The Purdue decision from the Supreme Court banning nonconsensual releases of nondebtors does not preclude a U.S. bankruptcy court in chapter 15 from enforcing foreign plans with nondebtor releases, for reasons explained by Bankruptcy Judge Thomas M. Horan of Delaware.

In his April 1 opinion, Judge Horan described how the “Purdue Court held that [Section 1123(b)(6)] does not allow a chapter 11 plan to include nonconsensual third-party releases.” Distinguishing the language in Section 1123(b)(6) from the relevant provisions in chapter 15, he held that “the plain language of both section 1521(a)(7) and section 1507(a) permit a U.S. court to enforce a foreign order for nonconsensual third-party releases.”

The Mexican Plan

The debtor was one of Mexico’s largest nonbank lenders. Financial problems began in 2021 and led to a liquidation proceeding in a Mexican court in 2022. Discussions culminated when the debtor, the Mexican liquidators and an ad hoc group of creditors developed a restructuring support agreement. The Mexican liquidator then commenced a proceeding in Mexico to implement the prepackaged plan.

When the plan received support from almost 57% of creditors, the Mexican court overruled objections and approved the prepackaged plan.

The plan contained releases for the ad hoc committee members, the Mexican liquidator, the indenture trustee and related parties. The releases barred claims for actions taken during the restructuring. Judge Horan said the releases were “customary in Mexican settlement agreements and . . . permitted under Mexican Bankruptcy Law.”

An agency of the U.S. government, the U.S. International Development Finance Corporation, or DFC, had objected unsuccessfully to the Mexican court’s approval of the plan. Until appealing in Mexico, the DFC had not objected to the nondebtor releases. The DFC’s appeal remains pending in Mexico.

The debtor’s foreign representative commenced the chapter 15 case in early February, seeking foreign main recognition and enforcement of the Mexican plan and its releases in the U.S. The DFC lodged the only objection to recognition.

Judge Horan characterized the DFC as contending that the releases are “not authorized under Bankruptcy Code sections 1507 and 1521” and that “appropriate relief” available to a foreign debtor “refers to relief available under the Bankruptcy Code.”

Sections 1501, 1506, 1507 and 1521(a)

The outcome turned primarily on four sections in chapter 15. Section 1507(a) provides that the bankruptcy court “may provide additional assistance to a foreign representative . . . .” Upon recognition, Section 1521(a) similarly provides that the court “may . . . grant any appropriate relief, including” seven specific types of relief.

“In determining whether to provide additional assistance,” Section 1507(b) directs the U.S. court to “consider whether such additional assistance [is] consistent with the principles of comity.”

In addition, Section 1501 states that one of the purposes of chapter 15 is to promote “cooperation” with courts abroad. On the other hand, Section 1506 allows the court to refuse “to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.”

In deciding how to rule, Judge Horan said he would “consider[] the centrality of cooperation and comity in reaching [his] decision” and “maximize assistance to the foreign court conducting the foreign main proceeding.”

Regarding Section 1506, Judge Horan said that the foreign proceeding must “afford litigants the same fundamental protections that they would have received in a U.S. court,” but that the relief need not “be identical to relief that might be available in a U.S. proceeding.”

The Differences Between Chapters 11 and 15

For Judge Horan, the question was whether “Purdue changes the way courts should interpret sections 1521(a) and 1507,” given the Supreme Court’s conclusion that Section 1123(b)(6) “does not allow a chapter 11 plan to include nonconsensual third-party releases.” The DFC wanted him to apply the same analysis to chapter 15, because Sections 1521(a)(7) and 1507(a) are “catchalls,” just like Section 1123(b)(6).

Judge Horan answered the argument by stressing the linguistic differences between the sections in chapter 11 and those in chapter 15.

Unlike Section 1123(b)(6), Section 1521(a) uses the word “including” to show that “appropriate relief” is not limited to the seven specifically listed types of relief. Judge Horan went on to say that “section 1521(a)(7) qualifies its ‘any . . . including’ language by listing specific relief that a court is not permitted to grant under that section” and that the “list of prohibited relief does not include nonconsensual third-party releases.”

Employing the canon “expressio unius est exclusio alterius,” Judge Horan concluded that the “list of relief that courts should not grant under section 1521(a)(7) . . . implies that other forms of relief not expressly prohibited are permitted.” He therefore deduced that “enforcing foreign orders providing for nonconsensual third-party releases is within the scope of authority that section 1521(a) provides.” Because “comity is central to chapter 15, the relief granted in the foreign court does not have to be available in U.S. courts under chapter 11.”

Judge Horan held that “the plain language of both section 1521(a)(7) and section 1507(a) permit[s] a U.S. court to enforce a foreign order for nonconsensual third-party releases.” Even if chapter 15 were ambiguous, he concluded that “the legislative history and canons of statutory construction confirm this interpretation and corresponding Congressional intent.”

Judge Horan noted that “nonconsensual third-party releases are widely accepted by foreign courts.” Therefore, “granting bankruptcy courts the authority to enforce nonconsensual third-party releases originating in foreign courts would promote chapter 15’s goals of comity and providing assistance to foreign courts.”

‘Manifestly Contrary’

The DFC argued that enforcing nondebtor releases would be “manifestly contrary” to public policy under Section 1506 as a result of Purdue.

Judge Horan retorted by saying that “the Mexican proceeding comported with U.S. standards of procedural fairness[;] . . . the Concurso Plan does not violate any constitutional or statutory rights,” and the releases were “customary and permitted under Mexican law.”

Far from being “manifestly contrary,” Judge Horan said that nondebtor releases are permitted in “asbestos” cases by Section 524(g). Furthermore, he noted how the Supreme Court in Purdue said that Congress could have permitted nondebtor releases. “Lack of specific availability in U.S. courts does not equate to manifest contrariness to U.S. public policy,” he said.

Judge Horan noted possibly contrary authority from the Fifth Circuit in Ad Hoc Group of Vitro Noteholders v. Vitro S.A.B. de C.V. (In re Vitro S.A.B. de C.V.), 701 F.3d 1031 (5th Cir. 2012). He said the Fifth Circuit “could not deny the relief simply on the basis that third-party releases were not available in its jurisdiction.” Rather, he said that the Vitro “court only declined to enforce the plan in that case because of the role in the approval process of the votes of insiders holding intercompany claims.”

Judge Horan granted foreign main recognition and enforced the Mexican plan in the U.S., since the “plain language of Bankruptcy Code sections 1521(a) and 1507 giv[es] this Court a broad grant of discretion to aid foreign courts in accordance with principles of comity.” He added, “The simple fact that a U.S. court could not grant such releases in a typical chapter 11 plan does not make them manifestly contrary to U.S. public policy.”

The DFC is appealing.

Observations

Would Judge Horan’s decision give Johnson & Johnson a fourth shot at nondebtor releases?

Assume J&J incorporates a subsidiary abroad, and the subsidiary assumes all of J&J’s mass tort liability. Further assume that the foreign court approves a reorganization with discharges for the debtor-subsidiary and for the parent and all affiliates. Assuming the requisites for foreign main recognition were shown, would a U.S. bankruptcy court enforce the nondebtor releases in the U.S.?

Answer: Probably not, but why not?

What about this: A foreign parent has guaranteed a loan from a U.S. bank to one of its subsidiaries. The subsidiary reorganizes abroad with a plan giving a release to the nondebtor parent. Again assuming foreign main recognition, would a U.S. bankruptcy court enforce the release in favor of the nondebtor parent, barring the U.S. bank from collecting from the parent’s assets in the U.S.?

In the comment box below, we invite our readers to say how a U.S. bankruptcy court would or should rule.