The last installment of this column covered two recent opinions from Delaware and Colorado Bankruptcy Courts addressing whether a bankruptcy court has subject matter jurisdiction and constitutional authority to approve non-consensual third-party releases as part of a plan confirmation process. See Corinne Ball, “Decisions Consider Bankruptcy Court's Authority to Approve Third-Party Releases,” NYLJ (Oct. 26, 2017). Those two opinions—In re Millennium Lab Holdings II, Case No. 15-12284 (LSS), 2017 WL 4417562 (Bankr. D. Del. Oct. 3, 2017) and In re Midway Gold US, Case No. 15-16835 (MER), 2017 WL 4480818 (Bankr. D. Colo. Oct. 6, 2017)—suggested different approaches to determining whether the bankruptcy court has jurisdictional or constitutional authority to approve the releases. The Delaware Bankruptcy Court, on remand from the District Court to determine whether it had constitutional authority, once again confronted the continuing objection from claimholders who did not want to release non-debtors and concluded that dealing with claims purportedly released by a plan brings the matter within the subject matter jurisdiction and constitutional authority of the bankruptcy court, because the inquiry is made in the context of confirming a plan, which is a core proceeding. The Delaware Bankruptcy Court was addressing claims for which the debtor had exposure through indemnity obligations, thus giving rise to some “conceivable effect” on the estate. The Colorado Bankruptcy Court, on the other hand, held that while the releases were included within a proposed Chapter 11 plan, and “confirmation of plans” are expressly made a core proceedings, the court could not “permit third-party non-debtors to bootstrap their disputes into bankruptcy case in this fashion.” In this case, the potentially released claims did not arise under the Bankruptcy Code, and were not otherwise connected to the debtors, the property of the debtors' estates or the administration of the Chapter 11 cases. The court further reasoned that the fact that the non-debtor released parties “may have contributed financially” to the proposed Chapter 11 plan was “insufficient alone for the Court to find it [could] exercise 'related to' jurisdiction” over the potentially released claims.

On Nov. 8, 2017, the Bankruptcy Court for the Southern District of New York revisited the issue, considering whether the court had subject matter jurisdiction to approve non-consensual non-debtor releases proposed by SunEdison as part of their plan of reorganization. In re SunEdison, 576 B.R. 453 (Bankr. S.D.N.Y. 2017). Judge Stuart M. Bernstein, presiding over SunEdison's bankruptcy proceedings, denied the releases, concluding, inter alia, that the court lacked subject matter jurisdiction over the proposed releases, thus never reaching the question of constitutional authority. Judge Bernstein was constrained by (1) questions of jurisdiction due to what he identified as a lack of evidentiary support for “related to” jurisdiction for each of the third-party claims purportedly being released, and (2) for those released parties as to which subject matter jurisdiction arguably existed, the failure of the proposed releases to meet the standards established in Drexel and clarified by Metromedia.

The SunEdison Decision

On July 28, 2017, the SDNY Bankruptcy Court confirmed SunEdison's plan of reorganization. The plan, however, contained broad third-party releases in favor of numerous non-debtors by releasing parties that included creditors who were entitled to vote but elected not to do so. Although none of the affected claimholders objected to the releases, the court questioned their validity sua sponte and reserved its decision on that issue. The plan was nevertheless confirmed. Over three months later, on Nov. 8, 2017, after supplemental briefing from the debtors, the court ruled that such releases were non-consensual third-party releases, and, on the record presented, the Bankruptcy Court lacked subject matter jurisdiction in respect of many of the purportedly “released parties,” a failure that was further exacerbated by the broad scope of such releases. Additionally, to the extent jurisdiction arguably did exist for some released parties, because a limited number of released parties held indemnity claims against the debtors, the record did not support the proposed releases as meeting the rare and extraordinary circumstances required for approval, observing that the plan did not provide for channeling such claimholders to a fund or source established to pay such claims and only provided a 3 percent return to such claimholders. Moreover by virtue of the willingness of the parties to proceed through confirmation without such releases, the Bankruptcy Court could infer that the releases were not integral to the plan.

The court described the proposed plan as imposing on nonvoting creditors a release for “largely unidentifiable group of non-debtors from liability based on pre-petition, post-petition and post-confirmation (i.e., future) conduct occurring through the Plan's future Effective Date that related in any way to the claims or these bankruptcy cases subject to the usual exceptions for fraud, willful misconduct, or gross negligence.”