Chapter 11: Third Party Releases

Web posted and Copyright © 1/12/98, American Bankruptcy Institute.

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.

The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)		  

ID Name Group Other Code
Sec		 Cross
Ref		 Problem Referenced Proposed Solutions
NBRC-0452 Murray S. Lubitz, Alan Gordon, Wanda Borges President of Commercial Law League of American, and members of CLLA Chapter 11 Subcommittee, respectively. Proposal on release of third parties on confirmation of Chapter 11 Plan. 1123 524, 1141 While courts are leaning in the direction of adopting criteria which must be met before a permanent injunction would be issued and/or a co-debtor could receive a release from its debt based on provisions in the Debtor's Plan of Reorganization, there is not yet uniformity as to the circumstances under which a third party co-debtor may be released from its liability. The CLLA recommends that the Bankruptcy Code be amended to provide that a Plan of Reorganization may not provide for the release of the indebtedness of a co-debtor unless the holder of the claim or interest executes a separate release of its claim or interest against the co-debtor.
NBRC-0601 Richard H. Walker General Counsel, Securities and Exchange Commission
1123 524(e) Author, on behalf of the SEC, comments on the Chapter 11 Working Group Proposal #6, Release of Claims Against Non-Debtor Parties. The Chapter 11 Working Group's proposal recommends that Congress amend Sections 1123 and 524(e) of the Bankruptcy Code to clarify that a plan proponent "may solicit releases of non-debtor liabilities," with the limitation that only creditors that "agree" to the release would be bound. The SEC objects to injunctions of suits against and releases of non-debtors in Chapter 11 reorganizations involving public companies. Allowing such releases means that non-debtors, who have not undertaken the burdens of bankruptcy, benefit from the debtor's bankruptcy by obtaining their own release with respect to past misconduct, including violations of the federal securities laws. The Chapter 11 Working Group's proposal is consistant with the views of the SEC that a creditor may voluntarily agree to release its claim against third parties; however, the proposal is not specific enough and may have the unintended result of broadening the ability of a debtor or plan proponent to provide for non-debtor releases as an adjunct to a reorganization case. "...we urge the National Bankruptcy Review Commission to rethink whether it is wise to recommend any changes to the current law."
NBRC-0604 Richard H. Walker General Counsel, Securities and Exchange Commission Document entitled "Issues Identified by Division of Enforcement and Office of General Counsel of Securities and Exchange Commission for Consideration by Bankruptcy Review Commission. 524(e)
The SEC has been active in objecting to chapter 11 plans that purport to extinguish the liability of persons or entities who are not in bankruptcy. Courts which have held that §524(e) prohibits the discharge of creditor claims against nondebtors have held that this section embodies the bankruptcy policy that one who does not undertake the burdens of bankruptcy may not obtain the benefits of a bankruptcy discharge by riding on the coattails of a debtor. Such nondebtor discharges are rife with the potential for abuse. Amend §1129 to preclude nondebtor discharges.
NBRC-0851 Ralph Brubaker Assistant Professor of Law, Emory University

11 "The Chapter 11 proposal regarding non-debtor liability releases, by proposing that only creditors who agree to a release can be bound, adopts the position I have advocated - that nonconsensual non-debtor releases should not be permitted. In proposing amendments to sections 1123 and 524(e) to authorize discretionary approval of consensual releases, however, the proposal raises issues that I did not address in my article. Consensual non-debtor releases create some very difficult problems that have not been fully addressed by the courts or commentators and which should be more fully considered before any statutory amendments are proposed." "I strongly support the position that nonconsensual non-debtor releases should be prohibited." "I oppose an open-ended authorization of all consensual non-debtor releases, because of the potential coercive and discriminatory aspects of separate consideration releases."