Court rejects due process challenge of creditors against discharge of bankrupt debtor’s subsidiaries


In Jackson v. The Center on Fourth, LLC (In re The Center on Fourth, LLC), 2021 US App. LEXIS 33845 (11th Cir. November 15, 2021), the Eleventh Circuit dismissed the due process challenge by creditors of the release granted to the debtor’s affiliates in a confirmed Chapter 11 plan.

The creditors were plaintiffs in a tort action filed after Willie Jackson was struck and injured by a vehicle driven by a hotel valet. Jackson and his wife sued the hotel’s owner, The Center on Fourth, LLC, and several of its affiliates. Before bankruptcy court upheld Le Center’s Chapter 11 plan, Le Center’s attorney sent the debtor’s creditors, including the Jackson’s attorney, a statement explaining the proposed plan. The disclosure statement stated that “CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN ”, and explained that anyone who voted for the plan or abstained from voting would be deemed to have released“ the released parties ”. The initial disclosure statement did not define “released parties”, but clarified that the bankruptcy court had the authority to discharge non-debtor parties and that “non-debtor discharges in the plan are intended for individuals and entities who are affiliated with the current members and officers of the Debtor ”, because an action against those parties would be“ essentially an action against the Debtor and [would] exhaust the assets of the debtor’s estate. The disclosure statement also included the date set for the confirmation of charges hearing. Lawyers for the Jackson’s conceded receiving the disclosure statement, but did not oppose the plan, appear at the hearing, or take any other action.

The bankruptcy court upheld the plan, specifically addressing the discharges of the non-debtor parties – at least some of whom had been named as defendants in the Jackson’s lawsuit – and determining that the discharges were an integral part of the debtor’s reorganization. Subsequently, The Center and the discharged non-debtors went to state court to dismiss the Jackson’s claims against them. In response, the Jacksons asked the bankruptcy court to clarify that neither the confirmation order nor the confirmed plan prevented the Jacksons from nominally suing the released parties, in order to reach their insurers. The Jackson’s argued that the confirmation order had only reached the debtor and its affiliates, not their insurers, and that applying the releases to their claims would violate due process because they did not ‘had not received notification of the proposed discharge in the form required by Bankruptcy Rule 2002. The bankruptcy court dismissed the petition and the district court upheld. The Jackson appealed.

The Eleventh Circuit, in an opinion written by Judge Jill Pryor and joined by Judges Jordan and Tjoflat, asserted. Consideration of the due process argument de novo, the court noted that Bankruptcy Rule 2002 requires that if a bankruptcy plan “provides for an injunction against conduct that is not otherwise prohibited by the Code”, such as discharge in favor of non-debtors, then a creditor ” must receive a notice that includes a statement that the plan proposes a discharge injunction, a brief description of the injunction and the identity of the entities subject to the injunction, ”provided 28 days before confirmation. The question was not whether the rule applied, but “whether due process required the Jackson to receive notice in accordance with the procedural requirements of rule 2202 (c) (3) even though they were given notice. real the same information in a different form. “To answer this question, the court considered United Student Aid Funds, Inc. v. Espinosa, 559 US 260 (2010). There, the Supreme Court ruled that a creditor who had received actual notice of the filing and contents of the debtor’s plan in a Chapter 13 case had benefited from due process despite the debtor’s failure to comply with the requirements of the debtors. bankruptcy rules 7001, 7003, 7004 and 7008., which the Court characterized as “procedural”. “Given the Supreme Court’s rejection of an almost identical argument in a very similar bankruptcy context,” Circuit Eleventh said, “the Jackson’s argument must fail.”

The court also rejected the Jackson’s argument that while the discharge injunction was valid, it did not extend to nominal claims against non-debtor discharged parties. Reviewing for abuse of power the bankruptcy court’s decision not to vary its order to allow nominal claims, the court ruled that, “[a]assuming that § 524 (e) [of the Bankruptcy Code] grants bankruptcy courts the power to authorize nominal claims against discharged non-debtors, we are not convinced that the bankruptcy court should have done so in this case. “By virtue of the court’s decision in SuVicMon Development, Inc. v. Morrison, 991 F.3d 1213 (11th Cir. 2021), a plaintiff can only proceed nominally against a discharged debtor if the lawsuit is necessary to collect against a third party and there is “sufficient certainty” that the continuation of the lawsuit against the debtor will not place any economic burden on the debtor, so that the debtor’s fresh start will not be hindered. The Jackson’s met the first requirement because Kentucky law, which governed their claims, required them to sue the insured in order to reach the insurer. But given the indemnification agreements between the debtor and the other discharged parties, “we cannot conclude that the bankruptcy court abused its discretion in determining that the nominal claims of the Jackson [against the debtor’s released affiliates] could result in an economic burden for The Center.


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