In re Hal Luftig Co.

655 B.R. 508

IN RE: HAL LUFTIG COMPANY, INC., Debtor.

Case No. 22-11617 (JPM)

United States Bankruptcy Court, S.D. New York

Filed December 7, 2023

Signed November 22, 2023

RUSKIN MOSCOU FALTISCHEK, P.C., Counsel for Debtor Hal Luftig Company, Inc., East Tower, 15th Floor, 1425 RXR Plaza, Uniondale, NY 11556, By: Michael S. Amato, Esq. Sheryl P. Giugliano, Esq.

ADAM L. ROSEN PLLC, Counsel for Hal Luftig, 1051 Port Washington Blvd. PO Box 562, Port Washington, NY 11050, By: Adam L. Rosen, Esq. MARTIN J. FOLEY, PLC, Counsel for Hal Luftig, 601 S. Figueroa Street, Suite 2000, Los Angeles, CA 90017, By: Martin J. Foley, Esq.

LIPPES MATHIAS LLP, Counsel for FCP Entertainment Partners, LLC, 50 Fountain Plaza, Suite 1700, Buffalo, New York 14202-2216, By: John A. Mueller, Esq.

BEDERSON, LLP, Subchapter V Trustee, 347 Mount Pleasant Avenue, West Orange, NJ 07052, By: Charles N. Persing, CPA

WILLIAM K. HARRINGTON, United States Trustee, One Bowling Green, Room 534, New York, NY 10004, By: Paul Schwartzberg, Esq.

MEMORANDUM OPINION AND ORDER ON CONFIRMATION OF SMALL BUSINESS PLAN OF REORGANIZATION UNDER CHAPTER 11

JOHN P. MASTANDO III, UNITED STATES BANKRUPTCY JUDGE

I. INTRODUCTION . . . 514

II. JURISDICTION . . . 516

III. BACKGROUND . . . 516

A. THE DEBTOR AND ITS SUBCHAPTER V BANKRUPTCY . . . 516

B. SUMMARY OF THE PLAN . . . 518

C. RESULTS OF VOTING ON THE PLAN . . . 520

D. THE PARTIES' CONFIRMATION BRIEFS . . . 520

1. The Debtors' Memorandum of Law in Support of Confirmation . . . 520

2. The U.S. Trustee Objection . . . 521

3. The FCP Objection . . . 522

4. The Debtor's Reply . . . 522

E. TESTIMONY AT THE HEARING . . . 522

IV. LEGAL ANALYSIS . . . 524

A. THE UNCONTESTED CONFIRMATION REQUIREMENTS . . . 525

B. THE LUFTIG RELEASE . . . 526

1. The Law on Non-Consensual Third-Party Releases . . . 526

2. Claims Released by the Plan . . . 531

3. The Court's Subject Matter Jurisdiction . . . 533

4. The Court's Authority to Approve the Luftig Release . . . 534

5. The Purdue Test . . . 536

a) First Purdue Factor: Whether There is Identity of Interest . . . 537

b) Second Purdue Factor: Whether Claims are Factually and Legally Intertwined . . . 538

c) Third Purdue Factor: Whether Scope is Proper . . . 539

d) Fourth Purdue Factor: Whether the Release is Essential . . . 541

e) Fifth Purdue Factor: Whether Contribution is Substantial . . . 543

f) Sixth Purdue Factor: Whether Support is Overwhelming . . . 545

g) Seventh Purdue Factor: Whether Payment is Fair . . . 546

h) Weighing the Purdue Factors . . . 547

i) Equitable Considerations . . . 548

C. THE LUFTIG INDEMNIFICATION CLAIM & THE ADVERSARY PROCEEDING . . . 550

V. CONCLUSION . . . 551

I. INTRODUCTION

This case presents the difficult question of whether, under In Re Purdue Pharma L.P. ("Purdue III"), 69 F.4th 45 (2d Cir. 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., No. (23A87), 2023 WL 5116031 (U.S. Aug. 10, 2023) and other relevant caselaw, this Court should grant a non-consensual third-party release to a non-debtor (the Debtor's president and sole shareholder) as part of the confirmation of the Debtor's Small Business Plan of Reorganization under Chapter 11. For the reasons set forth below, the Court finds that the plan should be CONFIRMED, and the non-consensual release APPROVED, subject to the modifications set forth in this opinion.

Pending before the Court is the request of Debtor Hal Luftig Company, Inc. (the "Debtor") to confirm the Debtor's Small Business Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (Docket No. 55)¹, as modified by that certain Plan Supplement (the "Plan Supplement") (Docket No. 63) (collectively, the "Plan"). The Debtor supports its request with the Memorandum of Law in Support of Confirmation of Debtor's Small Business Plan of Reorganization under Chapter 11 of the Bankruptcy Code (Docket No. 84) (the "Memo in Support"). The Plan is also supported by: (i) the Declaration of Hal Luftig in Support of Confirmation of Debtors' Small Business Plan of Reorganization under Chapter 11 of the Bankruptcy Code and the exhibits thereto (Docket No. 85) (the "Confirmation Declaration"); (ii) the Declaration of Brian Ryniker in Support of Confirmation of Debtor's Chapter 11 Plan of Reorganization under Subchapter V of the Bankruptcy Code and the exhibits thereto (Docket No. 86) (the "Ryniker Declaration"); and (iii) the Declaration of Sheryl P. Giugliano Regarding Solicitation of Votes and Tabulation of Ballots Accepting and Rejecting Debtor's Small Business Plan of Reorganization under Chapter 11 of the Bankruptcy Code (Docket No. 90) (the "Voting Declaration").

The objection deadline was July 5, 2023 (the "Objection Deadline"). The Court received the following objections prior to the Objection Deadline:

(i) the United States Trustee's (the "U.S. Trustee") Objection of the United States Trustee to Debtor's Small Business Plan of Reorganization under Chapter 11 of the Bankruptcy Code (Docket No. 87) (the "U.S. Trustee Objection"); and

(ii) FCP Entertainment Partners, LLC's ("FCP") Objection to Confirmation of Small Business Plan of Reorganization (Docket No. 89) (the "FCP Objection" and, together with the U.S. Trustee Objections, the "Objections").

The Debtor responded to the Objections with its Reply in Support of Confirmation of Debtor's Small Business Plan of Reorganization under Chapter 11 of the Bankruptcy Code (Docket No. 93) (the "Reply"). FCP later filed the Notice of Supplemental Authority in Further Support of its Objection to Confirmation of Small Business Plan of Reorganization (Docket No. 98) (the "FCP Supplement"). The Debtor then filed its Response to FCP Entertainment Partners, LLC's Notice of Supplemental Authority in Further Support of its Objection to Confirmation of Small Business Plan of Reorganization (Docket No. 100) (the "Response to FCP Supplement"). The Court has received no other objections to the Plan.

The Court heard evidence and arguments of counsel at a hearing on July 11, 2023 (the "Hearing," and the transcript thereof (Docket No. 97), the "Hearing Transcript").

The Court has reviewed (i) the Plan; (ii) the Memo in Support; (iii) the Confirmation Declaration; (iv) the Ryniker Declaration; (v) the Voting Declaration; (vi) the Objections; (vii) the Reply; (viii) the FCP Supplement; (ix) the Response to FCP Supplement; (x) the testimony and arguments presented at the Hearing; and (xi) all other relevant material on the record.

II. JURISDICTION

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 157(b)(1), and 1334, and the Amended Standing Order of Reference dated January 31, 2012 (Preska, C.J.). Plan confirmation is generally a "core" proceeding pursuant to 28 U.S.C. § 157(b)(2)(L). However, as discussed infra, Part (IV)(B)(4), because the Luftig Release (as defined below) includes releases of "direct claims, arising under state law, against non-debtors," the Court is required to submit "proposed findings of fact and conclusions of law to the district court, for that court's [de novo] review and issuance of final judgment." Purdue III, 69 F.4th at 68 (discussing Stern v. Marshall. 564 U.S. 462, 471 (2011)). Accordingly, the Court will propose findings of fact and conclusions of law with respect to approval of the Luftig Release. See 28 U.S.C. § 157(c). The FCP Objection also seeks disallowance of a claim and dismissal of an adversary proceeding, both of which qualify as "core" proceedings pursuant to 28 U.S.C. § 157(b).

III. BACKGROUND

A. THE DEBTOR AND ITS SUBCHAPTER V BANKRUPTCY

The Debtor is a New York corporation engaged in the production of theatrical works both on and off Broadway. (Confirmation Declaration Ex. E (the "First Day Declaration") ¶¶ 2-4.) Shows produced by the Debtor include Kinky Boots the Musical, Fiddler on the Roof in Yiddish, American Utopia, Plaza Suite, Becoming Nancy, Legally Blonde the Musical, Evita, Catch Me If You Can the Musical, Come Fly Away, and Life of Pi. (First Day Declaration ¶¶ 12, 14.) The Debtor's president and sole shareholder is Mr. Hal Luftig. (First Day Declaration ¶ 1.) As relevant here, the Debtor's bylaws contain a clause that requires the Debtor to indemnify directors and officers against:

reasonable expenses, judgments, fines and amounts actually and necessarily incurred in connection with the defense of such action or proceeding or in connection with an appeal therein, including attorney's fees actually and necessary [sic] incurred as a result of such action, to the fullest extent permissible by the laws of the State of New York if such director or officer acted in good faith, for a purpose which he reasonably believed to be in, or, not opposed to, the best interests of the Corporation . . . .

(the "Indemnification Provision"). (See First Day Declaration Ex. B § 5.)

On August 12, 2019, FCP Entertainment Partners, LLC ("FCP"), one of the Debtor's investors and business partners, initiated an arbitration (the "Arbitration") against the Debtor for breach of contract and against Mr. Luftig for breach of fiduciary duty. (First Day Declaration ¶ 26.) In the Arbitration, FCP generally alleged that FCP did not receive certain income from the productions of Kinky Boots and Elephant Man, which income FCP claims it was entitled to pursuant to a 2007 agreement. (Id. at ¶¶ 20-21, 24.)

On April 1, 2022, the arbitrator issued a final award (the "Final Award") finding that: (i) the Debtor and Mr. Luftig were jointly and severally liable to FCP in the amount of approximately $2.6 million for the breach of contract claim brought against the Debtor (First Day Declaration ¶¶ 28-29); (ii) the breach of fiduciary duty claim against Mr. Luftig in his individual capacity was dismissed (First Day Declaration ¶ 29); and (iii) the Debtor and Mr. Luftig were obligated to pay 55% of the net income from Kinky Boots to FCP (First Day Declaration ¶ 30). On October 26, 2022, the District Court confirmed the Final Award. (First Day Declaration ¶ 33.) On November 2, 2022, the District Court...