Bankruptcy Judge Caryl E. Delano, sitting in Fort Myers, Fla., took a conservative approach when she decided not to confirm a chapter 11 plan given the Eleventh Circuit’s cautious approach to granting third-party releases.
Judge Delano cited a split where three circuits do not approve third-party releases, while six permit them. Among the permissive courts is the Eleventh Circuit, which held last year in Seaside Engineering that third-party releases “should not be issued lightly” but reserved for “unusual cases.” The Atlanta-based court sanctioned the seven-part test developed by the Sixth Circuit in Dow Corning.
The case in Judge Delano’s court involved a company in chapter 11 owned by a husband and wife with debts or liabilities of their own to several creditors. The company, the owners and several creditors negotiated a settlement where some of the creditors got property and the owners made contributions. The settlement required the plan to provide that no creditors could sue the owners after confirmation.
In her opinion on Jan. 6, Judge Delano would not approve either the plan or the settlement. She prominently noted how the chapter 11 estate got nothing under the settlement. Although the owners made contributions, she said the couple had not shown whether they were contributing a “substantial” part of their assets.
The judge said the plan was not a “true reorganization.” Instead, it was “a restructuring of various obligations to obtain releases for [the owners] and their entities.”
If the owners wanted a discharge, Judge Delano said they should have filed their own bankruptcies. She said it would not be fair for someone to obtain the equivalent of a chapter 7 discharge “when that party has not made full disclosure of his assets and liabilities.”