An opinion by another district judge in New York underscores the growing hostility of Article III courts to nondebtor, third-party releases in chapter 11 plans, even plans that have been confirmed and consummated.
The reader may conclude from reading the March 8 opinion that District Judge Denise Cote was stretching the rubber band to hold that the corporate parent’s guarantee of a lease was not released by a broadly worded third-party release in the lessee’s chapter 11 plan.
The Plan and the Release
The debtor signed a three-year commercial lease. The debtor’s corporate parent issued an unconditional guarantee in favor of the landlord.
The pandemic intervened, and the debtor was never able to open a store in the leased premises. Eventually, the debtor filed a chapter 11 petition, rejected the lease and confirmed a plan.
The plan contained a release reading in pertinent part as follows:
[A]ll Persons who . . . hold Claims . . . that are subject to . . . the Plan . . . are deemed to have released the Debtor, Reorganized Debtor, the Estate and each of their affiliates, current and former officers, directors, principals, members, professionals, advisors, accountants, attorneys, investment bankers, consultants, employees, agents, and other representatives (collectively, the “Released Parties”), from any and all claims . . . , including any direct claims held by any such Person against each Released Party . . . whether known or unknown, . . . that each such Person would have been legally entitled to assert, . . . based on or relating to . . . the Debtor or its affiliates. [Emphasis added.]
After the plan was confirmed and consummated, the landlord sued the parent on the guarantee in district court in New York. The landlord and the parent filed cross motions for summary judgment.
The parent wins, right? The parent was an affiliate of the debtor, and the guarantee was related to the debtor. It’s open and shut, isn’t it? There was no suggestion in the opinion that the landlord was unaware of the bankruptcy or the plan. So, didn’t the plan release the landlord’s claim on the guarantee against the parent?
Answer: No. Not by a long shot.
Narrow Reading of the Plan
Tellingly, Judge Cote began her legal analysis by quoting Metromedia where the Second Circuit said that plans may contain third-party releases in “rare cases.” In re Metromedia Fiber Network, 416 F.3d 136, 141 (2d Cir. 2005). Later in the opinion, she would remark how the parent never explained “why this is one of the ‘rare cases’ in which a nondebtor release would be essential to the reorganization plan.”
Focusing on the plan, Judge Cote said that releases in favor of officers, directors and other entities had to do their potential liability on derivative claims. The landlord’s claim, she said, was not derivative. It was direct and primary.
However, the plan explicitly released creditors’ direct claims. In other words, without saying so directly, Judge Cote was at least suggesting that a nondebtor release may only pertain to derivative claims.
Next, Judge Cote focused on the word “affiliate,” because the plan broadly released claims against the debtor’s affiliates.
The parent alluded to the definition of “affiliate” in Section101(2)(A), which includes an entity controlling at least 20% of a debtor’s voting securities. Wouldn’t “affiliate” cover the parent?
No, Judge Cote said. The definition in Section 101(2)(A) was “irrelevant” because the plan said that capitalized terms would have the meaning given in the Bankruptcy Code. In the plan, “affiliate” bore a lower case “a.”
Judge Cote cited an authority that distinguishes between affiliates and parents.
In addition, the plan several times referred to “Parent.” Judge Cote said that the drafters of the plan knew how to refer to the parent but didn’t when it came to the releases.
Next, Judge Cote said that adoption of the parent’s interpretation of the plan “would lead to extreme results.” She said that the broad language in the plan would release any claim that any creditor had against the parent, “regardless of whether that claim had anything to do with [the debtor].”
We heard the same refrain in the district court’s opinion overturing confirmation of the chapter 11 plan of Mahwah Bergen Retail Group Inc. and affiliates. See Patterson v. Mahwah Bergen Retail Group Inc., 21-167, 2022 BL 13068, 2022 US Dist. Lexis 7431 (E.D. Va. Jan. 13, 2022). To read ABI’s report, click here.
[Note: This writer reads the release quoted above as only releasing a claim that a creditor had against the parent if that claim was related to the debtor.]
Because it was not a “rare” case, Judge Cote ruled that the landlord was entitled to enforce the guarantee against the parent.
Before entering summary judgment against the parent for more than $2 million, Judge Cote dismissed the parent’s other affirmative defenses, including failure of consideration and impossibility of performance.
Observations
Looking only at the language of the release in view of the finality of the plan, Judge Cote’s ruling might be upset on appeal.
However, an appellate court might find other reasons to affirm.
Notably, the plan released the landlord’s direct claim against the parent seemingly without additional consideration. Releases of that sort stuck in the craw of District Judge Colleen McMahon of Manhattan when she overturned confirmation in In re Purdue Pharma LP, 635 B.R. 26 (S.D.N.Y. Dec. 16, 2021). However, there was a timely appeal in Purdue, and the plan had not been consummated. To read ABI’s report on Purdue, click here.
Perhaps the bankruptcy court lacked subject matter jurisdiction or constitutional power on its own to release direct claims. Perhaps a circuit court would say that a plan provision is unenforceable if the bankruptcy court lacked constitutional power under Stern.
What we are seeing is Article III courts’ animosity toward third-party releases. This writer recommends that bankruptcy courts sense which way the wind blows and trim third-party releases back to the bone before circuit courts or Congress toss them out altogether.
An opinion by another district judge in New York underscores the growing hostility of Article III courts to nondebtor, third-party releases in chapter 11 plans, even plans that have been confirmed and consummated.
The reader may conclude from reading the March 8 opinion that District Judge Denise Cote was stretching the rubber band to hold that the corporate parent’s guarantee of a lease was not released by a broadly worded third-party release in the lessee’s chapter 11 plan.
The Plan and the Release
The debtor signed a three-year commercial lease. The debtor’s corporate parent issued an unconditional guarantee in favor of the landlord.
The pandemic intervened, and the debtor was never able to open a store in the leased premises. Eventually, the debtor filed a chapter 11 petition, rejected the lease and confirmed a plan.