The Eleventh Circuit has two standards for approval of non-debtor, third-party releases. In a nonprecedential opinion on November 5, the appeals court explained why one applies to chapter 11 reorganizations and the other to settlements.
One company acquired another. After the acquisition, the buyer discovered that officers of the seller had misappropriated about $2 million. Both companies later ended up in chapter 11 with a creditors’ committee.
The two companies, the committee and the defendants worked out a settlement, which included a bar order, as the appeals court called it. The bar order prevented anyone from suing the defendants.
The buyer’s dominant shareholder unsuccessfully objected to the settlement and appealed. The district court affirmed. In the Eleventh Circuit, the shareholder contended that the bankruptcy court had applied the wrong standard for imposing a bar order.
Twenty years apart, the Eleventh Circuit wrote two opinions laying out standards for approval of bar orders. See In re Munford, 97 F.3d 449 (11th Cir. 1996); and In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015). In both cases, the corporate debtors were in chapter 11.
In Munford, the bankruptcy court approved a bar order included in settlement of an adversary proceeding. The November 5 per curiam opinion explained how the panel in Munford approved the bar order as “necessary because at least one of the [defendants] ‘would not have entered into the settlement agreement’ without it, and as such, it was ‘integral’ to the settlement.” Munford, supra, 97 F.3d at 455.
In Seaside, the debtor proposed a chapter 11 plan to reorganize and continue operating. The plan included a bar order precluding lawsuits against company officers “related to or arising out of the bankruptcy.”
The panel in the November 5 opinion said that Seaside approved the bar order “because it was deemed necessary for the reorganized entity to succeed.” Seaside, supra, 780 F.3d. at 1077. The panel in 2015 said that failing to prevent “claims against non-debtors . . . would undermine the operations of, and doom the possibility of success for, the reorganized entity.” Id.
The November 5 opinion said that Munford and Seaside presented “non-comparable bar orders.” The fact that they both arose in chapter 11 cases was “non-determinative.” To decide which precedent to apply, the court must review the “context and facts underlying the bar order.”
Munford, the circuit said, applies “to bar orders assessed in the settlement context.” They are “appropriate where the parties would not have entered into a settlement agreement without it, and thus it is ‘integral’ to the settlement.”
Seaside is applicable “to bar orders that are specifically within the reorganization context” and are proper in “unusual cases in which such an order is necessary for the success of the reorganization.” Seaside, supra, 780 F.3d at 1078–1079.
The panel decided that the case on appeal was “more like Munford” because “the Bar Order under review was integral to settlement.” The appeals court said that the bar order was not intended “to ensure success for a reorganized entity by eliminating liability,” because neither corporate debtor “sought to reorganize and continue operations.”
Instead, the bar order was adopted “to facilitate a settlement agreement.”
The circuit affirmed because the bankruptcy court had not abused its discretion in applying the Munford factors.
The Eleventh Circuit has two standards for approval of non-debtor, third-party releases. In a nonprecedential opinion on November 5, the appeals court explained why one applies to chapter 11 reorganizations and the other to settlements.
One company acquired another. After the acquisition, the buyer discovered that officers of the seller had misappropriated about $2 million. Both companies later ended up in chapter 11 with a creditors’ committee.
The two companies, the committee and the defendants worked out a settlement, which included a bar order, as the appeals court called it. The bar order prevented anyone from suing the defendants.
The buyer’s dominant shareholder unsuccessfully objected to the settlement and appealed. The district court affirmed. In the Eleventh Circuit, the shareholder contended that the bankruptcy court had applied the wrong standard for imposing a bar order.