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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Is the Use of Third-Party Releases In Bankruptcy Cases Stretched Too Thin?

By Francis J. Lawall and Suzanne Soboeiro
April 01, 2022

One of the many powerful tools Chapter 11 provides is the opportunity for a debtor to obtain a discharge of debts through a plan of reorganization. In complex cases, however, debtors often view the discharge as being insufficient to accomplish all of its restructuring goals. Thus, third-party releases are often incorporated into the bankruptcy plan as a means of protecting nondebtor parties from litigation that is directly or even tangentially related to the debtor's business. Over the last several years, the scope and use of such third-party releases appears to have been stretched arguably to the breaking point as demonstrated in the recent and important district court decision in the Ascena case. See, Patterson v. Mahwah Bergen Retail Group, Civ. No. 3:21cv167 (DJN) (E.D. Va. Jan. 13, 2022).

The Ascena bankruptcy case presented facts which are typical to many complex Chapter 11s filed over the last few years. Mahwah Bergen Retail Group, Inc. (f/k/a Ascena Retail Group, Inc.) (Ascena) and affiliated debtors commenced Chapter 11 in the U.S. Bankruptcy Court for the Eastern District of Virginia on July 23, 2020. The Eastern District of Virginia had become a popular venue to file large retail bankruptcy cases. Immediately following the sale of substantially all of its assets, the debtors filed an amended plan of reorganization.

The plan contained broad releases of claims held by third parties. These releases operated to permanently release and discharge any claim actionable against any debtor, any affiliate of any debtor, and anyone associated with any debtor, if such claim occurred on or before the plan effective date. In connection with the releases, the Bankruptcy Court required the debtors to circulate a notice of nonvoting status to holders of claims subject to the releases. The notice advised recipients that they could opt out of release of their claims by returning a "Release Opt-Out Form," further advising that failure to return the form would result in the claimant being "deemed to have released whatever claims it may have against many other people and entities (including company officers and directors)". The Bankruptcy Court confirmed the debtors' plan containing the releases and entered the confirmation order Feb. 25, 2021, despite objections from plaintiffs in pending securities fraud litigation targeted at Ascena and certain of its former executives.

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