Confirming a chapter 11 plan, Chief Bankruptcy Judge Martin Glenn of New York explained why, in his view, state law rules about contract formation don’t control when deciding whether the opportunity to opt out represents consent making nondebtor releases permissible after Harrington v. Purdue Pharma L.P., 602 U.S. 204 (2024). The decision by Judge Glenn is being appealed by the U.S. Trustee.

The debtor was a large Latin American airline with about $4 billion in funded debt, more than half of which was secured. The result of numerous compromises, the debtor proposed a plan that extinguished about $2.5 billion of debt, some in exchange for new equity.

The plan included nondebtor releases in favor of the creditors’ committee and its members, along with creditors and groups of creditors who were engaged in financing and negotiating the plan. The releases covered claims “based on or relating to, or in any manner arising from, in whole or in part,” the chapter 11 case, in the broadest sense.

The plan also included an exculpation for the released parties and a broadly worded injunction barring creditors and “parties in interest” from taking action to interfere with implementation of the plan.

Creditors were given the option of opting out of releases by checking a box on the ballot. The nondebtor releases were binding on creditors — whether they voted for or against the plan or abstained from voting — as long as they did not check the opt-out box.

As Judge Glenn said in his May 22 opinion, the releases were not binding on those “who could not vote because they are impaired under the Plan and were deemed to have rejected the Plan.”

Creditor classes accepted the plan by wide majorities. There were several hundred opt-outs, mostly from holders of funded debt.

The debtor resolved all objections to confirmation apart from two objections by the U.S. Trustee.

The government watchdog contended that the releases were not consensual and that the plan-support injunction was too broad. More specifically, Judge Glenn described the U.S. Trustee as contending “that there is no federal bankruptcy law to determine what consent is, [that] state law must apply, and that under state law, opt-outs are impermissible and do not manifest consent.” In addition, the U.S. Trustee argued “that there is no authority in the Code for an injunction barring claims between nondebtors.”

What Governs Consent: State or Federal Law?

Whether state or federal law governs consent, Judge Glenn said, “ultimately decides whether opt-outs are appropriate in these circumstances.”

For Judge Glenn, the first question was whether nondebtor releases can be part of a chapter 11 plan or whether they must be “separate contracts.” He said it was “necessary to look first at Purdue’s analysis of 1123(b) to determine whether the Court narrowed subsection (b) to such an extent that it cannot encompass consensual third-party releases.” He concluded that the “Court did not so narrow the statute.”

Judge Glenn said it would be “too cramped a reading of Purdue” if one were to conclude that Section 1123(b)(6) permits “only those plan provisions which concern relationships between the debtor and another entity (not between two third parties).” He reached his conclusion in large part based on U.S. v. Energy Resources Co., 495 U.S. 545 (1990), a Supreme Court decision relied upon by both the majority and the dissent in Purdue.

Judge Glenn read Energy Resources “as permitting chapter 11 plans to affect creditor-non-debtor relationships.” He added that the majority in Purdue “was careful to state that it did not wish its ruling to affect the propriety of consensual releases,” and that Purdue “should not be read to significantly curtail the scope of bankruptcy courts’ powers under section 1123(b)(6).” [Emphasis in original.]

Citing the Fifth Circuit’s prohibition of nonconsensual, nondebtor releases even before Purdue, Judge Glenn said, “Courts in the Fifth Circuit have long allowed releases via opt-outs, and they continue to do so post-Purdue. See, e.g., In re Robertshaw US Holding Corp., 662 BR 300, 323 (Bankr. S.D. Tex. 2024).” He added, “None of these Fifth Circuit cases have focused on state law in deciding whether opt-outs are permissible.” [Emphasis in original.] To read ABI’s report on Robertshaw, click here.

“In short,” Judge Glenn said,

[T]he caselaw strongly indicates that courts in the Fifth Circuit find that bankruptcy courts have authority under federal law, most likely section 1123(b)(6), to grant consensual third-party releases, as they assess the validity of those releases under a federal, not state, law rubric. This logic existed prior to Purdue and survives it.

Closer to home, Judge Glenn cited a recent decision by New York’s Bankruptcy Judge Sean Lane, who “recently recognized in his Spirit Airlines decision [that] the weight of the caselaw in this district has found that federal bankruptcy law applies. In re Spirit Airlines, Inc., 24-11988, 2025 WL 737068, at *9 (Bankr. S.D.N.Y. Mar. 7, 2025).” To read ABI’s report on Spirit Airlines, click here.

Judge Glenn also found a practical reason for concluding that federal law, not state contract law, governs consent to nondebtor releases: “The potential need to engage in untold numbers of individualized choice-of-law analyses cuts in favor of applying federal law, for the sake of both judicial efficiency and the Code’s goal of creating a centralized bankruptcy law.”

Courts that Employ State Law

Judge Glenn cited decisions from Delaware, New York and the Ninth Circuit that “found that third-party releases must be standalone contracts, separate from the chapter 11 plans, and thus draw their power from state contract law, not federal law.” Prominently, he cited In re Smallhold, Inc., 665 B.R. 704 (Bankr. D. Del. 2024), and In re Tonawanda Coke Corp., 662 B.R. 220 Bankr. W.D.N.Y. 2024). To read ABI’s reports, click here and here.

Judge Glenn said that each opinion looking to state law “misses that (1) section 1123(b)(6) provides bankruptcy courts with such authority and (2) federal waiver doctrines also provide the background and applicable federal law.”

Jurisdiction

The U.S. Trustee argued that the bankruptcy court had no jurisdiction to impose waivers or releases between nondebtors. “If the creditor has consented to the bankruptcy court’s jurisdiction over non-core claims,” Judge Glenn said, “the court can issue a final order and thereby release the claim.”

Judge Glenn cited Wellness Int’l Network, Ltd. v. Sharif, 575 U.S. 665, 684-5 (2015), for the proposition that consent need not be express but may be implied, as long as it is knowing and voluntary. In the case before him, he found consent because the creditors had been served and did not raise a constitutional objection. In terms of adequacy of notice, he said that the fact that a “significant number of creditors both voted and chose to opt out of releases here indicates that there has been adequate service of process.”

Judge Glenn overruled the objections and confirmed the plan.

Update

The U.S. Trustee has appealed. As counsel for the regional U.S. Trustee, the notice of appeal lists, among others, the General Counsel from the Executive Office for U.S. Trustees from Washington, D.C.

Observations

Prof. Ralph Brubaker provided ABI with the following commentary:

The GOL opinion gets one thing right: It is impossible to determine what constitutes sufficient consent to release a third-party, nondebtor’s claim included in a plan without first determining what authorizes inclusion of such a release in the plan.

The conclusion that § 1123(b)(6) provides such authority, however, simply cannot be squared with Purdue Pharma’s interpretation of § 1123(b)(6) as only authorizing plan provisions “which concern the debtor — its rights and responsibilities, and its relationship with its creditors,” not those of a nondebtor.

The bankruptcy courts simply do not have the power (under the Bankruptcy Code or otherwise) to create, at their own behest, a settlement-only class-action process for creditors’ direct claims against nondebtors.

For further analysis, see Ralph Brubaker, Taking the Purdue Pharma Decision Seriously: Not Even Consensual Nondebtor Plan Releases Are Permissible (Part I), 45 Bankr. L. Letter No. 3 (Mar. 2025).

Prof. Brubaker is the James H.M. Sprayregen Professor of Law at the University of Illinois College of Law.