Third-party releases voided

Where the bankruptcy court provided little analysis for its approval of third-party releases that released the claims of hundreds of thousands of potential plaintiffs not involved in the bankruptcy, it exceeded the limits of its constitutional authority. The third-party releases were accordingly voided and rendered unenforceable.

Background

This case arises out of the bankruptcy cases commenced by Mahwah Bergen Retail Group Inc. and 63 of its affiliates. The bankruptcy court confirmed the reorganization plan set forth by the parties in interest. Appellants challenge third-party (non-debtor) releases, as well as an exculpation provision, contained in the plan.

Standing

Debtors argue that by objecting to the third-party releases, the securities litigation lead plaintiffs opted out of the release and, therefore, it has no impact on them. The court agrees and finds that the securities litigation lead plaintiffs lack standing to prosecute this appeal. However, the trustee has standing to raise the same challenges to the third-party releases as the securities litigation lead plaintiffs have raised.

Third-party releases

By granting the third-party releases, the bankruptcy court took jurisdiction over and extinguished the liability of an extraordinarily vast range of claims held by an immeasurable number of individuals against a broad range of potential defendants. However, before doing so, the bankruptcy court took no steps to determine if it had the power to extinguish the liability on any particular claim.

Indeed, the only extinguished claims that the bankruptcy court considered were the securities fraud claims against the individual defendants, and it ignored all of the other potential claims that it terminated by approving the releases. In so doing, the bankruptcy court failed to take the proper steps to ensure that it had the authority to grant the releases.

Although the court cannot determine precisely which released claims the bankruptcy court could have adjudicated, it takes only a cursory review of the third-party releases and the releasing parties to find released claims that the bankruptcy court lacked the authority to adjudicate. In response, debtors ask the court not to parse the released claims in any way and, instead, find that the bankruptcy court had constitutional authority based on the inclusion of the releases in the plan. This argument would require the court to conclude that only the plan confirmation order constitutes a judgment and that jurisdiction over confirmation proceedings cures any jurisdictional defects within those proceedings. The court concludes neither.

The court must vacate the confirmation order and treat it as a report and recommendation with proposed findings of fact and conclusions of law. Here, unfortunately, the bankruptcy court’s opinion lacks any meaningful factfinding, so the court will need to set forth its own factual findings based on the record from the confirmation hearing.

Findings of fact

The bankruptcy court clearly erred in finding that the releases satisfied the factors from Behrmann v. Nat’l Heritage Found., 663 F.3d 704 (4th Cir. 2011). Its analysis was contained in a single footnote devoid of reasoning or analysis. Consequently, the third-party releases must be voided and rendered unenforceable. The court will now turn to the impact on the plan of the voiding of the third-party releases and whether the voided releases may be severed from the plan.

Severability

Debtors argue that the non-severability provision renders the third-party releases non-severable from the plan. The court disagrees. After analyzing the law surrounding severability and the record, the court determines that severing the third-party releases at this stage would not upset the viability of the plan. In fact, the evidence demonstrates otherwise.

The record contains no evidence of how the third-party releases induced specific releasing parties to settle, or why the plan required that releasing party’s contribution.  It contains no evidence as to why the court could not excise the third-party releases without seriously threatening debtors’ ability to re-emerge successfully from bankruptcy. Nor does the record suggest that the parties would need to reenter any negotiations. For these reasons, the court has no difficulty in severing the voided third-party releases from the plan.

Equitable mootness

Debtors also argue that the court should dismiss this appeal on the grounds of equitable mootness. The court concludes that the equities strongly favor considering the merits of this appeal. Debtors’ doomsday scenarios all stem from the inclusion of the non-severability provision. However, the court will not allow that provision or an equitable doctrine to preclude appellate review of plainly erroneous release provisions.

The exculpation provision

The trustee further argues that the bankruptcy court erred in approving the exculpation provision. The court concludes, however, that the bankruptcy court did not err by failing to apply the Behrmann factors to the exculpation provision. However, because the exculpation provision extends beyond the permissible parties and fails to contain a gatekeeper function that would allow an avenue into court for some claims, the court concludes that the bankruptcy court clearly erred in approving it. Unlike the third-party releases, the court believes that this can be redrafted on remand to comply with the requirements outlined here.

Bankruptcy court’s order confirming debtors’ reorganization plan vacated.

Patterson v. Mahwah Bergen Retail Group Inc., Case No. 3:21-cv-167, Jan. 13, 2022. EDVA at Richmond (Novak). VLW 022-3-019. 87 pp.