In Re Seaside Engineering: Eleventh Circuit Holds Fast On Legitimacy Of Nonconsensual Third Party Plan Releases

In a recent decision, the United States Court of Appeals for the Eleventh Circuit reaffirmed its position sanctioning, under appropriate circumstances, nonconsensual third party release provisions in chapter 11 plans. In SE Prop. Holdings, LLC v. Seaside Eng'g & Surveying, Inc.(In re Seaside Eng'g & Surveying, Inc.), 780 F.3d 1070 (11th Cir. 2015), the Eleventh Circuit affirmed bankruptcy and district court decisions approving a debtor's chapter 11 plan that released the debtor's former principals over the objection of a noninsider equity holder. In so ruling, the Eleventh Circuit maintained its alignment with the majority position on the third party release issue, along with the Second, Third, Fourth, Sixth, and Seventh Circuits.

Validity of Nonconsensual Third Party Releases in a Chapter 11 Plan

The federal circuit courts of appeal are split as to whether a bankruptcy court has the authority to approve chapter 11 plan provisions that, over the objection of creditors or other stakeholders, release specified nondebtors from liability and/or enjoin dissenting stakeholders from asserting claims against such nondebtors. The minority view, held by the Fifth, Ninth, and Tenth Circuits, bans such nonconsensual releases on the basis that section 524(e) of the Bankruptcy Code, which provides generally that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt," prohibits them. See Bank of N.Y. Trust Co. v. Official Unsecured Creditors' Comm. (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009); In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re W. Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990). On the other hand, the majority of circuits to consider the issue—the Second, Third, Fourth, Sixth, and Seventh Circuits—have found such releases and injunctions permissible, under certain circumstances. See In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992); In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000); In re A.H. Robins Co., Inc., 880 F.2d 694 (4th Cir. 1989); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002); In re Airadigm Communications, Inc., 519 F.3d 640 (7th Cir. 2008). For authority, these courts generally rely on section 105(a) of the Bankruptcy Code, which authorizes courts to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." Moreover, as the Seventh Circuit held in Airadigm, the majority view is that section 524(e) does not limit a bankruptcy court's authority to grant such a release. The First and D.C. Circuits have indicated that they agree with the "pro-release" majority, as did the Eleventh Circuit in a decision that had...