One of the principal goals of Chapter 11 is to provide the debtor with a “fresh start” upon emergence. To accomplish this goal, the Bankruptcy Code provides a broad release and discharge of claims against the debtor. But this is not always enough to bring the case to a successful resolution. In exchange for contributing to the case, non-debtors often insist on receiving their own release of liability, not only from claims belonging to the debtor, but the claims of third-parties too. This second type of release is commonly referred to as a “non-debtor, third-party release.”
One frequently litigated issue is whether a Chapter 11 plan can release a non-debtor’s claims against a non-debtor, third-party absent the releasing party’s consent. While courts differ on this issue, most of the decisions have focused on the court’s subject matter jurisdiction and application of circuit precedent on the permissibility of non-debtor, third-party releases, often assuming, without deciding, that the court has constitutional authority to grant the release if warranted under the substantive case law. In Opt-Out Lenders v. Millennium Lab Holdings II, Civ. No. 16-110-LPS (D. Del. March 17, 2017), the District Court for the District of Delaware potentially upended this way of thinking, suggesting that in many cases, bankruptcy courts lack authority under Article III of the U.S. Constitution to enter a final order granting non-debtor, third-party releases, at least without the affected party’s consent. The decision is also significant for its holding that de novo review of the bankruptcy court’s order could not cure the problem, reasoning that there was no adjudication of the third-party’s claims in the first place, leaving nothing of substance for the district court to review.
