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The Bankruptcy StrategistFeaturesBankruptcyLitigation

The Role of Third-Party Releases In Successful Chapter 11 Reorganizations

By John J. Rapisardi and Jacob T. Beiswenger
June 01, 2023

In the April 2023 issue, we published Part One of this article examining the role of third-party releases in successful Chapter 11 reorganizations. That article evaluated whether and to what extent third-party releases are permissible to release nondebtors from liabilities that are intertwined with the debtor's liabilities. That analysis revealed an important circuit split in which the majority of circuits allow third-party releases in limited circumstances based on factual findings supporting a different multi-factor analysis in each jurisdiction. However, a minority of courts — specifically, the Fifth, Ninth and Tenth Circuits — disallow nonconsensual third-party releases entirely. We noted that the U.S. Supreme Court has not yet weighed in on this issue, and suggested that either the Supreme Court or the U.S. Congress should intervene to resolve the confusion and uncertainty surrounding the use of third-party releases as a tool for resolving complex Chapter 11 restructurings.

In Part Two, we continue the analysis by evaluating two constitutional issues arising from third-party releases: whether creditor consent to be bound by a third-party release is required to satisfy the due process clause of the Fifth and Fourteenth Amendments to the U.S. Constitution; and whether bankruptcy courts have constitutional authority to issue final orders granting third-party releases in a plan of reorganization under Stern v. Marshall.

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