Originally published in Law360, New York (June 13, 2012, 12:29 PM ET)

A recent decision by a Philadelphia bankruptcy judge highlights the obstacles faced by an indenture trustee seeking to obtain, through a Chapter 11 plan, a third-party release from its bondholders. In In re Lower Bucks Hospital, et al., the judge, citing what he felt was inadequate disclosure, denied the release, even though the judge had previously approved a settlement incorporating the release, and despite the fact that the affected bondholders had overwhelming voted in favor of the plan which included the release.

The lesson learned (the hard way) by the indenture trustee in this case, is that where a plan provides for a release of an indenture trustee by its bondholders, the holders must be “conspicuously” informed that if the plan is confirmed they will be deemed to have released the indenture trustee from any potential claims. The decision is noteworthy not just for its holding, which is not necessarily novel, but also because of its criticism of the indenture trustee’s conduct, and because it touches (albeit in dicta) on many issues with which indenture trustees frequently grapple.

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