By: Donald L Swanson
“chapter 15 authorizes this Court to enforce nonconsensual third-party releases ordered by foreign courts.”
That’s the conclusion of the Delaware Bankruptcy Court in In re Real, Case No. 25-10208, Doc. 65 at 19 (decided April 1, 2025).
The Facts
Here is a quick summary of the In re Real facts.
Debtor in a Mexican bankruptcy case petitions the Delaware Bankruptcy Court under Chapter 15 for an order to:
- recognize and enforce the bankruptcy plan that the Mexican court approved, which includes nonconsensual third-party releases.
A creditor opposes the requested relief, arguing that such releases, (i) are not authorized under Chapter 15, and (ii) are “manifestly contrary to the public policy of the United States.”
The Question & Answer
Here is how the Bankruptcy Court defines the question before it:
- since the U.S. Supreme Court held, in Harrington v. Purdue Pharma, L.P., that a chapter 11 plan of reorganization cannot provide for a nonconsensual third-party release of claims against a non-debtor;
- can a bankruptcy court, in a case under Chapter 15, enforce a foreign plan containing such releases?
The answer is, “Yes.”
Rationale
Here is a summary of the Delaware Bankruptcy Court’s rationale for the empowerment to approve such releases in Chapter 15..
–Statutory Policies
Chapter 15 provides the following policy objectives—in § 1501.
“The purpose of this chapter is . . . to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of”:
- cooperation between courts of the United States and foreign countries;
- fair and efficient administration of cross-border cases to protect the interests of all parties;
- maximizing the value of debtor’s assets; and
- rescuing financially troubled businesses, to protect investments and preserve jobs.
So, the focus of Chapter 15 in cases before the U.S. bankruptcy courts is on “cooperation and comity with foreign courts and deference to those courts,” within the confines of Chapter 15.
A bankruptcy court has broad discretion, in Chapter 15, to order enforcement of foreign orders under principles of comity:
- U.S. courts have a long history of comity in foreign bankruptcy proceedings, because:
- bankruptcy requires the assembling of all claims against limited assets in a single proceeding; and
- if all creditors cannot be bound, a plan of reorganization will fail;
- therefore, U.S. bankruptcy courts should aim to maximize assistance to the foreign bankruptcy proceeding; but
- such assistance cannot violate the idea of procedural “fairness” or be “manifestly contrary to the public policy of the United States”—which limitations are to be “narrowly interpreted.”
–Third Party Releases are not “Manifestly Contrary” to U.S. Policies
A creditor opposes third-party releases in the Chapter 15 bankruptcy Plan from Mexico as “manifestly contrary” to the public policy of the United States—based on the U.S. Supreme Court’s Purdue opinion.
However, because of the statutory, qualifying word, “manifestly,” U.S. courts must use the contrary-to-public-policy exception sparingly.
The related Mexican bankruptcy proceedings are consistent with U.S. standards of procedural fairness, and the Mexican Plan does not violate any U.S. constitutional or statutory rights.
Moreover, the Mexican bankruptcy court provided objecting creditor with a full and fair opportunity to be heard, but the creditor failed to raise any third-party release issue during the Mexican proceedings.
While nonconsensual third-party releases are contrary to U.S. public policy (because the Purdue decision prohibits them in most Chapter 11 plans), such releases are far from being “manifestly contrary to the public policy of the United States.” That’s because such releases:
- are expressly permitted for asbestos cases, under § 524(g) of the Bankruptcy Code; and
- the Supreme Court, in Purdue, noted that Congress could have authorized such releases for Chapter 11 cases generally, if Congress wanted to do so.
“Simply put, if permitting third-party releases is a policy decision that Congress can and has made, it cannot also be true that enforcing such releases” in Chapter 15 would be “manifestly contrary to the public policy of the United States.”
- The simple fact that a U.S. court could not grant such releases in a typical Chapter 11 plan does not make them “manifestly contrary to U.S. public policy” in this Chapter 15 case.
Conclusion
Although nonconsensual third-party releases are prohibited by the U.S. Supreme Court in its Purdue Pharma opinion, such releases may be approved by a U.S. Bankruptcy Court in a Chapter 15 case, when a bankruptcy plan confirmed by a foreign bankruptcy court has authorized such releases.
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