Bankruptcy Court Rules That It Has Constitutional Authority to Grant Nonconsensual Releases in Chapter 11 Plan

By Charles M. Oellermann and Mark G. Douglas (Jones Day)

Many chapter 11 plans include nonconsensual third-party releases that preclude certain non-debtors from pursuing claims against other non-debtors as part of a restructuring deal in which such releases are a quid pro quo for financial contributions made by prepetition lenders or old equity holders. However, bankruptcy and appellate courts disagree as to whether such non-consensual plan releases should be permitted due, among other things, to concerns regarding the scope of a bankruptcy court’s subject matter jurisdiction and constitutional authority. Several court rulings handed down in 2017 addressed these concerns.

For example, In In re Midway Gold US, Inc., 575 B.R. 475 (Bankr. D. Colo. 2017), the court held that, although Tenth Circuit law does not categorically forbid third-party releases in chapter 11 plans, it lacked jurisdiction to “adjudicate” plan releases of claims against non-debtors because the underlying claims should not be considered as part of the proceedings to confirm the plan and were not within either its “core” or “related to” jurisdiction. In addition, in In re SunEdison, Inc., 2017 BL 401968 (Bankr. S.D.N.Y. Nov. 8, 2017), the court ruled that, as a matter of contract law, merely implied consent for plan releases is insufficient, and it lacked subject matter jurisdiction to approve releases that were overly broad.

By contrast, in In re Millennium Lab Holdings II, LLC,  2017 WL 4417562 (Bankr. D. Del. Oct. 3, 2017), the court held that it had the constitutional jurisdiction to authorize nonconsensual releases, despite the existence of litigation in another forum to adjudicate one of the claims to be released. A discussion of the court’s ruling in Millennium is available here.

Recent Developments in Bankruptcy Law October 2017

By Richard Levin (Jenner & Block LLP)

The bankruptcy courts and their appellate courts continue to explore issues of interest to practitioners and academics. This quarterly summary of recent developments in bankruptcy law covers cases reported during the third quarter of 2017.

The Second Circuit adopted the use of a market rate to determine cram-down interest rates in a chapter 11 case. It also disallowed a secured lender’s make-whole, although without deciding whether a make-whole should be generally disallowed as unmatured post-petition interest. (In re MPM Silicones (Momentive)) In contrast, the Houston bankruptcy court allowed a make-whole in a solvent case, but also without reaching the post-petition interest issue. (In re Ultra Petroleum)

The Delaware bankruptcy court clarified its jurisdiction to approve a third-party release in a settlement implemented through a confirmed chapter 11 plan, holding that plan confirmation is a core proceeding, so Article III limits do not apply. (In re Millennium Lab Holdings II, LLC) The Delaware bankruptcy court also reconsidered, and disallowed, a merger agreement termination fee after termination of the agreement. (In re Energy Future Holdings, Inc.)

Bankruptcy courts increasingly approve of the idea that under section 544(b), the trustee may use the longer reachback periods of the Internal Revenue Code and the Federal Debt Collection Procedures Act (In re CVAH, In re Alpha Protective Services). And the Ninth Circuit has ruled that for the trustee to pursue an avoidance claim against the United States, section 544(b) does not require a separate sovereign immunity waiver. (In re DBSI, Inc.) 

Finally, the courts have been sympathetic to attorneys in allowing their fees. (In re Stanton; In re Hungry Horse, LLC; In re CWS Enterps., Inc.) Less so for investment bankers. (Roth Capital Partners)

The full memo, discussing these and other cases, is available here, and the full (900-page) compilation of all prior editions is available here.