Earlier this month, Judge Carey in Delaware weighed in on third-party releases in his opinion confirming the Chapter 11 bankruptcy plan for Abeinsa Holdings, Inc., et al. Back in February, we reviewed Judge Delano’s third-party release decision in HWA Properties, a Middle District of Florida case. In that case, the court refused to permit a third-party release and bar order of a debt which (1) had no connection with the debtor and (2) would have been released under a plan of liquidation. He found that both of those factors resulted in the release being impermissible under the Eleventh Circuit’s Seaside decision. You can read the HWA post here and our post on the ABI Commission’s take on third-party releases here.
The Abeinsa Holdings bankruptcy cases involve the U.S. entities connected with Abengoa, S.A., a Spanish company undergoing a global reorganization. Essentially, the Abeinsa plan consists of four subplans: two liquidating plans and two reorganizing plans. However, they contained two release provisions that are applicable to all of the debtors. First, the debtors proposed to release claims against related companies, the Creditors’ Committee, and certain entities under the Spanish master restructuring agreement, along with their representatives and professionals. Second, and more controversially, the debtors proposed that their creditors release claims against the debtors, debtor-related companies, the Creditors’ Committee, and certain entities under the Spanish master restructuring agreement.
The releases of the debtors, as Judge Carey noted, are “quite broad.” They included the debtors, their parent company, note agents, creditors’ committee and its members, several other committees, and the consenting creditors, as well as the representatives and professionals of each. Judge Carey reminds us that debtors may release claims under Section 1123(b)(3) “if the release is a valid exercise of the debtor’s business judgment, is fair, reasonable and in the best interest of the estate.” In Judge Carey’s review of the proposed debtor releases, he acknowledged that, with the exception of the parent entity and the entities who provided new value in the form of equity contributions, the value provided by the released parties was “imprecise.” However, “it is both relevant and consequential that confirmation of the Plan is a material component, and a condition, of the global restructuring of the Spanish companies.” He also concluded that thee releases were arm’s length agreements and that the Creditor’s Committee and the overwhelming majority of creditors agreed to the debtor releases. Thus, Judge Carey approved the plan’s releases of the debtors and their affiliates.
Judge Carey also addressed the third-party releases under the same standards. However, for third-party releases, the court considered five factors in determining whether the release is fair and equitable:
- the identify 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;
- substantial contribution by the non-debtor of assets to the reorganization;
- the essential nature of the injunction to the reorganization to the extent that, without the injunction, there is little likelihood of success;
- an agreement by a substantial majority of creditors to support the injunction, specifically if the impacted class or classes “overwhelmingly” votes to accept the plan; and
- provision in the plan for payment of all or substantially all of the claims of the class or classes affected by the injunction.
[Note for bankruptcy practitioners in the 11th Circuit: the Washington Mutual factors cited in Abeinsa Holdings are the same factors used by the 11th Circuit in Seaside Engineering except that the 11th Circuit adds two additional factors: (6) plan provides opportunity for those claimants who choose not to settle to recover in full and (7) court made a record of specific factual findings that support its conclusions.]
Judge Carey was careful to note that the factors are neither exclusive nor conjunctive requirements. Rather, they merely guide the fairness determination.
Ultimately, Judge Carey approved the third-party releases, not because the Plan met each or even most of thee factors, but because Judge Carey found that the creditors that would be bound by the release (some 191 of the 390 ballots submitted) had agreed to be bound. This was because the third-party releases applied to only persons who voted for the Plan and the ballot allowed a person voting to accept the plan to opt-out of the third-party release. Judge Carey found that acceptance of the plan and failure to check the opt-out box constituted consent and, thus, was fair and equitable to the consenting creditors.
As an item of interest and an indication of the likely path of this developing area of the law, the U.S. Trustee, the party objecting to the third-party releases, agreed at the hearing that there were three ways that a creditor could have been deemed to have agreed to a third-party release:
(1) a vote in favor of the plan (although the U.S. Trustee preferred that such a creditor be able to opt-out of the release)
(2) a vote against the plan, but fails to check the opt-out box.
(3) a failure by a creditor to vote on the plan or by an unimpaired creditor’s inability to vote on the plan.
While Judge Carey ultimately approved the plan based on the creditors’ affirmative consent (and gave no indication on the U.S. Trustee’s stance), we will be watching with interest to see whether courts approve the second two options which require implicit, rather than affirmative, consent.