Gatekeeping Provisions In Chapter 11 Plans May Provide An Alternative To Nonconsensual Nondebtor Releases

• Published date: 31 August 2023
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Pillsbury Winthrop Shaw Pittman
• Author: L. James Dickinson and Hugh Ray III

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 include other mass torts, and the Circuits have split on the authority of bankruptcy courts to grant nonconsensual nondebtor releases outside of the asbestos context. The Second, Third, Fourth, Sixth, Seventh, Ninth and Eleventh Circuits allow varying degrees of nonconsensual nondebtor releases in non-asbestos cases, whereas the Fifth and Tenth Circuits categorically bar nonconsensual nondebtor releases outside asbestos.

In 2021, several members of Congress introduced the Nondebtor Release Prohibition Act, a bill to amend the Bankruptcy Code to prohibit...