To Release or Not To Release -
Non-Consensual Third Party Releases in Chapter 11 Plans
Doing the Splits:
Circuit Splits Under the Bankruptcy Code
Annette W. Jarvis, Dorsey & Whitney LLP
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The circuit split on the issue of the propriety and ability of bankruptcy courts to grant non-consensual third party releases in Chapter 11 plans of reorganization is long standing and deeply divided. Five circuits (the Second, Fourth, Sixth, Seventh, and Eleventh Circuits) allow non-consensual third party releases in Chapter 11 plans. See SE Prop. Holdings, LLC v. Seaside Eng'g & Surveying (In re Seaside Eng'g & Surveying), 780 F.3d 1070 (11th Cir. 2015); Airadigm Communs., Inc. v. FCC (In re Airadigm Communs., Inc.), 519 F.3d 640 (7th Cir. 2008); Deutsche Bank AG, London Branch v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005); Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002); Menard -Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir. 1989). Three circuits (the Fifth, Ninth, and Tenth Circuits) have held that the Bankruptcy Code does not allow the bankruptcy court to order non-consensual third party releases in confirmed Chapter 11 plans. See Bank of N.Y. Tr. Co., NA v. Official Unsecured Creditors' Comm. (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009); Resorts Int'l v. Lowenschuss (in Re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995); In re W. Real Estate Fund, 922 F.2d 592 (10th Cir. 1990); In re American Hardwoods, 885 F.2d 621 (9th Cir. 1989). While acknowledging the circuit split, the Third Circuit has avoided taking sides to date, finding the evidence in the case seeking third party releases did not support a permanent injunction even if it followed the majority view. See Gillman v. Continental Airlines (In re Continental Airlines), 203 F.3d 203 (3d Cir. 2000). The D.C. Circuit has not addressed the issue head on, but has indirectly favored the minority view in the context of equal treatment of creditors under Section 1123(a)(4). See In re AOV Industries, Inc. et al., 792 F.2d 1140 (D.C. Cir. 1986). The complexity of this circuit split includes differing statutory interpretations, vastly different fact patterns on each side of the split, and fact intensive requirements from circuits allowing non-consensual releases.
The Fourth Circuit decided Menard-Sanford v. Mabey (In re A.H. Robins Co.) in June of 1989, affirming confirmation of a plan of reorganization resolving thousands of mass tort claims that included a permanent injunction preventing third party suits against the Company’s settling insurer, its directors, and attorneys for the insurer and the directors. Only a few months later, in September of that same year, the Ninth Circuit, in