In the first opinion on the topic since the Supreme Court’s Purdue decision in late June, Bankruptcy Judge Christopher M. Lopez of Houston confirmed a so-called opt-out chapter 11 plan with nondebtor, third-party releases. He held that Purdue did not change governing law in the Fifth Circuit.

The chapter 11 reorganization before Judge Lopez was preceded by pitched battles between creditor groups that continued after filing. On the main battlefield, there was a settlement in bankruptcy court that satisfied all but one group of sophisticated lenders. They objected to confirmation of the plan on several grounds, but Judge Lopez dismissed their objections in his August 16 opinion.

The only other objection came from the U.S. Trustee, who opposed confirmation because the plan would bestow releases on nondebtors. The debtor contended that the releases were consensual because creditors could opt out.

The U.S. Trustee argued that the supposedly consensual releases were coercive and that the releases should be given only by creditors who opt in. Notably, any creditor who voted in favor of the plan could not opt out, and creditors who did not vote would be bound by the releases. In addition, creditors who opted out could not sue unless the bankruptcy court were to determine that the claims were colorable.

The debtor gave extensive notice about the opt-out provisions in the plan. About 100 creditors opted out, Judge Lopez said in his opinion.

Opting Out Is Ok

Addressing the U.S. Trustee’s confirmation objection and citing Bank N.Y. Tr. Co. v. Off. Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009), and Feld v. Zale Corp. (In re Zale Corp.), 62 F.3d 746 (5th Cir. 1995), Judge Lopez said in his August 16 opinion that Purdue “did not change law in this Circuit.” Harrington v. Purdue Pharma L.P., 219 L. Ed. 2d 721, 144 S. Ct. 2085 (Sup. Ct. June 27, 2024). To read ABI’s report on Purdue, click here.

In the wake of Pacific Lumber and Zale, Judge Lopez said that “Fifth Circuit case law appeared to prohibit non-consensual third-party releases.” However, he went on to say that the plan before him “does not include non-consensual third-party releases like the ones addressed in Purdue.”

Did Purdue change Fifth Circuit law on consensual releases? As Judge Lopez read Purdue, “the Supreme Court said nothing [that] should cast doubt on consensual” releases. He quoted the majority opinion in Purdue where Justice Neil M. Gorsuch said, “Nor do we have occasion today to express a view on what qualifies as a consensual release.” Purdue, 144 S. Ct. at 2087–88.

Citing a decision from a bankruptcy judge in Delaware before Purdue, Judge Lopez saw “nothing improper with an opt-out feature for consensual third-party releases in a chapter 11 plan.” See In re Arsenal Intermediate Holdings, L.L.C., 23-10097, 2023 WL 2655592, at *6–8 (Bankr. D. Del. Mar. 27, 2023). To read ABI’s report on Arsenal, click here.

“Hundreds of chapter 11 cases have been confirmed in this District with consensual third-party releases with an opt-out. And, again, Purdue did not change the law in this Circuit,” Judge Lopez said. Regarding the plan before him, Judge Lopez recited how the debtor had given detailed notices about the plan and the opt-out provisions.

Furthermore, Judge Lopez said that the “third-party releases are also narrowly tailored to this case.” As often happens, he said that the releases were a “core” consideration in the plan to eliminate more than $640 million in debt.

Citing support from the official creditors’ committee, Judge Lopez overruled the U.S. Trustee’s objection and said he would confirm the plan, given how “the third-party releases are consensual and narrowly tailored.”