunEdison, where a plan would impose a release in favor of most, if not all, parties benefitting from the plan upon claimholders that receive little, if anything, under the plan, that circumstance itself raises significant questions, which must be addressed. This controversy will continue. Protection of non-debtors, including non-debtor affiliates, may be particularly important where less than all affiliates of the debtor seek bankruptcy relief and there is an investment in or acquisition of the non-debtor affiliates as part of the plan. In this situation, a sale under §363 of the Bankruptcy Code may not be a realistic alternative. In such cases, as developing case law instructs, the record justifying releases protecting investors and the targeted non-debtor affiliates must be clear.
Corinne Ball is a partner at Jones Day.