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Continuing Doubt About the Opt-Out: Uncertainty Reigns Over Third-Party Releases

Whether because of, or in spite of, the proliferating case law it is hard to say, but the issues in, underlying and surrounding third-party releases in Chapter 11 plans just continue to arise with incessant regularity, albeit without a marked increase in clarity.  We have posted about those issues here six times in little more than two years,[1] and it is fair to assume that this post will not be the last.

This post illustrates two recent examples of matters in which the third-party releases contained in plans presented hurdles or detours (choose your own metaphor) in obtaining their confirmation.

The debtors in the Emerge Energy Services case in Delaware were seeking third-party releases by way of a route that avoided the substantive limitations and procedural burdens imposed by Gillman v. Continental Airlines, 203 F.3d 203, 214 (3d Cir. 2000), on non-consensual third-party releases.  Their plan provided that, unless certain creditors and interest-holders affirmatively opted-out of the release provisions, they would be deemed to have consented to them,[2] and consensual releases are far easier to sell in a confirmation hearing than non-consensual releases.  The Creditors’ Committee, the SEC and the U.S. Trustee objected to the procedure for implicit consent.

Bankruptcy Judge Karen B. Owens sustained the objections (having overruled other confirmation objections based on feasibility, fair-and-equitable, best interest and other grounds) and withheld confirmation of the plan.  The opt-out procedure did not suffice to establish consent and therefore justify escape from Continental:

[I]t cannot be said with certainty that those failing to [opt out] did so intentionally to give the third-party release, and that is what the Court must find under the law to approve a third-party release absent the satisfaction of the Continental standard.

*  *  *  *

[This Court] has concluded that a waiver cannot be discerned through a party’s silence or inaction unless specific circumstances are present. A party’s receipt of a notice imposing an artificial opt-out requirement, the recipient’s possible understanding of the meaning and ramifications of such notice, and the recipient’s failure to opt-out simply do not qualify.[3]

Remarkably, on the same day in the same district, Bankruptcy Judge Kevin Gross confirmed the plan of Cloud Peak Energy Inc. and its affiliate-debtors[4] with a different position on release opt-outs.  Their plan included an opt-out from releases that was substantively identical to the opt-out in Emerge Energy Services.  Judge Gross sustained objections to the opt-out but only as to shareholders who are receiving nothing under the plan and therefore, being deemed by the Bankruptcy Code to have rejected the plan, had no obligation or opportunity to return a ballot, and not as to creditors that had been provided with ballots.  The plan was amended on the record of the confirmation hearing to eliminate the implicitly consensual releases of the shareholders, and, as so amended, it was confirmed.[5]

In short, the Bankruptcy Court in the District of Delaware has adopted at least three different positions on implicit consent to third-party releases which the District Court or the Third Circuit will need to resolve.

 

[1]  See our posts of November 9, 2017, August 24, 2018, October 15, 2018, April 5, 2019, July 10, 2019 and July 18, 2019.

[2]  In re Emerge Energy Services LP, 2019 Bankr. LEXIS 3717 at *52-53 (Bankr. D. Del. Dec. 5, 2019).

[3]  Id. at *53-54.  Judge Owens acknowledged that she was taking a position on consent-by-opt-out that was not shared by a majority of her colleagues in the District of Delaware.  An example on the majority side of that divide: In re Indianapolis Downs, LLC, 486 B.R. 286, 306 (Bankr. D. Del. 2013).

[4]  In re Cloud Peak Energy Inc., et al., Debtors, No. 19-11047 (Bankr. D. Del.).

[5]  Id. docket no. 868.