A Potential Alternative to Approving Consensual Third-Party Releases: § 1141(a) of the Bankruptcy Code

The approval of third-party releases in connection with the confirmation of a debtor’s chapter11 plan before a bankruptcy court has become increasingly controversial and the subject of several recent district court decisions. At the insistence of nondebtor parties, third-party releases are often included in a plan of reorganization or liquidation to shield such parties from claims — related to the debtor, its business and/or the restructuring — brought by the debtor’s creditors, equity securityholders and other stakeholders.

Historically, courts approve third-party releases in instances where the release is consensual. In considering these releases, courts apply traditional contractual principles to determine whether a creditor or interest-holder in fact “consented” to the third-party release. Over the last several years, courts even within the same district have had differing views as to what showing is required for a release to be deemed consensual. For example, several courts require creditors to affirmatively opt in to the third-party release, while others conclude that opt-out provisions are satisfactory to manifest a creditor’s consent to be bound by the release. As a result, there is a growing lack of clarity as to what is required to obtain the creditor or interest-holder’s consent.