To Release Or Not To Release - If That Is The Question, What Is The Answer?

In a recent decision by the Bankruptcy Court for the District of Delaware, the court adopted a flexible approach to consensual third party releases in a plan of reorganization. In In re Indianapolis Downs, LLC, 2013 Bankr. LEXIS 384 (Bankr. D. Del. Jan. 31, 2013), the court permitted third party releases where creditors failed to opt out of the release provisions of the plan either by not submitting their vote on the plan, or by voting against the plan but failing to check the "opt out" box on the ballot. The Indianapolis Downs decision highlights a split in the Delaware bankruptcy court with the decision handed down in In re Washington Mutual., 442 B.R. 314 (Bankr. D. Del. 2011).The Indianapolis Downs debtors operated a horse racing track and casino in Shelbyville, Indiana. The debtors filed for Chapter 11 protection in April 2011, and within a year had proposed a plan, which included certain third party releases. Third party releases are releases by non-debtors of non-debtors, and are often sought in a plan to enable raising new capital or to avoid litigation that would hamper the reorganized debtor. While some jurisdictions have adopted per se prohibitions against such releases, other jurisdictions will consider these factors in analyzing whether such releases are appropriate: (1) an identity of interest between the debtor and the third party, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete assets of the estate; (2) substantial contribution by the non-debtor of assets to the reorganization; (3) the essential nature of the release to the reorganization to the extent that, without the release, there is little likelihood of success; (4) an agreement by a substantial majority of creditors to support the release, specifically if the impaired class or classes "overwhelmingly" vote to accept the plan; and (5) a provision in the plan for payment of all or substantially all of the claims of the class or classes affected by the release.

The debtors' plan in Indianapolis Downs applied certain third party release provisions to claimholders who "(i) affirmatively vote to accept or reject the Plan and do not opt out of granting the releases, (ii) are unimpaired pursuant to the Plan and therefore deemed to accept the Plan pursuant to section 1126(f) of the Bankruptcy Code, or (iii) abstain from voting on the Plan and who do not otherwise submit a Ballot indicating their desire to opt out of the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT