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Bankruptcy Litigation

Is the Use of Third-Party Releases In Bankruptcy Cases Stretched Too Thin?

Third-party releases are often incorporated into the bankruptcy plan as a means of protecting nondebtor parties from litigation that is directly or even tangentially related to the debtor’s business. Over the last several years, the scope and use of such third-party releases appears to have been stretched arguably to the breaking point as demonstrated in a recent and important district court decision.

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One of the many powerful tools Chapter 11 provides is the opportunity for a debtor to obtain a discharge of debts through a plan of reorganization. In complex cases, however, debtors often view the discharge as being insufficient to accomplish all of its restructuring goals. Thus, third-party releases are often incorporated into the bankruptcy plan as a means of protecting nondebtor parties from litigation that is directly or even tangentially related to the debtor’s business. Over the last several years, the scope and use of such third-party releases appears to have been stretched arguably to the breaking point as demonstrated in the recent and important district court decision in the Ascena case. See, Patterson v. Mahwah Bergen Retail Group, Civ. No. 3:21cv167 (DJN) (E.D. Va. Jan. 13, 2022).

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