April 26, 2023
Delaware Bankruptcy Judge Goldblatt Issues Opinion Regarding Third-Party Releases
On March 27, 2023, Delaware Bankruptcy Court Judge Craig Goldblatt issued an opinion in the case Arsenal Intermediate Holdings, LLC, No. 23-10097 (CTG) (“Arsenal”) addressing third-party releases. While Judge Goldblatt has previously addressed the topic in bench rulings, this is his first such written opinion. In short, the Court held that prominently and conspicuously disclosed third party releases contained in a plan that permit creditors to opt out of the releases may be deemed valid and consensual as to those who do not exercise that option.
Background and Ruling
The Arsenal debtors (“Debtors”) operate captive insurance and alternative risk management companies that are part of a larger risk-management business known as Beyond Risk. The Debtors proposed to sell their assets and filed a liquidating plan to effectuate the same. “[T]he proposed plan contains a consensual third-party release under which creditors release claims against Beyond Risk and its ‘Related Parties,’ which include its directors and officers.”
The Debtors asked the “Court to approve procedures under which creditors will be deemed to consent to the third-party release unless they affirmatively opt out.” The Trustee opposed the request on the basis that consensual third-party releases require creditors to opt in. The Trustee argued further that “even if an opt-out procedure is appropriate in a ‘typical case,’ . . . the unusual circumstances of this case provide reason to require an opt-in procedure.”
Judge Goldblatt first addressed the issue of whether an opt-out mechanism is sufficient to obtain the consent of a creditor to third party releases. Judge Goldblatt began his analysis by noting that his opinion “does not speak to the authority of the bankruptcy court . . . to grant a non-consensual third-party release.” The Court then observed that in In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000), the Third Circuit suggested nonconsensual releases are appropriate in exceptional circumstances. Given the Third Circuit’s suggestion that non-consensual releases may be authorized in exceptional cases, Judge Goldblatt found that consensual third-party releases should be “noncontroversial.” However, as noted by the Court, the Third Circuit has never “articulate[d] what it means for a release to be ‘consensual.’” Courts are divided as to whether consent exists when (a) a “creditor must provide some affirmative expression of consent, such as voting in favor of the plan or checking a box on a form” or (b) a “creditor[] had the opportunity to opt out of the release and did not exercise it[.]” Judge Goldblatt found that there was not a “right or wrong” answer as to what is consensual and that it is a “matter of judgment rather than a question of law.”
Judge Goldblatt continued his analysis by discussing the different views taken by courts. He stated that on one end of the spectrum, courts find “a third-party release to be consensual . . . based on principles of contract law [where] some affirmative expression of consent is required[.]” “At the other end of the spectrum, there are [courts] . . . that view a third-party release just like any other plan provision.” The Court explained that as “with any other plan provision whose compliance with the [law] is disputable, if an affected party objects to the inclusion of that plan provision, the debtor (or other proponent of the plan) is faced with a choice[: the] proponent may seek to meet its burden, at the confirmation hearing, of demonstrating that the plan is confirmable under the demanding standard applicable to non-consensual third-party releases [or] the plan proponent may carve the objecting party out of the release, leaving the plan, including the third-party release, as ‘consensual’ to all other parties.”
Ultimately, in holding that the opt-out model typically applies for the approval of third-party releases, Judge Goldblatt was persuaded by the reasoning of cases on the latter end of the above-referenced spectrum such as In re DBSD North America, Inc. 419 B.R. 179 (Bankr. S.D.N.Y. 2009) and In re Indianapolis Downs, LLC, 486 B.R. 286 (Bankr. D. Del. 2013). He reasoned in part that “the functioning of the bankruptcy system generally depends on requiring parties that object to the relief proposed in a plan to come into court to raise their objection.” He also found that the “procedures that have become standard . . . for consensual third-party releases, such as the requirement that the terms of the release be set forth clearly and conspicuously, and that impaired creditors have the option of opting out by checking a box on their ballot, rather than filing a formal objection to confirmation, are discretionary measures employed by the [C]ourt in order to guard against a creditor’s inadvertently consenting to a release to which it in fact objects.”
Judge Goldblatt further explained that “the word ‘consensual,’ when used to describe a third-party release, does not necessarily mean that every creditor who will be bound by the release has affirmatively agreed to it. . . . [I]t may be just as likely that the creditor was careless, inattentive, or mistaken. Rather, the term ‘consensual’ is used in the sense that a confirmation hearing in which no party-in-interest raises an objection is described as a ‘consensual’ hearing. . . . And in the absence of any objection, the Court entered a confirmation order that, in conjunction with § 1141(a) of the Bankruptcy Code, renders the plan binding on all creditors.”
Although Judge Goldblatt held that an opt-out mechanism is typically sufficient to protect the interests of creditors opposed to granting a third-party release, he noted that in unusual circumstances additional protections might be required. In this case, Judge Goldblatt found such circumstances existed due to an order he had previously issued, under which certain potential creditors may not have learned of “potential claims [that] they would be foregoing under the ‘consensual’ third-party release until [after the proposed opt-out deadline].”
Aside from the Court’s prior order, the U.S. Trustee argued that opt-out procedures should not be allowed for various other reasons such as the complexity of the language of the releases and that “some creditors may end up holding claims that [they] would have no reason to know about” due to the delayed unwinding of comingled funds. However, the Court determined that it would “not require an opt-in procedure simply because some of the creditors may be unsophisticated or because some of the creditors hold claims that may be contingent on the occurrence of future events,” as such points are generally true in all bankruptcy cases. However, an order by a court, which “might operate to prevent creditors from learning of their claims, and therefore prejudice their interests[,]” is not present in every case. Accordingly, Judge Goldblatt entered an order authorizing the Debtors to (a) use an opt-in mechanism under the current third-party release deadline, or (b) use an opt-out mechanism, so long as the opt-out deadline was extended past the confirmation date.
Conclusion
Always a hot-button issue in plan formation (and subsequent litigation), the Arsenal opinion is yet another that adds to Delaware’s robust jurisprudence addressing third-party releases. The Court’s opinion is helpful in enunciating specific guideposts for what will and will not pass muster when it comes to releases, as well as Judge Goldblatt’s view on what allows judges within the same jurisdiction to draw different conclusions on the issue. Final confirmation in Arsenal is set for May 3, 2023.
A copy of the opinion can be found here.
Background and Ruling
The Arsenal debtors (“Debtors”) operate captive insurance and alternative risk management companies that are part of a larger risk-management business known as Beyond Risk. The Debtors proposed to sell their assets and filed a liquidating plan to effectuate the same. “[T]he proposed plan contains a consensual third-party release under which creditors release claims against Beyond Risk and its ‘Related Parties,’ which include its directors and officers.”
The Debtors asked the “Court to approve procedures under which creditors will be deemed to consent to the third-party release unless they affirmatively opt out.” The Trustee opposed the request on the basis that consensual third-party releases require creditors to opt in. The Trustee argued further that “even if an opt-out procedure is appropriate in a ‘typical case,’ . . . the unusual circumstances of this case provide reason to require an opt-in procedure.”
Judge Goldblatt first addressed the issue of whether an opt-out mechanism is sufficient to obtain the consent of a creditor to third party releases. Judge Goldblatt began his analysis by noting that his opinion “does not speak to the authority of the bankruptcy court . . . to grant a non-consensual third-party release.” The Court then observed that in In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000), the Third Circuit suggested nonconsensual releases are appropriate in exceptional circumstances. Given the Third Circuit’s suggestion that non-consensual releases may be authorized in exceptional cases, Judge Goldblatt found that consensual third-party releases should be “noncontroversial.” However, as noted by the Court, the Third Circuit has never “articulate[d] what it means for a release to be ‘consensual.’” Courts are divided as to whether consent exists when (a) a “creditor must provide some affirmative expression of consent, such as voting in favor of the plan or checking a box on a form” or (b) a “creditor[] had the opportunity to opt out of the release and did not exercise it[.]” Judge Goldblatt found that there was not a “right or wrong” answer as to what is consensual and that it is a “matter of judgment rather than a question of law.”
Judge Goldblatt continued his analysis by discussing the different views taken by courts. He stated that on one end of the spectrum, courts find “a third-party release to be consensual . . . based on principles of contract law [where] some affirmative expression of consent is required[.]” “At the other end of the spectrum, there are [courts] . . . that view a third-party release just like any other plan provision.” The Court explained that as “with any other plan provision whose compliance with the [law] is disputable, if an affected party objects to the inclusion of that plan provision, the debtor (or other proponent of the plan) is faced with a choice[: the] proponent may seek to meet its burden, at the confirmation hearing, of demonstrating that the plan is confirmable under the demanding standard applicable to non-consensual third-party releases [or] the plan proponent may carve the objecting party out of the release, leaving the plan, including the third-party release, as ‘consensual’ to all other parties.”
Ultimately, in holding that the opt-out model typically applies for the approval of third-party releases, Judge Goldblatt was persuaded by the reasoning of cases on the latter end of the above-referenced spectrum such as In re DBSD North America, Inc. 419 B.R. 179 (Bankr. S.D.N.Y. 2009) and In re Indianapolis Downs, LLC, 486 B.R. 286 (Bankr. D. Del. 2013). He reasoned in part that “the functioning of the bankruptcy system generally depends on requiring parties that object to the relief proposed in a plan to come into court to raise their objection.” He also found that the “procedures that have become standard . . . for consensual third-party releases, such as the requirement that the terms of the release be set forth clearly and conspicuously, and that impaired creditors have the option of opting out by checking a box on their ballot, rather than filing a formal objection to confirmation, are discretionary measures employed by the [C]ourt in order to guard against a creditor’s inadvertently consenting to a release to which it in fact objects.”
Judge Goldblatt further explained that “the word ‘consensual,’ when used to describe a third-party release, does not necessarily mean that every creditor who will be bound by the release has affirmatively agreed to it. . . . [I]t may be just as likely that the creditor was careless, inattentive, or mistaken. Rather, the term ‘consensual’ is used in the sense that a confirmation hearing in which no party-in-interest raises an objection is described as a ‘consensual’ hearing. . . . And in the absence of any objection, the Court entered a confirmation order that, in conjunction with § 1141(a) of the Bankruptcy Code, renders the plan binding on all creditors.”
Although Judge Goldblatt held that an opt-out mechanism is typically sufficient to protect the interests of creditors opposed to granting a third-party release, he noted that in unusual circumstances additional protections might be required. In this case, Judge Goldblatt found such circumstances existed due to an order he had previously issued, under which certain potential creditors may not have learned of “potential claims [that] they would be foregoing under the ‘consensual’ third-party release until [after the proposed opt-out deadline].”
Aside from the Court’s prior order, the U.S. Trustee argued that opt-out procedures should not be allowed for various other reasons such as the complexity of the language of the releases and that “some creditors may end up holding claims that [they] would have no reason to know about” due to the delayed unwinding of comingled funds. However, the Court determined that it would “not require an opt-in procedure simply because some of the creditors may be unsophisticated or because some of the creditors hold claims that may be contingent on the occurrence of future events,” as such points are generally true in all bankruptcy cases. However, an order by a court, which “might operate to prevent creditors from learning of their claims, and therefore prejudice their interests[,]” is not present in every case. Accordingly, Judge Goldblatt entered an order authorizing the Debtors to (a) use an opt-in mechanism under the current third-party release deadline, or (b) use an opt-out mechanism, so long as the opt-out deadline was extended past the confirmation date.
Conclusion
Always a hot-button issue in plan formation (and subsequent litigation), the Arsenal opinion is yet another that adds to Delaware’s robust jurisprudence addressing third-party releases. The Court’s opinion is helpful in enunciating specific guideposts for what will and will not pass muster when it comes to releases, as well as Judge Goldblatt’s view on what allows judges within the same jurisdiction to draw different conclusions on the issue. Final confirmation in Arsenal is set for May 3, 2023.
A copy of the opinion can be found here.