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Debtor’s Proposed Use of Third-Party Releases Prevents Approval of Chapter 11 Reorganization Plan in Florida Bankruptcy Case

Clewiston sunriseA real estate company with holdings in Lee and Hendry Counties lost its bid to secure approval of its Chapter 11 reorganization plan because the proposed use of third-party releases was not proper. The central problem that doomed the plan, in the opinion of the U.S. Bankruptcy Court for the Middle District of Florida, was that the proposed releases and court orders barring future legal actions were not sufficiently connected to, and beneficial for, the debtor company, but they were instead an effort to benefit the debtor company’s two owners and the other entities they controlled. The case is a reminder that, although debtors can use third-party releases as part of their Chapter 11 plans, they must truly benefit the debtor company itself to be approved by the court.

The debtor in this case was HWA Properties, Inc., a Michigan corporation with significant property holdings in Cape Coral and Clewiston, Florida. HWA’s owners, Harry and Suzann Albright, each owned 50% of the company. The Albrights also owned or controlled at least eight other entities.

HWA, in advance of its bankruptcy filing, negotiated with its creditors regarding settlements. By the time HWA filed its Chapter 11 petition, it had worked out agreements with several of its creditors in which each creditor agreed, in exchange for either cash or a portion of HWA’s Florida property holdings, to issue releases that covered not only HWA but also the Albrights individually, along with the other entities that they controlled. These deals also required HWA to obtain the judge’s signature on court orders that barred any claims against the Albrights, their companies, or the creditor that stood, under this arrangement, to receive all the shares of HWA.

Two entities with which agreements were not obtained were the senior mortgage-holder on four of HWA’s properties and a bank that held a $1.9 million judgment against Harry Albright personally. These entities objected to the proposed reorganization plan. The court agreed and declined to approve the plan. The court noted that, last year, the 11th Circuit Court of Appeals issued a ruling in the case of In re Seaside Engineering & Surveying, Inc., in which the court approved of the third-party releases that were part of that reorganization plan, but it also instructed courts in the future to use the factors listed by the Sixth Circuit in a 2002 case (In re Dow Corning Corporation) in determining whether the bar order that was proposed by the debtor could be approved.

In HWA’s case, the factors from the Dow Corning case did not weigh in HWA’s favor. If the facts of a case indicate that the interests of the debtor and the third party in question are so similar or identical that a lawsuit against the third party would amount to a lawsuit against the debtor and reduce the bankruptcy estate, that would weigh in favor of a bar order. In HWA’s case, though, litigation against the Albrights or the entities they owned would have no impact on HWA’s bankruptcy estate, which did not help HWA’s case.

Additionally, the size of the third party’s contribution to the reorganization can be a criterion weighing in favor of a bar order. In this case, many of the contributions the non-debtors made did not go toward the benefit of HWA, and the ones that did were not proven to be “substantial” contributions, so that also weighed against the proposal.

Ultimately, the judge decided that none of the factors weighed in favor of approving the plan. In rejecting the proposal, the judge explained that, despite the debtor’s diligent efforts, the plan it proposed was less of a reorganization and more of “a restructuring of various obligations in an effort to obtain releases for” the Albrights and their other companies.

Whether you are a debtor weighing the prospects of pursuing Chapter 11 bankruptcy or a creditor of an entity that has filed under Chapter 11, it is important to have a clear understanding regarding all of your options and the consequences of each one. That’s where a knowledgeable and experienced legal advocate can step in. The skilled bankruptcy attorneys at Stok Folk + Kon are here to help you weigh your range of choices and work with you to select an approach that works best for your business and you.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

More blog posts:

Florida Bankruptcy Judge Denies Creditor’s Accrued Interest, Attorneys’ Fees Claims in Storage Facility Owner’s Chapter 11 Case, Florida Business Lawyers Blog, May 11, 2016

Federal Appeals Court Approves Florida Debtor’s Chapter 11 Reorganization with Third-Party Releases, Florida Business Lawyers Blog, Nov. 20, 2015

Photo credit: TrotlineDesigns (Ron Joseph) In The Glades on Flickr.com.