In a chapter 11 plan with a tiny distribution and large tort claims, Chief Bankruptcy Judge Carl L. Bucki of Buffalo, N.Y., decided that state contract law does not permit a plan to confer releases on nondebtors when creditors are only entitled to opt out.

The August 27 decision by Judge Bucki could also be seen as a declination to confer releases on nondebtors who made no financial contribution to the pool for creditors.

The debtor had operated a coke foundry described by Judge Bucki as having “accumulated substantial debt” from the “alleged emission of toxic pollutants.” After a six-year sojourn in chapter 11, the corporate debtor cobbled together $300,000 for distribution among creditors with more than $282 million in unsecured claims.

The proposed plan called for releasing not only the debtor but also the debtor’s officers, directors, shareholders and agents. Nondebtor releases were also earmarked for the debtor’s and the committee’s professionals, among others. Whether they voted or not, creditors would be conferring releases unless they opted out when voting on the plan.

The U.S. Trustee lodged an objection to approval of the disclosure statement, contending that the plan with nondebtor releases could not be confirmed unless a creditor were to opt in. The debtor protested, saying that consent could be inferred by giving creditors the opportunity to opt out.

Like the debtor’s plan in the Purdue decision from the Supreme Court in late June, Judge Bucki said that the plan of the debtor before him “contemplates a release from liability for the benefit of various third parties.” He noted, though, that Purdue did not express a view on what qualifies as a consensual release. See Harrington v. Purdue Pharma L.P., 219 L. Ed. 2d 721, 144 S. Ct. 2071 (Sup. Ct. June 27, 2024). To read ABI’s report on Purdue, click here.

Quoting the majority opinion in Purdue, Judge Bucki recited how Justice Neil M. Gorsuch remarked that “nothing in the bankruptcy code contemplates (much less authorizes)” nondebtor releases. Purdue, 114 S. Ct. at 2088. With nondebtor releases not authorized anywhere in the Bankruptcy Code, Judge Bucki said that “any such arrangement would be governed instead by state law.”

Judge Bucki decided that New York law would apply because “nearly all” creditors either transacted business in New York or sustained injuries that emanated from New York. He cited Section 5-1103 of the New York General Obligations Law, which governs some types of contracts. It says that an agreement to “discharge” an “obligation” must be in writing and signed by the party against whom it would be enforced.

“Under this standard,” Judge Bucki said, “the release becomes a mere proposal that no one can enforce.”

In “many” chapter 11 cases, only a “small percentage” of creditors vote on the plans, Judge Bucki said. In addition, he said that “many” who do vote “may overlook” the box for opting out.

Without prejudice to the filing of a modified plan and disclosure statement, Judge Bucki sustained the objection to the disclosure statement. He held that creditors “have not given consent as required by the Supreme Court” in Purdue “[a]bsent a writing expressly agreeing to a release of nondebtors.”

Observations

The decision by Judge Bucki may not be a revelatory departure from an opinion handed down 11 days earlier in Houston when Bankruptcy Judge Christopher M. Lopez confirmed a plan with opt-outs. See In re Robertshaw US Holdings Corp., 24-90052, 2024 BL 292649, 2024 Bankr Lexis 1958 (Bankr. S.D. Tex. Aug. 16, 2024). To read ABI’s report, click here.

To begin with, the distributions to tort claimants in the case before Judge Bucki were miniscule. Unlike Purdue, the released nondebtors were not making financial contributions toward the payment of creditors’ claims. In addition, the definition of released parties was remarkably broad.

When a chapter 11 plan has small or perhaps infinitesimally small distributions to each creditor, it might be fair to assume that creditors generally would fare better from lawsuits against allegedly responsible third parties and that the failure to opt out could be attributed to a failure to read or understand the disclosure statement.

Having the viability of nondebtor releases turn on state law is a troublesome concept. In chapter 11 cases with thousands of tort claimants, the governance of state law might result in releases that are binding in some states but not in others. In addition, deciding the choice of law for each claim could be burdensome if not impossible in a very large case.

The order by Judge Bucki is interlocutory, obviating an appeal absent certification of an interlocutory appeal. A case like this deserves review in the Second Circuit.