Since the Supreme Court handed down Purdue, bankruptcy courts in reported decisions have different answers for an unanswered question: What constitutes a “consensual” release given to nondebtors in a chapter 11 plan?

In an opinion on December 5, Bankruptcy Judge Paul Baisier of Atlanta decided that creditors who were given notice have conferred consensual releases in favor of nondebtors if they neither vote nor opt out.

Judge Baisier’s holding is at odds with a decision in late September by Delaware Bankruptcy Judge Craig T. Goldblatt, who held that a creditor would be bound by a nondebtor release if the creditor voted on the plan but 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.

Judge Baisier aligned himself with Bankruptcy Judge Christopher M. Lopez of Houston, who 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.

The Atlanta Debtors

The 282 debtors before Judge Baisier had been operators of 140 nursing homes. Mediation resulted in agreement on a chapter 11 plan.

Judge Baisier said that the plan “provides for a full release of claims against various third parties who made substantial contributions to this case and their affiliates by any creditor who does not affirmatively opt out of the release.” He added that “the Plan would not be possible, and unsecured creditors (and even certain of the secured creditors) would most likely get nothing from any other possible resolution of these cases.”

The debtor sent the plan, disclosure statement and ballots to some 6,400 creditors, but only 850 votes were cast. In other words, only 13% of creditors voted.

The ballots contained a box that a creditor could check to opt out. The plan did not permit creditors to vote for the plan but opt out, and creditors who did not vote would be bound by the releases. In substance, any creditor who did not check the opt-out box would be giving a release.

Among those who voted, Judge Baisier said that “well over” 500 opted out. He added that “the vast majority of the ‘opt out’ ballots were submitted by those who voted against the Plan.” One class of creditors did not approve the plan, requiring Judge Baisier to confirm the plan via cramdown.

What’s ‘Consensual’?

The U.S. Trustee lodged the only objection to confirmation, contending that an opt-out release is not consensual. Judge Baisier said that Purdue did not question the efficacy of consensual releases, nor did the Court say what a consensual release is. See Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). To read ABI’s report, click here.

Having found no “circuit level decisions addressing the issue of whether an opt-out mechanism renders a third-party release consensual,” Judge Baisier said that “an overwhelming majority of [decisions by bankruptcy courts] find that a creditor’s vote to accept a plan containing a third-party release (like the Plan) makes the release consensual, and this Court agrees.”

“A somewhat harder question,” Judge Baisier said, “is whether a party that votes to reject the Plan or sends a ballot abstaining from voting has consented to the Release if they do not choose to opt out.”

The “hardest question,” he said, “is what to do with creditors that take no action.” On that question, he said that courts “are markedly split on the issue, with some categorically finding that a release cannot be consensual absent an affirmative act to opt in, and others finding that opt-out mechanisms that (as is the case here) provide adequate notice and a simple opt-out process can result in a consensual release.”

In Smallhold, Judge Baisier said that “Judge Goldblatt transitioned away from a default model of determining consent to a third-party release to another model for making that determination — a contract model.” He went on to say that “the basis for the enforcement of consensual releases has not as far as this Court has been able to determine been described anywhere as a ‘contract’ for them.”

For himself, Judge Baisier said “evidence of consent . . . appears to be the touchstone for determining whether a creditor can be bound to a release.”

Employing the evidence-of-consent standard, Judge Baisier held that creditors who voted for the plan have consented. Similarly, he held that creditors who voted against the plan would be giving releases if they did not check the opt-out box.

Judge Baisier then dealt with the 5,550 creditors who did not vote. If someone received a ballot, he said, “You cannot simply ignore it.” That is to say, someone who did not vote would be giving releases.

“However, that is not the end of the story,” Judge Baisier said. He created a rebuttable presumption that silence is acceptance.

“As to any individual creditor there may be some set of facts . . . that would make it unreasonable to assume that their failure to respond constitutes their consent to the result,” Judge Baisier said. As examples, he mentioned someone in the hospital or not residing where the plan was sent.

To allow for rebutting the presumption, Judge Baisier held that the confirmation order must provide “an opportunity for those people and entities to make a case to this Court sometime after confirmation that they should not be bound, [and] that they should not be ‘deemed’ to have consented.” Furthermore, he said that the “opportunity cannot be time-bounded but should include some provision that requires the party seeking relief to identify the claims or types of claims they seek to pursue and the identities or types of defendants they intend to seek them against.”

Observations

The decision by Judge Baisier does not scribe a bright line regarding creditors who did not vote. Let’s see whether debtors and releasees will be satisfied with the possibility of having thousands of creditors entitled to opt out after confirmation.

Regarding creditors who do not vote, this writer believes that the definitive opinion ultimately will be based on due process concepts. By analogy, notice by publication has been sufficient for discharging claims held by unknown creditors. But will the same concept hold for barring creditors from suing nondebtors?

And what about acceptance of a distribution by a creditor who did not vote? If voting is required to impose releases (as Judge Goldblatt held), does accepting a distribution, no matter how small, effect a release of nondebtors? And what’s the result when nondebtors contribute no cash or property toward creditors’ distributions?

And what if the distribution is small, as it was in In re Tonawanda Coke Corp., 662 B.R. 220 (Bankr. W.D.N.Y. Aug. 27, 2024). There, 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.” To read ABI’s report, click here.