Third-Party Releases in Chapter 11 Plans

by Hogan Lovells
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U.S. Bankruptcy Judge Kevin Gross sitting in Delaware recently approved J.G. Wentworth’s (the “Debtor’s”) Chapter 11 plan after overruling an objection from the U.S. Trustee regarding third-party releases. The Debtor’s Chapter 11 reorganization plan was the second it has brought before the Delaware bankruptcy court in the last ten years.

The Debtor is a consumer finance company that specializes in purchasing and selling structured settlements and other assets in exchange for insurance payouts. After restructuring $370 million in term loan debt in 2009, the Debtor filed for bankruptcy on December 12, 2017 and brought another prepackaged chapter 11 plan to Delaware bankruptcy court. The plan called for a restructure of nearly $450 million in secured debt whereby senior secured lenders’ claims would be satisfied by receiving 95.5% of the new common equity in the reorganized J.G. Wentworth in addition to roughly 46% of their claims in a cash payout.

While the Debtor and the U.S. Trustee worked through the vast majority of issues regarding the Debtor’s plan, the U.S. Trustee objected to the way third-party releases could be granted absent any affirmative action by a creditor. The U.S. Trustee argued that consent is typically given by creditors to third-party releases in the form of an opt-in or opt-out clause, but here, no such clause or provision existed. Instead, creditors had to file an objection. The U.S. Trustee argued that requiring creditors to file objections to oppose the release of such consent rights imposed an undue burden on creditors. Such an imposition would require the financial burden of hiring and retaining counsel.

In response, J.G. Wentworth noted that the plan received no opposition from any creditors regarding the releases or the plan generally. J.G. Wentworth further argued that creditors were fully aware of their rights since they received a notice explaining the releases with explanatory definitions of all terms for clarity purposes.  The notice clearly stated releases within the plan could affect the creditors’ rights.

Although Judge Gross had denied certain third-party releases in the past, he approved these releases noting that they seemed consensual in the absence of any objections from creditors.

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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