Two recent decisions by U.S. District Courts have rejected attempts to include nonconsensual third party releases in chapter 11 reorganization plans. These rulings suggest third party releases may be facing increasing push back from the courts.
Traditionally, bankruptcy only operates to eliminate claims held by creditors against the debtor. Over the last few years, however, corporate debtors have increasingly attempted to include nonconsensual third party releases in chapter 11 plans of reorganization. These third party releases, when approved by the bankruptcy court, operate to preclude creditors of the debtor from pursuing claims they possess against non-debtor third parties. Despite being increasingly found in chapter 11 restructurings, however, third party releases have remained controversial and the subject of heated debates, both inside and outside the courtroom.