D. Third-Party Releases
Another consideration for an insurer settling with the debtor-insured is § 524(e) of the Bankruptcy Code. A discharge through bankruptcy is intended to benefit the debtor only. The Bankruptcy Code provides that "a discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt."510 A creditor can still seek to collect a debt from a nondebtor even where the debt was discharged as to the debtor. A settlement and policy buy-back, complete with injunctive relief, may be subject to scrutiny on the grounds that it appears to provide a discharge to the insurer.
Arguably, § 524(e) is inapplicable since the insurer is not getting a discharge. Rather, the insurer is purchasing an asset from the bankruptcy estate and receiving the protections afforded by the Bankruptcy Code.511 However, courts could entertain the argument, especially when the contemplated policy buy-back is incorporated into the debtor's plan of reorganization.
Courts are split with regard to the bankruptcy court's authority to issue and enforce nonconsensual third-party nondebtor releases. The Fifth, Ninth and Tenth Circuits have held that a bankruptcy court does not have authority to issue and enforce third-party nondebtor releases in a chapter 11 plan. The majority position held by the First, Second, Third, Fourth, Sixth, Seventh, Eighth and Eleventh Circuits is that a bankruptcy court may permit nondebtor third-party releases in a chapter 11 plan under certain circumstances and when certain standards are met.
The majority view also holds that the bankruptcy court's broad equitable powers under § 105(a) permit approval of third-party releases in chapter 11 plans in appropriate circumstances. Section 105(a) gives the court authority to issue "any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title."512 Further, § 1123(b)(6) permits the debtor to "include any other appropriate provision not inconsistent with the applicable provisions" of the Bankruptcy Code.513 If confirmed, the plan binds all parties to the contents of the plan, regardless of whether they voted for or against the plan.514
Courts evaluating whether a bankruptcy court has authority under Bankruptcy Code §§ 105(a) and 524(e) to issue and enforce a nondebtor third-party release in a restructuring plan consider certain factors:515
• Whether there is identity of interests between the...
