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Third-Party Releases Under Chapter 15

CBI’s Principal Dan Glosband Analyses Cases Allowing

Third-Party Releases Under Chapter 15

july 2017 article

Schemes of Arrangement (“Schemes”), employed in the U.K and former British Commonwealth countries to restructure funded debt, regularly provide so-called third-party releases – non-consensual releases by creditors of persons in addition to the debtor.  In plenary U.S. cases, third-party releases are rare and subject to rigorous standards; some judicial circuits (the 5th, 9th an 10th) prohibit them entirely. See, e.g. Resorts International v. Lowenschuss, 67 F. 3d 1394 (9th Cir. 1995), cert. denied 517 U.S. 1243, 116 S.Ct. 2497 (1996).  However, in chapter 15 cases that recognize Schemes, courts often also grant comity to the foreign court to enforce the third-party releases, giving priority to this overriding policy of chapter 15.  See In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010); see also Order Granting Verified Petiton for Recognition of Foreign Proceeding, Winsway Enterprises Holdings Limited, Case No. 16-10833 (Bankr. S.D.N.Y. 2016).

Dan Glosband recently surveyed the third-party release landscape in an article in Insolvency Intelligence (attached).  After the article was published, the U.S. District Court for the District of Delaware ruled in an appeal from a bankruptcy court order confirming a chapter 11 plan in In re Millennium Lab Holdings II, LLC that the releases of a non-debtor third party’s non-bankruptcy fraud and RICO (a civil cause of action for acts performed as part of an ongoing criminal organization) claims against equity holders was beyond the power of the bankruptcy court.  Under the peculiar limitations on the jurisdiction that may be exercised by bankruptcy judges, who are not appointed under Article III of the U.S. Constitution and who do not have lifetime tenure and protection against salary reduction, the Millenium Court, citing Stern v. Marshall, 564 U.S. 462 (2011), stated that a bankruptcy court does not have final adjudicatory authority over “a private right, that is, of the liability of one individual to another.”

The logic of the cases enforcing third-party releases granted in foreign proceedings would seem to escape this ruling since those cases rely on adjudicatory power of the foreign court not the bankruptcy court.  Nonetheless, the Millennium decision provides ammunition to a party objecting to recognition and enforcement of a scheme of arrangement that includes, as is typical, broad third-party releases.  New York might now be a safer venue choice than Delaware for chapter 15 proceedings that seek recognition and enforcement of schemes of arrangement.

july 2017 – in re millennium


By Dan Glosband