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Federal Appeals Court Approves Florida Debtor’s Chapter 11 Reorganization with Third-Party Releases

A North Florida business’s Chapter 11 bankruptcy reorganization survived a bank’s challenge to a portion of the plan that created non-consensual third-party releases covering several individuals and entities. The 11th Circuit Court of Appeal, in a position mirrored by the majority of federal appeals courts, ruled that these types of releases are allowable if they are necessary to the success of the reorganization plan and are “fair and equitable under all the facts and circumstances.”

The business, Seaside Engineering & Surveying, Inc., was a civil engineering firm in the Florida panhandle. Some of the firm’s shareholders, who doubled as officers and directors, were also involved in some real estate business activities. Vision Bank issued some loans to the real estate business, which the Seaside shareholders personally guaranteed. The real estate ventures failed, leading to a default on the loans. On the hook for their personal guarantees, three of the Seaside shareholders filed for Chapter 7 bankruptcy. As part of one of the shareholder’s bankruptcy cases, his shares of Seaside were auctioned off, and the bank bought them for $100,000.

Shortly after that, Seaside filed for Chapter 11 bankruptcy. Seaside’s reorganization plan called for it to continue operating as Gulf Atlantic, LLC. The plan called for Gulf to be managed by the same people who had managed Seaside. Under the plan, the bank got a promissory note but no ownership interest in Gulf.

The plan additionally released several individuals and entities from liability, including Seaside’s officers, directors, and members, Gulf’s officers, directors, and members, and Gulf itself. The releases covered those individuals and entities except in instances of fraud, gross negligence, or willful misconduct.

The bank went to court challenging these releases. The bankruptcy court, however, approved the plan, including the releases. The bank appealed but again lost. The court explained that non-consensual, non-debtor releases were permissible, as it had previously ruled in 1996 in In re Munford. The bankruptcy court may approve such releases in situations when the releases and court approval of them were “integral to settlement in an adversary proceeding.”

The court also clarified that such releases should not be approved in all situations. Approval of such releases “ought not to be issued lightly” and should be limited to those rare cases when the technique is an essential piece of crafting a successful bankruptcy reorganization plan, and it is “fair and equitable under all the facts and circumstances.”

The 11th Circuit’s Seaside opinion, renewing its position approving the use of non-consensual third-party releases (in some circumstances) is potentially a benefit for some Chapter 11 debtors because it offers another tool in the process of creating a viable reorganization plan, especially in complicated and contested cases. For knowledgeable and reliable advice and representation when your business is considering a Chapter 11 bankruptcy, contact the Florida bankruptcy attorneys at Stok Kon + Braverman. Our attorneys have many years of experience helping business clients as they contemplate their options both inside and outside bankruptcy.

Contact us online or by calling (954) 237-1777 to schedule a consultation.

More blog posts:

Bank’s Failure to Contest Reorganization Plan’s Broad Release Terms on Time Dooms Claim, Florida Business Lawyers Blog, March 11, 2015

Salon Owner’s Chapter 11 Filing Won’t Let Him Escape Million-Dollar Trademark Infringement, Cybersquatting Judgment, Florida Business Lawyers Blog, Feb. 20, 2015

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