Summary:
A provision of the Chapter 11 plan for National Heritage Foundation (“NHF”) provided that its officers, directors, and employees, the Unsecured Creditor Committee, and their successors and assigns (the “Released Parties”) were released from liability for any acts or omissions relating to NHF.
Relying on Class Five Nevada Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002), the Fourth Circuit considered (and found the plan of NHF lacking) the following factors in determining the valid of a third-party release:
1. whether there is an identity of interests between the debtor and the third party…such that a suit against the non-debtor, in essence, is a suit against the debtor or will deplete the assets of the bankruptcy estate;
2. whether the non-debtor has contributed substantial assets to the reorganization;
3. whether the injunction is essential to the reorganization;
4. whether the impacted class, or classes, overwhelmingly voted to accept the plan;
5. whether the plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; and
6. whether the plan provides an opportunity for those claimants who choose not to settle to recover in full.
A debtor need not, however, demonstrate that every factor weighs in its favor to obtain approval of a non-debtor release.
Commentary:
While 11 U.S.C. § 1301 provides a co-debtor stay for consumer debts in Chapter 13 and 11 U.S.C. § 1322(b)(1) allows separate classification from other unsecured claims, such provisions are more narrow in scope. Firstly, these provision only apply to “consumer debts”, which most notably excludes, among other claims, taxes. Secondly, the separate classification is most often used to pay such co-signed claims in full.
This case, however, does not seem to rely on any specific provisions unique to Chapter 11 and should, accordingly, allow for Chapter 13 plans that provide for co-debtor releases. Not all of these factors would apply in a Chapter 13 case, as, for example, the voting requirement in fourth factor does not occur, and meeting this burden would likely be difficult, but theoretically possible.
For a copy of the opinion, please see:
National Heritage Foundation v. Highbourne Foundation- Non-Debtor Release of Liability Invalid
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