Opt-Outs: Dead or Alive?

By Omar J. Alaniz

In “White Lotus,” season 3, episode 5, Belinda Lindsey, a spa manager with the White Lotus Resort & Spa Maui, invites a Thai man to stay the night. With excitement and nerves combined, she says, “But just so you know ... this is consent. Do you do that here? We just started.” The “opt-out” vehicle for achieving third-party release consent is not new, but bankruptcy courts are now laser-focused on the viability of opt-outs following Purdue Pharma.1

Consent: Express or Implied

The U.S. Trustee’s position is that a “consensual release” is an agreement between parties governed by state law.2 Hon. Paul Baisier of the U.S. Bankruptcy Court for the Northern District of Georgia challenged this view in Lavie Care, noting the complexities of a state law approach. Which state applies? The state of the bankruptcy case? The state of the debtor’s headquarters? Should the court examine all of the state’s contract law or just offer acceptance or consideration?3 This impractical approach appears to be at odds with the federal bankruptcy policy of uniformity.

The U.S. Trustee also posits that silence cannot manifest consent — in other words, a party’s consent must be express.4 However, U.S. Supreme Court law and dicta do not support a bright-line view of “consent.” After the Purdue Pharma majority excised consensual third-party releases from its decision,5 it highlighted that the Court does not “express a view on what qualifies as a consensual release.”6 This statement undercuts a categorical rejection of implied consent.

The Supreme Court rejected an “express consent” standard in Roell v. Withrow in construing 28 U.S.C. § 636(c), providing that a magistrate judge may conduct proceedings and enter judgment “[u]pon the consent of all parties.” The Court held that such consent need not be express if implied by the parties’ conduct, notwithstanding that Rule 73(b)(1) of the Federal Rules of Civil Procedure requires parties to file a statement expressing consent.7

To be fair, the implied consenting party in Roell actively participated in the magistrate’s proceedings. Thus, the party’s affirmative conduct supported the ruling notwithstanding the lack of express consent. The recent Smallhold ruling upholding the opt-out mechanism for creditors that reject the plan but fail to opt out is analogous. Hon. Craig Goldblatt of the U.S. Bankruptcy Court for the District of Delaware was satisfied that the creditor’s active conduct of voting — albeit rejecting the plan’s treatment — supplied the hook to impose a third party when the creditor did not check the opt-out box. The “consent” in this scenario looks more implied, rather than express.

Ironically, the Fifth Circuit’s decades-long law prohibiting nonconsensual third-party releases8 supported the decision of Hon. Christopher M. Lopez of the U.S. Bankruptcy Court for the Southern District of Texas in Robertshaw that Purdue Pharma did not change the viability of the opt-out process in Fifth Circuit bankruptcy courts.9 Judge Lopez reasoned that the Southern District of Texas has confirmed hundreds of chapter 11 plans incorporating the opt-out process supporting consensual releases (which the Supreme Court noted were undisturbed).10

Similarly, in framing the question “what does consent look like?,” Hon. Sean H. Lane of the U.S. Bankruptcy Court for the Southern District of New York in Spirit Airlines noted that the court does not write on a blank slate in the Second Circuit.11 Judge Lane cited several cases in the Second Circuit and the Southern District of New York addressing the opt-out process as a path to consensual consent for third-party releases.

Opt-Outs Are Not Created Equal

A chapter 11 plan’s “releasing party” comes in different shapes and sizes. The exhibit illustrates the most common seven scenarios. The plans in Spirit Airlines, Robertshaw, Container Store and CareMax included five scenarios — each of which the courts blessed. Judge Goldblatt in Smallhold declined a blanket approach by approving two scenarios but not a third (an unimpaired creditor deprived of an opt-out opportunity).12 The post-Purdue Pharma cases are grouped as follows:

• Express Consent: Failure to opt out can never support a “consensual” release (see, e.g., Ebix).
• Implied-by-Action Consent: In appropriate cases, only parties that actually voted on a plan and failed to opt out. Thus, consent cannot be inferred from (1) impaired voters that abstain from voting, or (2) a nonvoting class (whether deemed to accept or reject) (see, e.g., Smallhold).
• Implied-by-Inaction Consent: In appropriate cases, any party provided an opportunity to opt out and failed to opt out. (see, e.g., Spirit Airlines, Container Store, Robertshaw, Lavie Care, CareMax and Eiger BioPharmaceuticals). Judge Braiser opined that a failure to opt out should be a rebuttable presumption of consent. Evidence that may rebut the presumption includes hospitalization, service overseas or evidence of a mailing that the carrier lost.13

The variety of approaches might create disparate views within districts. The U.S. Bankruptcy Court for the Northern District of Texas includes three judges; two judges have adopted implied-by-inaction consent, while a third has adopted express consent. Hon. Michelle V. Larson confirmed the CareMax plan that included an opt-out process for all nonvoting and voting classes.14 Hon. Stacey G. C. Jernigan confirmed the Eiger BioPharmaceuticals plan that included an opt-out process for voting creditors.15 Hon. Scott W. Everett had no qualms in Ebix with “releasing parties,” including a creditor that accepted the plan, but disapproved every other scenario (i.e., a nonvoting creditor deemed to have accepted or rejected, or an impaired creditor that rejected or abstained) requiring an opt-out form submission.16

Factors Courts May Consider in Assessing an Opt-Out Process

Most opt-out proponents agree that it should not be a “free for all” that creates a windfall for the debtors’ insiders (i.e., the usual suspects in the “released parties” definition).17 The opt-out mechanism is more bespoke than headlines suggest. Courts may look at various factors to determine whether the opt-out process in a particular case is acceptable.

Adequacy of Notice

Rule 3016(c) of the Federal Rules of Bankruptcy Procedure requires that any plan providing an injunction be described “in specific and conspicuous language (bold, italic, or underlined text)” and disclose the entities enjoined. However, while rule compliance might be necessary, it is often insufficient.18 A court will consider whether a hypothetical recipient of an opt form would understand the opt mechanism, the scope of the released claims and the identity of the released parties.19 A court may also consider whether a meaningful number of parties elected the opt-out, suggesting that the instructions were not so wholly unclear as to doubt their clarity.

Scope of the Released Claims and Parties

Lawyers’ predisposition to draft release provisions broadly might jeopardize the third-party release. A court is more likely to approve an opt-out process for derivative claims or claims that have a close nexus between the released parties’ actions and the debtor. Thus, a broad definition of “released claims” that includes conduct untethered to the debtor or the chapter 11 case is no different than a provision requiring (absent opt-out) contribution to the CEO’s child’s college fund that Judge Goldblatt raised in Smallhold.20

Value Unlocked

A common justification for third-party releases is the value that such releases unlock. In Roman Catholic Diocese of Syracuse, the released parties contributed $50 million in exchange for the releases.21 Conversely, Hon. Carl L. Bucki of the U.S. Bankruptcy Court for the Western District of New York sustained the U.S. Trustee’s disclosure statement objection of a plan where creditors received no consideration for the third-party releases.22

Representative Fiduciaries Supporting the Releases

The court might also consider whether the plan proponent robustly negotiated the plan’s terms with case fiduciaries that are representative of the releasing parties. The plan in Roman Catholic Diosese of Syracuse included an opt-out ballot for a class of survivors that were represented by an official committee of survivors. The committee participated in the plan’s formulation and supported the releases affecting its constituency.23

Summary

Courts may tailor other factors particular to a case: the highly publicized nature of the case; the magnitude of recoveries afforded to stakeholders under the plan; overwhelming creditor support for the plan and lack of objection from economically interested parties; and the sophistication of the parties subject to the third-party release.24

Conclusion

The opt-out process might be the Purdue Pharma sequel at the Supreme Court. Early decisions had called the longstanding practice into question. While recent decisions do not view Purdue Pharma as disturbing the opt-out mechanism’s viability, these cases provide better guidance on the appropriateness of opt-outs in the “uncommon” case.

Omar Alaniz is the office managing partner of Reed Smith LLP’s Dallas office, and his primary practice is representing chapter 11 debtors and official committees. He is a 2017 ABI “40 Under 40” honoree.

Editor’s Note: ABI held a webinar shortly after the Supreme Court issued its decision in Purdue. To listen to the abiLIVE recording, please visit abi.org/newsroom/videos. ABI also published a digital book, The Purdue Papers, a compilation of 3,500+ pages of amicus briefs, petitions and other related background material. To order your downloadable copy, please visit store.abi.org.