The Expanding Contours of Authorized Releases for Non-Debtors in the Ninth Circuit | Mintz – Views on Bankruptcy and Restructuring

Until recently, Ninth Circuit courts generally followed the minority view that releases of non-debtors in a bankruptcy plan are prohibited by Section 524(e) of the Bankruptcy Code, which provides that “the The debtor’s discharge of a debt does not affect any other entity’s responsibility for, or any other entity’s ownership of, that debt”. In the summer of 2020, the Ninth Circuit hinted that its bar on releasing non-debtors was not absolute, when the court issued its ruling in Blixseth vs. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020), holding that a plan provision exculpating nondebtors was permitted because it did not affect obligations relating to claims filed by creditors and discharged by bankruptcy. In doing so, the Ninth Circuit concluded that Section 524(e) of the Bankruptcy Code does not categorically prohibit all nondebtor releases.

Although Blixseth dealt only with exculpatory provisions, it opened the door to other forms of releases permitted for non-debtors. In a recent decision, In re Astria Health, Case No. 19-01189-WLH11, 2021 Bankr. LEXIS 155 (Bankr. ED Wash. Jan. 22, 2021),[1] the bankruptcy court for the Eastern District of Washington has arguably further expanded the context in which nondebtor discharges may be authorized.

While the initial stages of the case “involved several skirmishes with and among key stakeholders”, debtors, the committee of unsecured creditors, secured creditors and the post-petition DIP lender eventually agreed on a consensual plan of reorganization. Upon solicitation, the voting classes accepted the plan with significant margins and the plan was subsequently confirmed. The plan included a provision exempting key participants in the plan process, including non-debtor parties, from post-petition liability with respect to bankruptcy cases and the plan, except in cases of gross negligence or willful misconduct. The plan also provided for (i) releases by debtors and bankrupt estates of a similar set of parties, including non-debtors, from all causes of action related to debtors, bankruptcy cases or the plan ; and (ii) third-party releases of similar scope.

Despite objections from the US trustee, the bankruptcy court approved each of the non-debtor release provisions. The bankruptcy court relied on Blixseth to maintain the exculpation provision because it was properly limited to post-petition acts of parties who actively participated in and contributed to the bankruptcy process, while excluding gross negligence and willful misconduct. The bankruptcy court also expanded on the reasoning of the Ninth Circuit, expressly holding that nondebtor releases should not be limited to parties with a fiduciary duty to the bankruptcy estate, since such a limitation would conflict with the analogous protections under Section 1125(e) of the Bankruptcy Code. , which limits the liability of a wide range of non-debtor parties for acts related to the solicitation of votes.

Moreover, the astria the court went beyond the decision of Blixseth approve non-debtor releases both by the debtor and by third parties. The court first considered the release of claims belonging to the bankruptcy estate, concluding that such releases, even with respect to non-debtors, are permitted and must be assessed pursuant to Section 1123(b) (3)(A) of the Bankruptcy Code, which authorizes “settlement or adjustment of any claim or interest belonging to the debtor or to the estate”. By using the A&C Properties The factors,[2] the court found that the release of estate claims against non-debtors was appropriate because no deductible claim likely existed against a released party and because each of the released parties had contributed to the consensual plan, thereby avoiding protracted and costly litigation regarding confirming the plan.

With regard to the release of claims held by third parties, the court relied on Blixseth to conclude that the prohibition in Section 524(e) regarding the release of claims against non-debtors was inapplicable to the releases of non-debtors under the plan, because the releases of non-debtors did not relate to any ” liability common to all debtors and the released parties” (that is to saythe released non-debtors were not liable for any of the debtors’ debts) and no party had asserted otherwise.

The decision in astria solidifies more Blixsethholding that Section 524(e) does not outright prohibit non-debtor releases in the Ninth Circuit, while expanding the context in which such releases may be authorized to include both debtor and debtor release provisions. third. As a result, we can expect to see the inclusion of these releases in Ninth Circuit bankruptcy plans in the future, as they may now become more widespread tools for debtors and creditors in plan negotiations.

[1] Mintz was the primary secured creditor in this case.

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