4th Circuit: Behrman v. National Heritage Foundation- Inclusion in Chapter 11 Plan of Provision Providing for Release of Claims by Creditors against 3rd Parties

Summary: National Heritage Foundation, Inc.  ("NHF") filed a Chapter 11 reorganization including provisions in its plan that prevented claim not only against NHF, but also its officers, directors and employees (among others), for acts or omissions arising prior to the reorganization.  The bankruptcy court affirmed these release provisions, finding that these release provisions were "essential" to the reorganization. On appeal, Berhman contended that the plan was not proposed in good faith and was "a sham perpetrated by NHF’s officers and directors to secure immunity for their fraudulent and misleading conduct...."    As the bankruptcy court had specifically found that NHF had filed this case for a "legitimate and honest purpose", the Court of Appeals held that there was no clear error on which to reverse this factual finding. Turning to the extent of the release, the Court of Appeals held that 11 U.S.C. § 524(e) notwithstanding,   a release provision should be granted "cautiously and infrequently" and looked to the factors enunciated in Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002):

1. There is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate;
2. The non-debtor has contributed substantial assets to the reorganization;
3. The injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor;
4. The impacted class, or classes, has overwhelmingly voted to accept the plan;
5. The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction;
6. The  plan provides an opportunity for those claimants who choose not to settle to recover in full; and
7. The bankruptcy court made a record of specific factual findings that support its conclusions.

Comments: While this is a Chapter 11 case, I do not see what would prevent a Chapter 13 Debtor from including similar provisions in his or her plan.  The co-debtor stay of 11 U.S.C. §  1301, especially when combined with the allowance in §1322(b)(1) to pay co-signed debts in full,  is already something of a release provision.  The specific allowance of one type of release provision  should not, however, exclude a Debtor from including other types of release provisions. One example that would seem appropriate would be a release against of priority tax claims against co-debtors.  As taxes are not consumer debts,  § 1301 does not apply.   If, however, the co-debtor was a spouse, whose income is required by the Code to be included in the Debtor’s projected disposable income, and the tax claims will be paid, as required by  § 1322(a)(2), in full,  the requirements of Dow Corning Corp.  and Behrman would seem to be met and an injunction against collection from the non-filing spouse would be appropriate. Behrman v. National Heritage Foundation- Inclusion in Chapter 11 Plan of Provision Providing for Release of Claims by Creditors against 3rd Parties.PDF