Among bankruptcy courts, the contours of permissible consensual, nondebtor releases are beginning to take shape with the newest opinion from Bankruptcy Judge Wendy A. Kinsella in the reorganization of the Roman Catholic Diocese of Syracuse, New York.

Banning nonconsensual, nondebtor releases, the Supreme Court’s Purdue decision in late June did not say when a plan would be permissibly consensual. Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). To read ABI’s report on Purdue, click here.

With the possible exception of an unusual case in Buffalo, N.Y., where there was a tiny distribution to mass tort claimants, it’s looking as though opt out is satisfactory when nonconsensual releases would be permissible in a class action under Rule 23(b)(3). In other words, “opting in” is not being required to impose nondebtor releases on creditors.

Recent Decisions on Opting Out

An opt out plan is one where a creditor will give releases to nondebtors if the creditor does not vote or if the creditor votes and does not check a box to indicate that the creditor is not giving nondebtor releases.

Bankruptcy Judge Christopher M. Lopez of Houston confirmed a plan with opt-outs, saying that Purdue did not change law in the Fifth Circuit where nondebtor releases were always prohibited. He imposed nondebtor releases on anyone who did not opt out, including creditors who did not vote on the plan. In re Robertshaw US Holdings Corp., 24-90052, 2024 BL 292649, 2024 Bankr Lexis 1958 (Bankr. S.D. Tex. Aug. 16, 2024). To read ABI’s report, click here.

In a more restrictive opinion on September 25, Bankruptcy Judge Craig T. Goldblatt of Delaware refused to approve a plan, although he decided that nondebtor releases were permissible if the creditor’s actions would have been sufficient to form a contract. More specifically, he held that a creditor would be bound by nondebtor releases if the creditor voted on the plan and did not opt out. A creditor who did not vote would not be bound. In re Smallhold Inc., 24-10267, 2024 BL 337399, 2024 WL 4296938 (Bankr. D. Del. Sept. 25, 2024). To read ABI’s report, click here.

Chief Bankruptcy Judge Carl L. Bucki of Buffalo, N.Y., decided that state contract law does not permit a plan to confer releases on nondebtors when creditors are only entitled to opt out. The plan had $300,000 for distribution among creditors with more than $282 million in unsecured claims. He held that creditors “have not given consent as required by the Supreme Court” in Purdue “[a]bsent a writing expressly agreeing to a release of nondebtors.” In re Tonawanda Coke Corp., 662 B.R. 220 (Bankr. W.D.N.Y. Aug. 27, 2024). To read ABI’s report, click here.

The Diocese Case in Syracuse

Judge Kinsella was ruling on a motion to approve a disclosure statement describing a plan to deal with sexual abuse claims besieging a diocese. The November 14 opinion put the plan under a microscope, because Judge Kinsella would not approve the disclosure statement were the plan patently unconfirmable. The U.S. Trustee and insurers opposed the plan because it did not require creditors to opt in before granting releases to nondebtors such as parishes and other entities. Creditors who did not vote would be granting releases.

Judge Kinsella was persuaded by two pre-Purdue chapter 11 cases in the Southern District of New York that were confirmed with opt out plans. She interpreted Judge Goldblatt’s Smallhold decision as “not foreclose[ing] the use of opt-out releases in a mass tort case like this one.” She pointed to language in Smallhold where Judge Goldblatt said that opt out plans might work if there was “sufficient commonality” among the creditors’ claims “to obtain a global resolution through a Rule 23 class action.”

Focusing on commonality in the diocese case before her, Judge Kinsella said that the outcome turned on whether claimants have suffered “the same injury” or “whether differences among proposed class members will necessarily generate individualized determinations as litigation moves forward.”

Judge Kinsella said that all claimants were sexual abuse survivors represented by “fellow survivors” who populated the official committee. She found that “the survivors share the commonality characteristics required by Fed. R. Civ. P. 23(a), and the Court finds the circumstances permitting an opt-out mechanism as discussed in the Smallhold decision to be present.”

Judge Kinsella also found that “this situation warrants the treatment of the Committee as both an estate fiduciary as well as a class representative,” with “class representative” authority “to bind absent class members, subject to those members receiving individual notice and being afforded the opportunity to opt out.” She said that the committee “is not just a supporter, but a negotiator and proponent of the Plan and the Solicitation Procedures that include the opt-out mechanism.”

As a “de facto class representative,” Judge Kinsella decided that “the Court will allow it,” having found that the “process is in the best interests of the Class 5 Claimants and no individual Abuse Claimants have objected to it.”

To allow opting out, Judge Kinsella found “additional considerations unique to this case.” She noted that there were 433 claimants but only 24 did not have counsel. The “adequacy of consideration,” about $100 million, “also weigh[s] in favor the opt-out process.”

“Finally,” Judge Kinsella said that requiring creditors to opt in would “ignore[] the realities of this case.” She said that many creditors would not vote to avoid reliving their traumas. She therefore held that opting out “does not run afoul of Purdue Pharma and make the Plan patently unconfirmable.”

Judge Kinsella directed the debtor to revise the solicitation materials. Among other things, she said that the opt out box must be in the body of the ballot, not in a separate release.

Observations

In terms of commonality, it is true that all claimants endured sexual abuse. However, the nature of the abuse was necessarily different among the claimants. Some claimants may have suffered the same abuse from the same abuser, but the degree and frequency of abuse could be different, depending on the identity of the abuser and other factors such as the church’s willful blindness to a particular abuser.

One wonders whether there would be sufficient commonality if it were a mass tort class action as opposed to a bankruptcy. Perhaps the claims allowance process in bankruptcy will grade the trauma to reflect the severity of abuse and other factors pertaining to the quantum of damages. Perhaps the claims allowance will satisfy commonality concerns.

Still, if there were sufficient commonality in bankruptcy, why wouldn’t there also be required commonality in a class action?