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This two-part article will examine the role of third-party releases in successful Chapter 11 reorganizations. This part will address the factors considered in each Circuit where such releases have been deemed permissible within the confines of the Bankruptcy Code, evaluate several recent cases highlighting the uncertainty created by the current Circuit split, and consider options for creating a clear, nationwide standard.
For nearly three decades, courts have wrestled with whether and to what extent the U.S. Bankruptcy Code authorizes non-debtor, third-party releases in a Chapter 11 plan of reorganization. The results over that time have yielded continuing confusion and uncertainty. While three of the 11 Circuit Courts are united in disallowing third-party releases entirely, the other eight provide separate justifications for allowing them, and their differing standards are often disjointedly applied. Although such releases are supposed to apply only in “rare and unique” cases, as one judge observed, “almost every proposed Chapter 11 Plan that I receive includes proposed releases.” In re Aegean Marine Petroleum Network, 599 B.R. 717, 726 (S.D.N.Y. 2019).
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By Michael L. Cook
When courts have made important exceptions in the past year, they have either added a gloss on the Judicial Code, corrected lawyers’ errors, filled in statutory gaps, or clarified the relevant statutory language.
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The steps outlined in this article offer a strategic guide for lenders, empowering them to navigate the complexities of loan workouts and enforcement actions with resilience and foresight.
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