Beware Of Broad Release Language In Confirmation Plan

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In a recent an opinion, the Delaware Bankruptcy Court enforced the broad release language in a confirmation plan to release certain entities that were never intended to be released.

The debtors and the creditors’ committee engaged in hard-fought negotiations, and the committee supported confirmation of the plan in large part because the settlement trust, to be created under the plan, was to pursue post-confirmation litigation against individuals and entities related to the former owner of the debtors’ business. The plan as confirmed contained broad releases.

When an adversary proceeding was filed by the settlement trust against various entities related to the former owner, certain defendants promptly sought summary judgment on the ground that they are each “Released Parties” under the plan, and thus immune from suit. The trustee argued that the adversary proceeding against the former owner entities was central to the committee’s support of the plan, and thus the plan could not operate to release any of these defendants. The bankruptcy court disagreed.

Reviewing the release language in the plan, the bankruptcy court found it unambiguous and adopted its plan meaning. Applying the plain meaning of the release, the bankruptcy court found that at least one of the defendants was entitled to summary judgment on their contention that they were released from liability in the adversary by operation of the plan.

The bankruptcy court reasoned: “Courts have held that a plan is effectively a contract between a debtor and its stakeholders. Those stakeholders vote upon a plan based upon their assessment of what the plan will accomplish, and what they will receive under it. Once a plan is confirmed and the order becomes final, the parties’ rights, obligations and expectations are fixed. The Trustee’s argument – that plan treatment is driven not by reading the plan but by what may have been told to the bankruptcy judge during the case, or by prior plan provisions that were discarded in the final confirmed plan – is inconsistent with applicable law and contrary to sound policy. The Plan here was confirmed by an Order that has become final. Its provisions control.”

To read the full opinion here.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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