The Supreme Court’s Purdue decision permits chapter 11 plans to contain releases of creditors’ claims against nondebtors as long as (1) creditors can vote for or against the plan, and (2) the plan contains a “clear and conspicuous” notice telling creditors that they can check a box to opt out of the releases, according to an opinion by Bankruptcy Judge Craig T. Goldblatt of Delaware.

Judge Goldblatt said in his September 25 opinion that he has changed his mind about the reason why opt-outs are permissible. Last year, before the Supreme Court decided Purdue, he approved opting out based on the idea that failure to opt out was akin to default. See Arsenal Intermediate Holdings, LLC, No. 23-10097, 2023 WL 2655592 (Bankr. D. Del. Mar. 27, 2023). To read ABI’s report, click here.

In the wake of Purdue, Judge Goldblatt believes that a nondebtor release is no longer relief that a debtor would be entitled to receive on a creditor’s default. Post-Purdue, he believes that a creditor must manifest consent to a release, which can be accomplished if notification to the creditor was sufficient to form a contract.

The Opt-Out Plan

The debtor in Subchapter V of chapter 11 proposed a plan to which there were no objections, aside from the U.S. Trustee’s complaint that the plan could not confer nondebtor, nonconsensual third-party releases unless creditors opted in.

The plan contained two classes of creditors affected by nondebtor releases. Unimpaired creditors were in a class of their own. The class contained creditors with priority claims to be paid in full and shareholders whose equity interests were not impaired by the plan. Creditors in the unimpaired class were not permitted to vote on the plan, but the plan would release their claims against nondebtors, with no ability to opt out.

The ballot for unsecured creditors contained a box allowing them to opt out. Regardless of whether a creditor voted for or against the plan, the creditor would confer nondebtor releases unless the creditor checked the opt-out box.

Judge Goldblatt said that notice about opting out was “clear and conspicuous.”

Applying Purdue

In his 37-page opinion, Judge Goldblatt was searching for a rationale to grant nondebtor releases that holds water after Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). To read ABI’s report on Purdue, click here.

In March 2023, Judge Goldblatt had decided in Arsenal that creditors who “did not object to or opt out of a third-party release could essentially be ‘defaulted,’ with the release being imposed on them, despite their silence.” He explained why his theory in Arsenal “does not survive Purdue Pharma.”

After Purdue, Judge Goldblatt said that “a third-party release is no longer an ordinary plan provision that can properly be entered by ‘default’ in the absence of an objection.” Following Purdue, he said,

The nonconsensual third-party release is now per se unlawful. As such, it is not the kind of provision that would be imposed on a creditor on account of that creditor’s default.

After Purdue, Judge Goldblatt said that “affirmative consent is required.” Although “a number of courts have reached a contrary conclusion even after Purdue Pharma,” he said that he “does not find their reasoning persuasive” because “these decisions provide no limiting principle on what could be accomplished by what they describe as ‘consent.’”

Now that “the creditor’s silence in the face of a plan and form of ballot can no longer be sufficient,” Judge Goldblatt said there must be “some sort of affirmative expression of consent that would be sufficient as a matter of contract law.”

What Is Affirmative Consent?

Having established that consent must be evident under principles of contract law, Judge Goldblatt first examined the unimpaired class of creditors who were granting releases without the opportunity to vote or opt out.

“[A]s a matter of ordinary contract law,” Judge Goldblatt said that the “silence” of unimpaired creditors, “in the face of language in the plan telling them that they would be giving the third-party release, is insufficient to bind them to it.” He therefore held that “creditors who were not solicited to vote have [not] validly consented to giving the third-party releases.”

Voting Brings Affirmative Consent

Regardless of whether they voted for or against the plan, unsecured creditors were granting releases unless they checked the box to opt out.

Judge Goldblatt held that voting “is an affirmative step and, coupled with conspicuous notice of the opt-out mechanism, suffices as consent to the third-party releases under general contract principles.” He said that “these creditors are in a position analogous to that of a consumer that makes a purchase over the internet, and ‘clicks through’ to accept the terms and conditions of the sale.” Citing the Ninth Circuit, he said “that such action is typically sufficient to give rise to an enforceable agreement.”

Judge Goldblatt said that the “same rationale applies to [unsecured creditors] who voted against the plan and elected not to opt out” because they “were provided clear instruction that a vote against the Plan would suffice to manifest agreement to a third-party release if they did not affirmatively opt out by marking the box on the ballot.”

Since “the touchstone is whether the creditor engaged in affirmative conduct to indicate the creditor’s consent,” Judge Goldblatt saw “no basis to distinguish between the creditor who voted in favor of the plan from the one who voted against it.”

In short, Judge Goldblatt excised releases for creditors who did not vote and were not given a chance to opt out, but he allowed releases to be given by creditors who voted for or against the plan, as long as they did not opt out.

Observations

Judge Goldblatt believes that actions sufficient to form a contract provide the basis for nondebtor releases via opt-out. This writer asks whether notice and opportunity to opt out should be subject to constitutional standards for due process. It may be, however, that rules for formation of a contract themselves satisfy constitutional standards.

If opting out carries the day around the country, the mechanics should be standard everywhere. Otherwise, the forms used throughout the country will have been drafted by a handful of firms handling the largest chapter 11 cases. Drafting should be the result of a more rigorous process from differing points of view.

Down the road, this writer recommends that there be a Bankruptcy Rule and official forms to prescribe the notice that creditors must be given to effect nondebtor releases via opting out.