Disagreeing with some of his colleagues in New York and Delaware, Bankruptcy Judge Stuart M. Bernstein ruled that he had neither jurisdiction nor statutory power to issue a release of claims against non-debtor third parties held by creditors who did not vote on the confirmed chapter 11 plan of SunEdison, Inc., a renewable energy developer.
Although he gave the debtors an opportunity to submit a modified release that he would approve, SunEdison might be unable to comply with the rigorous standards that Judge Bernstein imposed.
The SunEdison Plan
Although no one objected, Judge Bernstein said at the confirmation hearing in late July that he had questions about the propriety of the broadly worded third party releases contained in the plan. Judge Bernstein called for further briefing on the releases but went ahead and confirmed the plan, because the debtors and affected parties were willing to accept the risk that the judge would knock out the releases later.
In his Nov. 8 opinion, Judge Bernstein said that the claims to be released and the parties benefitting from the releases were equally broad. The releases bound not only creditors who voted for the plan but also creditors who did not vote at all. He said that non-voting creditors “would release a largely unidentified group of non-debtors from liability based on pre-petition, post-petition and post-confirmation (i.e., future) conduct occurring through the plan’s future effective date that related in any way to their clams or those bankruptcy cases.”
Deemed Consent
First, Judge Bernstein analyzed whether non-voting creditors impliedly consented to the releases, much like the Supreme Court in Wellness International Network, Ltd. v. Sharif, 135 S. Ct. 1932, 191 L. Ed. 2d 911, 4337 (2015), said that creditors’ inaction can result in implied consent to the bankruptcy court’s authority to issue a final order.
Rather than focus on constitutional principles, Judge Bernstein analyzed contract law to decide whether non-voting creditors were deemed to consent to the releases, because they were warned in the disclosure statement that inaction might be taken as consent.
Judge Bernstein began from the proposition that silence does not constitute consent, absent a duty to speak. He cited the New York Court of Appeals for saying that silence operates as an estoppel “only when it has the effect to mislead.”
Judge Bernstein disagreed with several New York and Delaware bankruptcy court decisions holding that non-voting creditors were deemed to consent to third party releases. He agreed, however, with other Delaware cases holding that third party releases only bound creditors who voted for the plan.
Explaining why he reached that conclusion, Judge Bernstein said that the debtors did not “identify” the source of the creditors’ “duty to speak.” Despite the warning in the disclosure statement that silence may equal consent, he said the debtors failed to show how the non-voting creditors’ “silence was misleading or that it signified their consent.”
Observing that the plan only provided a recovery of less than 3% for unsecured creditors, Judge Bernstein left the door open to the possibility of inferring consent if the dividend were meaningful.
Jurisdiction
Having decided that consent could not be implied, Judge Bernstein turned to the question of whether the court had jurisdiction and statutory authority to enjoin creditors’ unasserted claims against third parties. Assuming there were jurisdiction, he said that third party releases “are proper only in rare and unique circumstances,” citing Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136 (2d Cir. 2005).
The debtors argued that the court had jurisdiction because claims against the third parties would give rise to indemnification obligations running in favor of officers, directors, employees and agents. Judge Bernstein conceded that potential indemnification claims would give rise to a “conceivable effect” on the estate, thus giving the court jurisdiction to enjoin.
However, he said, the proposed releases were “much broader than the indemnification obligations.” He also said that the releases were not “limited to the potential indemnified parties listed by the debtors.”
Consequently, Judge Bernstein said that the debtors “failed to sustain their burden of proving that the court has subject matter jurisdiction to approve the Release in its current form.” He also said that the releases were not “appropriate” under Metromedia.
A Second Bite at the Apple
Judge Bernstein refused to approve the releases contained in the plan, but he gave the debtors 30 days to submit a new form.
Nonetheless, the new releases, Judge Bernstein said, “must specify the releasee by name or readily identifiable group and the claims to be released, demonstrate how the outcome of the claims to be released might have a conceivable effect on the debtors’ estates, and show that this is one of the rare cases involving unique circumstances in which the release of the claims is appropriate under Metromedia.”