Two Steps Forward or Two Steps Back
Hon. Craig Goldblatt (Bankr. D. Del.), Karen Cordry from the National Association of Attorneys’ General, Prof. Douglas
Baird and Sander
Third party releases have been in the news a lot lately. In Purdue Pharma and Mahwah Bergen Retail Group, District Courts struck down overly broad provisions, while they were allowed in the Mallinckrodt PLC case.
The panelists discussed the history of third party releases. Karen Cordry made the observation that the first time an innovation in the law is allowed it’s based on unique circumstances, then it’s allowed based on prior precedent and then it’s settled law.
Releases for Guarantors Disfavored
Third party releases were originally rejected by the Ninth and Tenth Circuits.Resorts Int’l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394 (9th Cir. 1995); In re Western Real Estate Fund, Inc., et al., 922 F.2d 592 (10th Cir. 1991). . These cases involved guarantor liability. and relied on section 524(e) to say that the discharge in bankruptcy doesn’t benefit anyone other than the debtor.
The Fifth Circuit continued with a hard line, rejecting not only third party releases but exculpation clauses. Bank of New York Trust Co., NA v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009). However, the Fifth Circuit’s ruling was not based on guarantor claims like the earlier 9th and 10th circuit decisions.
Mass Tort Cases Provide a Different Justification
Sander Esserman provided what he described as the other side of the story. In the Johns-Manville case, Judge Burton Lifland was faced with a mass tort case that, like the Railroad equity receiverships threatened to go on forever. There was a profitable company faced with tort suits. At first its one, two or three at a time. The company is winning most of the cases. The plaintiff’s lawyers threaten to just keep filing more suits until they got a big victory.
For Judge Lifland, the question was wow do we get
out of this mess? How do you
give protection to people who want to contribute to a plan? How do you
protect the right of future claimants? His solution was to create what was later codified as 11 U.S.C. Sec. 524(g). It provided for both payment of future claims and third party releases. When the insurance companies wrote a check, they would be done. The insurance companies needed a release because they could not be assured that tendering policy limits would be enough. They could be faced with bad faith claims, direct claims and policies without limits.
ast majority of claims voted in favor, it protected constitutional jury trial rights for those who wanted to exercise them and without the third party release, there would be no plan. This was later codified into law by Congress. However, at the time, Judge Lifland was crafting a remedy without clear statutory authority.
The mass tort claims provide a clear counterpoint to the guarantor cases. In the mass tort cases, the releases were necessary to provide a greater economic benefit to the creditor body as a whole as opposed to merely protecting someone who did not want to file bankruptcy.
Ultimately the Third and Fourth Circuits endorsed third party releases in the mass tort context.
Corporation is a defendant in
mass tort litigation
limiting third party releases. The parties getting released should be paying the full value of their liability and the settlement should receive overwhelming consent.
She said that to say you can
have it in bankruptcy law doesn’t mean you have it in our bankruptcy law.
Even if we
don’t have an actual Section 544(c), we have a virtual Section 544(c).
However, someone their water on that idea by saying that you won’t get you anywhere with
the Supreme Court. This power was explicitly rejected by the Supreme Court in Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972).
The Texas Two Step
Prof. Baird said he saw two
issues. On the one hand, there is a slam dunk fraudulent conveyance claim without writing the big check. However, the problem is that the good company won’t write the check unless they get the third party release. To do this, you have to be able to accurately value the liabilities. What if the tort claims are actually weak?
Opt In and Opt Out Releases.
However, what if the release requires a creditor to opt out? That depends on how conspicuous the release language. One of the panelists referred to disclosures that contain so many words that it actually discloses very little. Instead of
creditor opting in, they have to opt out.
What if most
people don’t read and respond? What if only half of creditors return a ballot but 90% of those opt in and 10% opt out. Under an opt in release, that would mean that only 45% of creditors would have opted in. However, if it were an opt out release, only the 10% of the 50% who returned ballots opting out (5% in total) would be exempt from the release.
o successor liability and there would be an injunction against
pursuing claims against the buyer. Assuming that it meets the section 363 standard is anything else required?
The idea that the split in circuits over whether to allow third party releases is really a split between circuits dealing with guarantor claims and those dealing with mass tort claims was new to me.
The potential use of Section 363 sales to accomplish third party releases was also something I had not heard before.
I was also struck with the idea that bankruptcy courts dealing with new and thorny problems are like the engineered dinosaurs in Jurassic Park, that nature will find a way. Judge Lifland created Section 524(g) before Congress enacted it into law. It may be that the Code will follow the necessities of solving big, messy problems. Either that or the Supreme Court will squash the effort like the giant foot in the opening credits of Monty Python’s Flying Circus.
I am also struck by the similarities between bankruptcy and class actions. Bankruptcy is essentially a class action between the debtor and its creditors. If bankruptcy can be expanded to be a class action between the debtor, its creditors and persons liable to the debtor, it may be possible to solve these problems through the vehicle of a class settlement rather than trying to incorporate third party releases into bankruptcy law.
I have a draft of an article on third party releases that is going through the editing process. One realization that hits me when I attend programs like this is just how much updating I will have to do from my original draft in February 2022.
The materials for this panel can be found here.