In a chapter 7 case, Bankruptcy Judge Christopher J. Panos of Worcester, Mass., declined to approve a settlement containing a bar order precluding creditors from bringing suit on independent, non-derivative claims against the corporate debtor’s officers and directors.
A chapter 7 trustee proposed a settlement. In return for a payment of $500,000 from the corporate debtor’s $7 million directors and officers’ liability policy, the trustee would release all claims against company officers, directors and insiders. The settlement was conditioned on a so-called bar order precluding everyone from suing the settling directors, officers and insiders for actions “within the scope of their duties.”
After bankruptcy, the plaintiffs had filed a lawsuit in federal district court against the debtor’s former chief executive alleging violations of state and federal securities laws. The plaintiffs objected to approval of the settlement on account of the bar order. In his July 14 opinion, Judge Panos said that approval of the settlement would bar “certain” of the plaintiffs’ claims.
In the chapter 11 context, Judge Panos said that the circuits are split, with the Second, Third, Fourth, Sixth, Seventh and Eleventh Circuits giving discretion to enter bar orders in plans and confirmation orders. The minority view from the Fifth, Ninth and Tenth Circuits, he said, prohibits non-consensual releases because they are not permitted by Section 524(e), which says that a discharge does not affect the liability of anyone else.
No one objected to the economics of the settlement for $500,000. If that were the only issue, Judge Panos said he would have approved the settlement as a valid exercise of the trustee’s business judgment.
However, the plaintiffs objected to the inclusion of the bar order in the settlement. Assuming he had jurisdiction and power to enter a bar order, Judge Panos said the “discretion to do so should be exercised with restraint and only in extraordinary circumstances not present in this case.”
Among the factors he considered were the following: (1) The $500,000 was not a “large percentage” of the total claims asserted by the trustee and the plaintiffs; (2) a “substantial number” of the plaintiffs did not support the settlement containing the bar order; (3) the plaintiffs’ complaint in district court did not fail to state a claim or lack merit; and (4) the bar order would preclude “certain independent claims” of the plaintiffs.
Saying that the First Circuit “has not ruled directly on the issue of third-party releases,” Judge Panos decided to disapprove the settlement because “the requested bar order would be significant with respect to the Objecting Parties, and the benefit to them uncertain, and possibly modest, in relation to their potential recovery in” their suit in district court.
One wonders whether Judge Panos would have approved the settlement had it been proposed in a chapter 11 case where the compromise would have promoted approval of a reorganization plan.
Having denied the settlement on the merits, Judge Panos said he did not need to decide whether he had “subject matter jurisdiction or adjudicatory authority” to approve the settlement. In that regard, click here to see ABI’s discussion of Opt-Out Lenders v. Millennium Lab Holdings II LLC (In re Millennium Lab Holdings II LLC), 16-110, 2017 BL 86282 (D. Del. March 17, 2017), where a district judge in Delaware clearly insinuated that Stern v. Marshall and its progeny preclude a bankruptcy court from entering a final order granting non-consensual third-party releases of non-bankruptcy claims, even as part of a chapter 11 confirmation order.