Year in Review: Bankruptcy — Third-Party Release

14 December 2015 Publication
Authors: Thomas Charles Scannell

Texas Lawyer

A disputed issue this year, one in which the U.S. Court of Appeals for the Fifth Circuit appears to hold a minority view, concerns the propriety of a "third-party release" through a chapter 11 plan. As a basic principle, the bankruptcy code provides a chapter 11 debtor the opportunity to obtain a "fresh start" by confirming a plan of reorganization. With few exceptions, a reorganized debtor exits bankruptcy owing only those obligations preserved in the confirmed plan. The bankruptcy code does not, however, contemplate the discharge of liabilities belonging to non-debtors. Third-party releases operate to extinguish the liability of a non-debtor arising from certain claims, causes of action, and other rights to payment held by third parties in interest.

Considering that the bankruptcy code does not explicitly authorize such non-debtor releases—and that some courts interpret the code to expressly prohibit them—it is unsurprising that a circuit split has emerged over this issue. The U.S. Supreme Court has not yet provided a dispositive answer to the question of whether bankruptcy courts possess the jurisdiction to order non-consensual third-party releases, leaving three main camps – pro-release, anti-release, and undecided—to form within the U.S. Circuit Courts of Appeal.

Courts approving non-consensual third-party releases find authority to do so within the provisions of the bankruptcy code affording bankruptcy courts general equitable powers. Together, 11 U.S.C. §§ 105(a) and 1123(b)(6) permit a bankruptcy court to issue any order, process, or judgment necessary to effectuate the provisions of the code, and permit a plan to include provisions not inconsistent with the code. Finding no direct conflict with the code to exist, these courts authorize non-consensual third-party releases. These pro-release courts evaluate each set of facts on a case-by-case analysis of certain non-exclusive factors. The pro-release courts—the Second, Fourth, Sixth, Seventh, Eleventh, and D.C. Circuits—constitute the majority view, and either affirmatively endorse non-consensual releases, or do not explicitly prohibit them.

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