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

In Part Two, we continue the analysis by evaluating two constitutional issues arising from third-party releases: whether creditor consent to be bound by a third-party release is required to satisfy the due process clause of the Fifth and Fourteenth Amendments to the U.S. Constitution; and whether bankruptcy courts have constitutional authority to issue final orders granting third-party releases in a plan of reorganization under Stern v. Marshall.

Due Process Consent Requirements

The Fifth and Fourteenth Amendments to the U.S. Constitution prohibit both federal and state governments, respectively, from "depriv[ing] any person of life, liberty, or property, without due process of law." The Supreme Court has interpreted this to mean — among providing other protections — that individuals have a right to petition courts for redress of their claims. Generally, the satisfaction of this right requires "some form of hearing … before an individual is finally deprived of a property interest." In the bankruptcy context, creditors may have several federal and/or state causes of action against a debtor — such as claims for breach of fiduciary duty, personal injury, and other torts — that require adjudication by a court of competent jurisdiction. The issue of due process for granting third-party releases arises when a plan attempts to resolve these claims by releasing nondebtor plan contributors without the consent of all affected creditors.