The expanding contours of releases authorized by non-debtors in the Ninth Circuit | Mintz – Views on Bankruptcy and Restructuring


Until recently, Ninth Circuit courts have generally followed the minority view that discharges by a non-debtor in a bankruptcy plan are prohibited by Section 524 (e) of the Bankruptcy Code, which provides that “ the discharge of a debt of the debtor does not affect the liability of any other entity over, or the property of any other entity for that debt. In the summer of 2020, the Ninth Circuit hinted that its ban on non-debtor releases was not absolute, when the court issued its ruling in Blixseth v. Swiss credit, 961 F.3d 1074 (9th Cir. 2020), holding that a provision of the plan exonerating non-debtors was admissible because it did not affect “the obligations relating to claims filed by creditors and released through the bankruptcy proceedings ”. In doing so, the Ninth Circuit found that Article 524 (e) of the Bankruptcy Code does not categorically prohibit all releases of non-debtors.

Even if Blixseth only addressed the exoneration provisions, it opened the door to other forms of release authorized by non-debtors. In a recent decision, In re Astria Health, Case No.19-01189-WLH11, 2021 Bankr. LEXIS 155 (Bankr. ED Wash. January 22, 2021),[1] Washington’s Eastern District Bankruptcy Court has arguably further broadened the context in which discharges by non-debtors may be permitted.

As the initial stages of the case “featured several skirmishes with and between key stakeholders,” the debtors, the unsecured creditors committee, secured creditors and the post-petition DIP lender eventually agreed to a reorganization plan. consensual. Upon solicitation, the voting classes accepted the plan with significant margins and the plan was subsequently confirmed. The plan included a provision exempting major participants in the plan process, including non-debtor parties, from all post-bankruptcy and plan liability, except in cases of gross negligence or willful misconduct. The plan also provided for (i) releases by debtors and bankruptcy assets from a similar set of parties, including non-debtors, for all causes of action relating to debtors, bankruptcy cases or plan ; and (ii) releases by third parties of similar scope.

Despite objections from the US trustee, the bankruptcy court approved each of the non-debtor discharge provisions. The bankruptcy court invoked Blixseth to maintain the exculpatory provision because it was appropriately limited to post-petition acts of parties who actively participated in and contributed to the bankruptcy process, while eliminating gross negligence and willful misconduct. The bankruptcy court also developed the Ninth Circuit reasoning, expressly holding that discharges of non-debtors should not be limited to parties with a fiduciary duty to the bankruptcy estate, as such a limitation would conflict with the protections. analogues under Article 1125 (e) of the Bankruptcy Code. , which limits the liability of a wide range of non-debtor parties for acts related to the solicitation of votes.

In addition, the Astria court went beyond the decision of Blixseth approve discharges of non-debtors both by the debtor and by third parties. The court first considered the discharge of debts belonging to the bankruptcy estate, holding that such discharges, even with regard to non-debtors, are admissible and must be assessed in accordance with section 1123 (b) ( 3) (A) of the Bankruptcy Code, which authorizes “the settlement or adjustment of any claim or interest belonging to the debtor or the estate”. Using the A&C Properties The factors,[2] the court considered that the discharge of inheritance claims against non-debtors was appropriate because there was likely no disguised claim against a released party and because each of the released parties had contributed to the consensual plan, thus avoiding protracted and costly litigation regarding the confirmation of the plan.

With regard to the discharge of claims held by third parties, the court relied on Blixseth to conclude that the prohibition in section 524 (e) on the discharge of claims against non-debtors was inapplicable to non-debtors under the plan, because non-debtors did not concern any “liability common to any debtor and the released parties ”(that is to say, discharged non-debtors were not responsible for any liability of debtors) and neither party had asserted otherwise.

The decision in Astria solidifies more Blixseth‘s believing that Article 524 (e) does not categorically prohibit releases by non-debtors in the Ninth Circuit, while broadening the context in which such releases may be authorized to include both release provisions debtors and third parties. As a result, we can expect such releases to be included in Ninth Circuit bankruptcy plans, as they can now become more prevalent tools for debtors and creditors in plan negotiations.

[1] Mintz represented the first secured creditor in this matter.

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