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The Bankruptcy StrategistFeaturesBankruptcyLitigation

The Role of Third-Party Releases In Successful Chapter 11 Reorganizations

By By John J. Rapisardi and Jacob T. Beiswenger
April 01, 2023

For nearly three decades, courts have wrestled with whether and to what extent the U.S. Bankruptcy Code authorizes non-debtor, third-party releases in a Chapter 11 plan of reorganization. The results over that time have yielded continuing confusion and uncertainty. While three of the 11 Circuit Courts are united in disallowing third-party releases entirely, the other eight provide separate justifications for allowing them, and their differing standards are often disjointedly applied. Although such releases are supposed to apply only in "rare and unique" cases, as one judge observed, "almost every proposed Chapter 11 Plan that I receive includes proposed releases." In re Aegean Marine Petroleum Network, 599 B.R. 717, 726 (S.D.N.Y. 2019).

Given the increased frequency of this issue in recent cases and the continued uncertainty over when third-party releases can be properly granted under a Chapter 11 plan (if at all), we thought it timely to review the current state of the law on the topic and provide an examination of potential ways to resolve the controversy.

This two-part article will examine the role of third-party releases in successful Chapter 11 reorganizations. This part will address the factors considered in each Circuit where such releases have been deemed permissible within the confines of the Bankruptcy Code, evaluate several recent cases highlighting the uncertainty created by the current Circuit split, and consider options for creating a clear, nationwide standard. Part two will evaluate the Circuit Courts' differing consent requirements for third-party releases and whether bankruptcy courts have the constitutional authority to issue final orders granting third-party releases under Stern v. Marshall, 564 U.S. 462 (2011).

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