Bankruptcy Judge Alan M. Koschik warns that “non-debtors should not be able to simply buy their own release or quasi-discharge without themselves being bankruptcy debtors.”
Reorganization plans providing for non-debtor releases (i.e., releasing non-debtors from claims by creditors of the debtor) have been regularly challenged in recent years, frequently by the United States Trustee and other government agencies. In determining whether to approve such releases, courts analyze a variety of factors, including what constitutes “consent” (e.g., voting versus not voting, opting-in versus opting-out) and when (if ever) nonconsensual releases for non-debtors are permissible.
In an April 4, 2019 oral ruling, Judge Alan M. Koschik of the Northern District of Ohio refused to approve FirstEnergy Solutions Corporation’s disclosure statement, partly reasoning that the third-party releases in the plan were an apparent purpose of, not a mere means to, the debtors’ reorganization.[1]
The crux of the problem was the releases in favor of the debtors’ parent and other affiliates (none of which were in bankruptcy). A central concern for the Court was that non-consenting and non-voting creditors of the debtors would be deemed to waive and release their claims against the debtors’ non-bankrupt parent and other affiliates, which claims did not lie against the debtors at all.
The Objecting Parties
Several government agencies, including the EPA, NRC and FERC, opposed the third-party releases by questioning the Court’s subject matter jurisdiction and arguing that the releases were not permissible under the Sixth Circuit test established in In re Dow Corning, 280 F.3d 648, 658 (6th Cir. 2002).
Although many of the agency claims could not be specifically identified, Judge Koschik found the claims were plausible. The objectors argued that their potential claims—“for environmental cleanup or other damages, including unknown latent claims arising from actions occurring long ago, concerning facilities owned and operated for decades by the debtors’ parent corporation and its non-debtor affiliates”—should not be released for the benefit of creditors who would receive the bulk of the financial accommodations under the plan.
The Oral Ruling
Ultimately, Judge Koschik found that the plan not only failed to satisfy Dow Corning, but also violated the spirit of Dow Corning by making the third-party releases an apparent purpose of, and not a mere means to, reorganization. Although the releases were not before the Court in the context of plan confirmation, Judge Koschik explained that because the plan was “patently unconfirmable” it would be futile to approve the disclosure statement and to solicit votes when “under no conceivable circumstances or evidence” could the nonconsensual third-party releases in the plan be justified.
Judge Koschik began by overruling the jurisdictional challenge, relying on Dow Corning, where the Sixth Circuit held that nonconsensual third-party releases are not explicitly prohibited by the Bankruptcy Code. Judge Koschik reiterated that nonconsensual releases of third-party claims against non-debtors are permissible, but that they are the exception and not the rule.
Before addressing the Dow Corning factors, Judge Koschik noted that the cases leading to Dow Corning, and several decisions that followed (such as The City of Detroit[2]), all involved debtors who sought contribution from third parties that were secondarily liable (or allegedly so) for the claims against the debtors, such as insurers or affiliates alleged to have some role in the injuries suffered by the claimants. In FirstEnergy’s case, however, the releases included “claims that do not lie at all against the Debtor, and yet result in the release of a non-Debtor.”
In applying the Dow Corning factors, the Court found that most of the factors were not satisfied or did not apply, and that the debtors might satisfy only one factor—substantial contribution—at confirmation. Specifically, Dow Corning requires:
- an identity of interest between the debtor and the third-party benefitting from the...
