Where broad nonconsensual nondebtor releases are unavailable, the Fifth Circuit has endorsed gatekeeping provisions and injunctions to protect certain nondebtor plan participants from post-confirmation litigation.
TAKEAWAYS
- The Fifth Circuit prohibits broad nonconsensual nondebtor releases but has approved "gatekeeping" to minimize post-confirmation litigation that could undermine a reorganization.
- "Gatekeeping" is not a release. It is an injunction preventing lawsuits against critical plan participants before the bankruptcy court determines whether there is a "colorable claim" that it or some other court will adjudicate.
- This alternative may be utilized more often if the Supreme Court rules that nonconsensual nondebtor releases are unavailable under the Bankruptcy Code.
Anondebtor release releases the claims of a nondebtor party against another nondebtor party related to a debtor, potentially for both pre-petition and post-petition conduct. A nondebtor exculpation is a limited release of claims against nondebtor parties who participated in a bankruptcy case, e.g., trustees and creditor committee members, and typically concerns post-petition conduct. A nondebtor release or exculpation is "nonconsensual" if imposed on a releasing party without its explicit or, in some cases, implicit consent.
Nonconsensual nondebtor releases have been a key reason businesses facing mass tort claims have filed for bankruptcy. They hope chapter 11 will result in a faster, less expensive resolution of mass tort claims than class actions or multidistrict litigation. This relief emerged from the landmark asbestos case Johns-Manville, after which Congress enacted 11 U.S.C. ' 524(g), which provides for nonconsensual nondebtor releases within a framework that channels asbestos liability claims away from a debtor to a trust designed to process and pay those claims.
Congress never expanded the application of section 524(g) to...
