Chapter 11 Plan Third-Party Release Provisions: Structuring or Objecting to Non-Debtor Releases

Description

Third-party releases in reorganization plans remain contentious and are often challenged when affected creditors have not expressly consented. Courts scrutinize these kinds of releases which have become broader and broader over the past few years. Some courts have held that an affirmative showing of consent is required. In contrast, others have found that general release clauses can effectively bind parties who do not participate in the confirmation process. In some cases, the parties' release must contribute to the plan funds. Counsel for debtors should consider steps to bolster the likelihood of approval of third-party releases as consensual.

Section 105(a) of the Bankruptcy Code gives the bankruptcy court the power to decide whether parties explicitly or implicitly consented to a release, weighing factors such as whether the provisions are fair, equitable, and reasonable and are in the best interests of the debtor, its estate, and parties in interest.

From the creditor's perspective, Chapter 11 plans frequently include broad third-party release provisions that might bind creditors who take no action concerning a plan or fail to affirmatively reject a release. Practitioners must develop a strategy for analyzing these releases on behalf of creditor clients, determining the scope and nature of any proposed releases and who is being released, and scrutinizing plan ballots regarding potential requirements for affirmatively declining to grant releases. A timely objection must be filed if necessary.

Listen as our authoritative panel of bankruptcy practitioners discusses how to structure third-party release provisions in Chapter 11 plans, the standards that courts apply in approving releases, and the steps creditors' counsel should take in reviewing and objecting or otherwise responding to such provisions.