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Non-Consensual Third-Party Releases and Your Chapter 11 Bankruptcy Case in Florida

There may be numerous ingredients that go into a workable and successful Chapter 11 reorganization plan. In some plans, one of those ingredients is non-consensual third-party releases. For some debtor businesses, the potential long-term viability of the business itself may hinge upon obtaining those releases and forever closing the door on certain creditor claims. Given how important these releases can be to the long-term success of your business, they serve as one more example of just how vital it is to have the right Florida Chapter 11 bankruptcy lawyer on your side to help you develop a plan with all the right ingredients, and then see that plan through all the way to a successful end.

Non-consensual third-party releases appear in Chapter 11 cases when the reorganization plan, in order to be viable, requires the court to sign off on the release of certain non-debtor third parties from claims by the debtor’s creditors. Recently, it was the Third Circuit Court of Appeals that was asked to address this topic.

In that case, the debtor was a Delaware-incorporated specialty laboratory that, in 2014, entered into a $1.825 billion credit agreement with multiple lenders. In 2015, the lab filed for bankruptcy. The debtor’s restructuring plan involved “broad releases, including ones that would bind non-consenting lenders.” One of those non-consenting lenders was one of the major lenders in that 2014 credit agreement. The bankruptcy court approved the plan, despite the lender’s objection.

The appeals court ultimately upheld the bankruptcy court’s approval of the reorganization plan, stating that bankruptcy courts have the right to take away creditors’ right to sue certain non-debtor third parties if eliminating that possibility was vital to the restructuring.

This, of course, is very good news for debtors seeking Chapter 11 reorganization in Delaware, Pennsylvania, and New Jersey. This may leave you wondering “how would this kind of case end up if it had been originally filed in Florida?”

Releases are OK if their absence would “doom the possibility of success” of the entity

Fortunately for debtors considering a Chapter 11 filing, the outcome would probably be somewhat similar in Florida. The 11th Circuit, whose decisions control bankruptcy cases filed in Florida, Georgia, and Alabama, generally agrees with the Third Circuit (and a majority of federal appellate courts) that these kinds of non-consensual third-party releases are allowable. In 1996, the 11th Circuit stated that these releases are permissible when they were “integral to settlement in an adversary proceeding” and when the party released from creditors’ claims was someone who would agree to the settlement only if it included that release.

More recently, the 11th Circuit handled another non-consensual third-party release case, and this one provided yet another scenario in which these releases may be permissible. The case, which was decided in 2015, involved an engineering firm from North Florida and releases that were not “integral” to settlement. Nevertheless, they were effective under the law because, without them, the claims would “undermine the operations” of the reorganized debtor and “doom the possibility of success” of that reorganized entity. When that’s the case, the court said, it is allowable to approve non-consensual third-party releases.

If your business is thinking about filing for bankruptcy, there may be several options available to you. Depending on the facts of your case, a Chapter 11 plan with non-consensual third-party releases may be just the step in the right direction that your business needs. To make sure that the step that you’re taking is the right one, count on the experienced South Florida bankruptcy attorneys at Stok Kon + Braverman to help you accomplish your business goals. Contact us online or by calling (954) 237-1777 to schedule your consultation and find out how this firm can help you.

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