Non-consensual third-party releases remain a controversial topic in bankruptcy proceedings. The validity of such releases in the context of settlement within a Chapter 11 plan continues to be attacked by dissenting creditors. While at times, objections have addressed the release of derivative claims, the more controversial topic is a release of direct claims held by creditors and/or equity holders. The former is regarded as property of the estate subject to the provisions of Chapter 11 of the Bankruptcy Code and undoubtedly a core bankruptcy matter, while the latter must find its support in the extent to which it is “related to” bankruptcy and vital to the plan.

The fundamental issue is whether and to what extent a non-debtor should benefit from a bankruptcy plan by obtaining protection against suits and claims by creditors. In some circuits (Fifth, Ninth, and Tenth) such releases are not permitted as only debtors can be discharged from liability through a bankruptcy case. Where such releases are permitted, they must be narrowly drawn (e.g., third parties are not released from fraud, gross negligence or willful misconduct and releases cannot act as blanket immunity for all wrongdoing). The level of creditor support for a plan providing for such releases can also be a consideration. In all events, however, the proposition divides the circuits and even where permissible, getting approval of third-party releases is said to be extraordinary or rare. While most cases focus on the specific features of the release, the plan and the contributions made by the released parties, two recent decisions from Delaware and Colorado Bankruptcy Courts address whether a bankruptcy court has subject matter jurisdiction over and constitutional authority to approve third-party releases as part of plan confirmation process. In considering this question, albeit facing very different plans, the two courts came to different conclusions.

Midway Gold

In a recent case from the Colorado Bankruptcy Court, a mining company—Midway Gold U.S. and affiliates—sought confirmation of a plan that contained releases by creditors of claims against non-debtors for causes of action, claims, debts and other obligations, whether existing on or after the petition date but prior to the effective date of the plan that were “in any way related to” the debtors, their Chapter 11 cases or the plan at issue. In re Midway Gold US, Case No. 15-16835 (MER), 2017 WL 4480818 (Bankr. D. Colo. Oct. 6, 2017). The decision addressed a number of release and exculpation provisions set forth in a plan. The decision upheld some releases (exculpation for fiduciaries acting in a Chapter 11 case), found others unnecessary or otherwise addressed (release of the lenders), or adequately addressed by the discharge of the debtor. In this context of a review of a number of releases the decision also addressed the protection extended to non-debtors through releases and injunctions provided by the Chapter 11 plan and proposed confirmation order. As presented in the decision, litigation claims and settlements did not have as prominent a role as the injunction protecting non-debtors.

The court reasoned that whether the bankruptcy court may consider approval of such releases hinges on whether the bankruptcy court has subject matter jurisdiction over the “peripheral claims” purportedly released under the plan. Presiding Judge Michael E. Romero concluded that it did not, because a bankruptcy jurisdiction only extends to “all proceedings arising under title 11, or arising in or related to a case under title 11″ and the released claims would not necessarily fall into one of those categories.