Third-Party Release in Uncontested Chapter 15 Cases

On April 9, 2018, Hon. Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York approved third-party releases of nondebtor affiliate guarantors in a chapter 15 proceeding, even though not all of the parties bound by the releases had voted in favor of the releases.[1]

At first blush, this opinion raises the hope that the bankruptcy court would weigh in on the issue of third-party releases in chapter 11 cases. The opinion discusses chapter 11 third-party releases in two distinct instances in the opinion,[2] but ultimately provides no analysis of third-party releases in chapter 11 cases.

The facts are not complicated or even particularly compelling. Avanti Communications Group PLC had become overleveraged and did not expect to be able to pay its 2023 Senior Secured Notes at maturity. Further, the 2023 Senior Secured Notes were effectively unsecured. Avanti and certain creditors negotiated a debt-restructuring agreement that swapped the 2023 Senior Secured Notes for equity and released Avanti’s affiliates that had guaranteed payment of the 2023 Senior Secured Notes.[3]

Avanti then filed a scheme of arrangement in the U.K. Creditors holding nearly 88 percent of the impaired 2023 Senior Secured Notes voted to approve the scheme, which the U.K. court approved.[4] Avanti’s foreign representative filed a chapter 15 proceeding in the Southern District of New York seeking recognition of the scheme, including the releases of the third-party guarantors.

The bankruptcy court admitted that the most interesting issue was whether the third-party releases in the scheme could be approved by the bankruptcy court. The second page of the opinion raises the hopes of a discussion of third-party releases in chapter 11 cases by noting the split in authority over whether bankruptcy courts can approve chapter 11 plan releases of third parties. The opinion then sets the stage for what could have been an insightful discussion of third-party releases:

Although no objections to the motions seeking to recognize and enforce [the third-party releases] were filed in this Court — and the Court has already entered an order enforcing the [third-party releases] — the Court believes that an explanation of the reasons for its ruling is appropriate.[5]

Notwithstanding this windup, the opinion is long on promise and short on delivery for chapter 11 cases. Instead, the analysis in the opinion is limited to chapter 15 cases arising from U.K. schemes of arrangement and can be summarized in five bullet points:

• Other bankruptcy judges in the Southern District of New York have approved third-party releases in chapter 15 proceedings;[6]
• U.K. courts have approved third-party releases in schemes of arrangement;[7]
• The Avanti Communications Group PLC case was a proper chapter 15 case because the debtor had a $100,000 retainer with Milbank, Tweed, Hadley & McCloy LLP and the indenture for its 2023 bonds was governed by New York law;[8]
• The third-party releases in the scheme were distinguishable from the third-party releases disapproved by the Fifth Circuit in In re Vitro S.A.B. de C.V.;[9] and
• Recognizing the scheme, including the third-party releases, was proper under §§ 1507(b) and 1521(a) of the Bankruptcy Code because recognition assists “the orderly administration” of the U.K. scheme.[10]

The opinion also flirted with the restrictions on third-party releases in chapter 11 cases in its discussion of § 1507(b). Section 1507(b)(1) requires that a court consider whether providing additional assistance to the foreign proceeding will ensure the “just treatment of all holders of claims against or interests in the debtor’s property.” The opinion walked back from the edge of the chapter 11 debate, however, with a lengthy block quotation from In re Rede Energia S.A.,[11] which discussed factors unrelated to third-party releases.[12]

The opinion again noted that third-party releases in chapter 11 cases are controversial, this time focusing on the judicial dispute of what constitutes a creditor’s consent to such release.[13] The opinion, however, did not analyze the conflicting opinions. Indeed, at every turn the opinion recognizes, but does not analyze, disputes about third-party releases in the chapter 11 context.

The opinion is a detailed apologia for chapter 15 recognition of third-party releases contained in uncontested U.K. schemes of arrangement. It is hard to perceive why the court decided that 15 pages of the Bankruptcy Reporter were required for this analysis when no one had objected to the recognition of the third-party releases[14] and other courts had previously granted similar relief.