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In an opinion issued on January 13, 2022, Judge David Novak of the United States District Court for the Eastern District of Virginia struck down non-consensual third-party releases [2] from a plan confirmed by the bankruptcy court.

In bankruptcy, a debtor-in-possession’s chief goal is to get its plan of reorganization confirmed by the bankruptcy court. [1] Among other things, the Bankruptcy Code requires that at least one class of impaired creditors vote to accept the plan — i.e., that at least two-thirds in amount and one-half in number of the allowed claims in such class accept the plan.

Seeking relief under the Bankruptcy Code is a common method of restructuring a business pushed into insolvency by tort claims. Under current law, filing a petition under chapter 11 of the Bankruptcy Code allows a business to stay all litigation against it and propose a plan of reorganization that channels tort claims to a settlement trust for valuation and payment. Many plans provide for the funding of the settlement trust through the proceeds of a debtor’s insurance policies and contributions from the debtor and third parties.

Since going effective on Feb. 19, 2020, much has been written regarding the restructuring benefits of a chapter 11, subchapter V case. Prior to its implementation, many small businesses were, from a practical standpoint, unable to benefit from chapter 11 due to the expense of filing and prosecuting a traditional chapter 11 case. The introduction of subchapter V has shifted that, thus giving smaller businesses a streamlined process to recognize the benefits of a chapter 11 restructuring.

The approval of third-party releases in connection with the confirmation of a debtor’s chapter 11 plan before a bankruptcy court has become increasingly controversial and the subject of several recent district court decisions. [1] At the insistence of nondebtor parties, third-party releases are often included in a plan of reorganization or liquidation to shield such parties from claims — related to the debtor, its business and/or the restructuring — brought by the debtor’s creditors, equity securityholders and other stakeholders.

In May 2021, the ABI Journal examined the recently-added “reasonable due diligence” requirement of 11 U.S.C. § 547(b), [1] with an in-depth analysis of how such a requirement may shift the burdens of proof assigned in 11 U.S.C. § 547(g). [2] Since the revision’s enactment, several courts have examined the new language, shedding light on what is required under this new standard in the real world.

The term “mootness” refers to a category of related precepts that preclude a reviewing court from reaching the underlying merits of a controversy. While questions dog this doctrine’s constitutional and prudential forms outside of the Bankruptcy Code’s ambit, few doubt either’s general validity. However, within bankruptcy’s periphery, more substantive questions abound. There, constitutional mootness’s recognizable form blurs, and the prudential doctrine dubiously known as equitable mootness resists pragmatic simplification.

When Congress passed the Small Business Reorganization Act of 2019 (the SBRA), [1] they made two important changes to chapter 11. [2] First, Congress created the subchapter V trustee. [3] Second, Congress eliminated the mandatory appointment of a committee of unsecured creditors. [4]