There has been a lot of discussion, by both the courts and practitioners, regarding whether the bankruptcy court, as part of a chapter 11 plan, can release a third party from creditors’ claims over the objection of such creditors. We have talked about these non-consensual third-party releases on this blog as well. Courts are not unanimous on this issue, and the controversy provides something to talk about. Less time is spent discussing the less remarkable statement that bankruptcy courts can approve third-party releases when creditors consent to such release. However, what constitutes consent?
Earlier this summer, the bankruptcy court for the Southern District of New York confirmed the chapter 11 plan of reorganization for Chassix Holdings, Inc. and its affiliates. In overruling objections to the plan, the court provided some guidance on what constitutes “consent” by creditors to third-party releases. See In re Chassix Holdings, Inc., et al., 533 B.R. 64 (Bankr. S.D.N.Y. 2015).
Chassix Holdings is a holding company for a number of direct and indirect subsidiaries, which manufacture chassis sub-frame components and power train products for sale to car manufacturers and other suppliers. Chassix Holdings is owned by accounts and entities managed by Platinum Equity Advisors, LLC (Platinum).
In December 2013, Chassix Holdings issued $150 million in unsecured notes and then paid almost all of the note proceeds to Platinum as a dividend. Shortly thereafter, Holdings was in financial trouble and entered into restructuring negotiations with the Chassix companies’ major creditors, customers and other parties in interest. The parties ultimately reached agreement on the terms of a settlement and proposed a reorganization plan for the debtors. As part of the settlements embodied in the plan, both the debtors and “consenting” creditors released any claims they had against Platinum. In exchange, Platinum agreed to waive certain stock losses, which had the effect of providing tax benefits to the debtors and increased the amounts available for distribution.
The Chassix companies then filed for bankruptcy in March 2015, seeking approval of the proposed reorganization plan which incorporated the settlement of claims among the parties. All of the classes entitled to vote on the plan voted in favor of it. However, one creditor objected, arguing that the debtors would not receive sufficient value for the release of their claims against Platinum. The creditor asserted that the claims, if pursued, would provide unsecured creditors with greater recoveries than those contemplated under the plan. After a careful review of the evidence submitted in support of the plan and its terms, the bankruptcy court held that the debtors’ settlement of claims against Platinum warranted approval pursuant to Bankruptcy Rule 9019.
Release of Third-Party Claims
Having held that the debtors’ release of third-party claims was warranted under the plan, the court could have concluded its opinion. Instead, the court “on its own initiative” undertook a review of the plan’s proposed releases of third-party claims by consenting creditors. As defined in the plan, “consenting creditors” meant (a) any holder of a claim other than a holder who voted to reject the plan and elected not to provide the third-party release and (b) any “released party.” Under this formulation, all creditors except those who actually voted to reject the plan were deemed to consent to such release. In addition, if a creditor was the beneficiary of a release, it was also deemed to grant the release for the benefit of the other released parties.
The court held that this definition was too broad, stating that the releases needed to be limited to those creditors “who have actually consented to them.” What does that mean? The court reviewed each “bucket” of creditors to determine when consent is actually granted.
Creditors voting to approve the plan: Consistent with prior court decisions in both the Second Circuit and Seventh Circuit, the court first noted that creditors who voted in favor of the plan could be deemed “consenting creditors” releasing Platinum from claims. No affirmative “opt in” box was required for the third-party release of claims to be binding on these creditors.
Creditors voting to reject the plan: The debtors had originally proposed that creditors voting to reject the plan would have to “opt out” of the release. The court noted, however, that the same logic that (a) provides that a creditor voting to approve a plan can be deemed to consent to a third-party release would also (b) provide that a creditor voting to reject a plan should be deemed to object to a third-party release. In response, the debtors revised their ballots, so that they provided that creditors who voted to reject the plan could still be a “consenting creditor” to the third-party releases by checking a box to “opt in” to the release. Absent opting in, creditors who rejected the plan were not “consenting” creditors. Other courts have permitted the “opt out” approach originally proposed by the debtors. See, e.g., In re Genco Shipping & Trading Ltd., 513 B.R. 233, 271 (Bankr. S.D.N.Y. 2014); In re Indianapolis Downs, LLC, 486 B.R. 286, 306 (Bankr. D. Del. 2013).
Creditors who did not vote on the plan: There is no hard and fast rule on whether non-voting creditors are “consenting” creditors. In this case, the court held that under the circumstances, non-voting creditors could not be deemed to consent to the third-party releases. The settlement with Platinum was reached only shortly before the deadline to vote on the plan and before that, the affected creditors were only scheduled to receive very small recoveries. These recoveries and other issues would not have motivated creditors to pay attention and vote on the plan. The court held that charging these inactive creditors with full knowledge of the scope and implications of the proposed third-party releases was not “realistic or fair” and stretched the meaning of “consent” too far. Other courts have used similar logic in holding that non-voting creditors are not consenting creditors. See In re Washington Mut. Inc., 442 B.R. 314, 355 (Bankr. D. Del. 2011); In re Zenith Elecs. Corp., 241 B.R. 92, 111 (Bankr. D. Del. 1999). However, other courts have found a proposed third-party release to be consensual, even when the impaired creditors abstain from voting. See In re Indianapolis Down, LLC, 486 B.R. at 305-06; In re DBSD N. Am., Inc., 419 B.R. 179, 218-19 (Bankr. S.D.N.Y. 2009).
Creditors deemed to reject the plan: As to creditors who were deemed to reject the plan (and therefore had no opportunity to vote for or against the third-party releases), the court held that “it would defy common sense” to conclude that these creditors had consented to the release. Creditors voting to reject the plan were not bound by the release unless they affirmatively opted in and the court found this same logic should apply to creditors who were deemed to reject the plan. Since they were given no “opt in” mechanism with respect to the releases, they could not have consented to the releases.
Creditors deemed to accept the plan: While other courts have held that unimpaired creditors may be presumed to consent to third party releases (see, e.g., In re Indianapolis Down, LLC, at 304-06), the Chassix court held that this position required further analysis. To be truly “unimpaired” under a plan, a creditor’s rights must be left unaltered. Requiring such a creditor to release a claim against a third party clearly does not leave all of the creditor’s rights unimpaired. The court noted there were only two options for fully paid creditors: (1) the releases relate to claims that the debtors themselves were satisfying (so that the release then served no purpose) or (2) the releases cover claims that the creditors could pursue notwithstanding the satisfaction of their claims against the debtors (meaning that there is no basis for the creditors to be called to consent to a release of claims against other parties in connection with satisfaction of claims against the debtors). See also In re Genco Shipping & Trading Ltd., 513 B.R. at 270 (simply classifying a party as unimpaired does not mean they should somehow automatically be deemed to grant a third-party release).
Courts may be likely to approve creditors’ consensual release of claims against third parties. The trick for debtors and other plan proponents is to make sure that creditors’ consent is properly obtained.