The Supreme Court’s recent Purdue Pharma decision has significantly impacted how bankruptcy courts address third-party releases in chapter 11 cases. The ruling struck down “nonconsensual” third-party releases but left room for “consensual” third-party releases, leading to varying interpretations by bankruptcy judges on what constitutes “consent,” as previously outlined by LFI.
Recent bankruptcy cases have approached third-party releases in differing ways:
- Opt-in Mechanism: This method, which the U.S. Trustee has endorsed at recent hearings, requires creditors to take an additional voting step, outside of an up or down vote on the plan itself, to agree to third-party releases.
- Vote-in-favor: This more straightforward approach simplifies the process wherein a vote for the plan is also tied to granting the third-party release.
- Opt-out Mechanism: This is the more onerous approach for creditors, where creditors are automatically bound by the third-party releases unless they explicitly opt out of the release outside of an up or down vote on the plan itself.
The Fifth Circuit has established the opt-out mechanism as a consensual third-party, as reaffirmed recently by Judge Christopher Lopez in the ongoing Robertshaw bankruptcy case. Lopez determined that the Purdue Pharma decision was inapplicable to the Robertshaw case since the Supreme Court ruling addressed only nonconsensual releases, and the opt-out mechanism is a consensual release in the Fifth Circuit.
By contrast, the Second, Third and Fourth Circuits have yet to reach a consensus on the necessary level of consent for a consensual third-party release. Courts in these circuits have issued divergent rulings, with some accepting notice and an opportunity to opt out as sufficient consent, while others require an opt-in mechanism.
Differing rulings within districts and between districts tee up a possibility that the Supreme Court will take up the issue of what constitutes a “consensual” third-party release, which it notably left absent in its recent Purdue Pharma decision.
Below, LFI’s third-party releases watchlist codifies how yet-to-be-approved plans in ongoing cases aim to address the third-party release issue.
Several of the above cases pending in the Third Circuit (Delaware) will test the boundaries of these third-party release mechanisms. The Express case proposes a vote-in-favor approach with an opt-out mechanism, while the SunPower, Wheel Pros and Vyaire Medical cases provide for the broader opt-out mechanism for all creditors. However, the Fourth Circuit’s Enviva case proposes a vote-in-favor approach with an opt-in mechanism for nonvoting classes. Meanwhile, in the Fifth Circuit, the Diamond Sports and Incora cases both utilize an opt-out mechanism.
Examining case excerpts reveals the nuances of these approaches. In the Express case, creditors in the voting class must affirmatively opt out by checking a box on the ballot, while nonvoting class members can opt in by completing a form. The SunPower case requires creditors to either opt out or file a written objection to avoid being bound by the third-party releases. The Wheel Pros case stipulates that creditors voting in favor of the plan are consenting with an opportunity for all creditors to opt out or object in writing. The Vyaire Medical case mandates that creditors either elect to opt out or timely object. The Enviva case deems creditors to have released certain parties if they vote in favor of the plan, with an opt-in option for others. The Diamond Sports and Incora cases in the Fifth Circuit require creditors to affirmatively opt out or object to avoid being bound by the releases.
Three recent rulings (charted above) provide further insight into how courts are navigating the issue. In the Second Circuit, the 2U Inc. case approved a vote-in-favor mechanism, incorporating an opt-in for rejecting creditors. The Eleventh Circuit’s Red Lobster ruling followed a similar approach. Despite objections citing the Purdue Pharma decision, the Fifth Circuit’s Robertshaw case reaffirmed the opt-out mechanism.
Third-Party Release Excerpts
Express
Express filed for chapter 11 bankruptcy on April 22 proposing a sale of the company. The chapter 11 plan, which has not yet been confirmed, proposes to pay secured claims in full and approximately 10%-15% of general unsecured claims based on the successful sale transaction for approximately $172mn cash consideration and assumed liabilities of $32mn to purchaser Phoenix Retail.
The plan provides for an opt-out mechanism in the proposed chapter 11 plan. The mechanism provides that a voting class member, which is only unsecured creditors in this case, “affirmatively opt out of granting the Third-Party Release” by checking a box indicated on a ballot.
An excerpt from Express’s disclosure statement:
Only Holders of Claims in Class 3 (the “Voting Class”) are entitled to vote to accept or reject the Plan. The voting ballot includes the option to opt out of the Third-Party Release. If a Holder of a Claim in the Voting Class returns a ballot and votes to accept the Plan, then such Holder shall be deemed to have consented to the Third-Party Release. If a Holder of a Claim in the Voting Class (i) returns a ballot, (ii) either votes to reject the Plan or abstains from voting, and (iii) does not opt out of the Third-Party Release, such Holder shall also be deemed to have consented to the Third-Party Release. To affirmatively opt out of granting the Third-Party Release, a Holder of a Claim in the Voting Class must check the box indicated on the Ballot. By opting out of the Third-Party Release, or by failing to opt into the Third-Party Release, as applicable, Holders of all Claims will forgo the benefit of obtaining the releases set forth in Article X of the Plan if such party would otherwise be a Released Party.
Additionally, a nonvoting class member may opt in to the third-party releases by completing, signing and dating an opt-in form. The benefit for such creditors to opt-in to such releases would be to gain the benefit of being a released party under the chapter 11 plan – an added protection to some creditors, especially unimpaired creditors deemed to accept the plan.
An excerpt from Express’s disclosure statement:
The Plan does not contain any non-consensual release of any non-debtor by any Third Party. However, Holders of all Claims in Class 1, Class 2, Class 4, Class 5, Class 6, and Class 7 will also have the opportunity to opt into the Third-Party Release. To affirmatively opt into the Third-Party Release, Holders of Claims must complete, sign, and date the Opt-In Form and return it promptly to the Notice and Claims Agent, in accordance with instructions provided in the Opt-In Form.
SunPower
SunPower filed for bankruptcy on Aug. 5 in the Delaware Bankruptcy Court seeking to effectuate a 363 sale followed by a wind-down of its business. The third-party release in the plan provides for an opt-out mechanism that includes either an opt-out procedure or a written objection to the plan. The plan provides that if the creditor opts-out to the third-party releases then it is not allowed to be a released party.
The Releasing Parties are each of, and in each case in its capacity as such, subject to the investigations of the Special Committee, [(a) the Debtors; (b) each of the Wind-Down Debtors; (c) the Plan Administrator; (d) the Creditor Trustee (if any); (e) the Prepetition First Lien Agent; (f) the Prepetition First Lien Lenders; (g) the Prepetition Second Lien Agent; (h) the Prepetition Second Lien Lenders; (i) the Prepetition Standby Letter of Credit Issuer; (j) all Holders of Claims against the Debtors; (k) all Holders of Interests in the Debtors; (l) the Committee and its members (in their capacity as Committee members); (m) each current and former Affiliate of each Entity in clause (a) through the following clause (n) for which such Entity is legally entitled to bind such Affiliate to the releases contained in the Plan under applicable non-bankruptcy law; and (n) each Related Party of each Entity in clause (a) through this clause (n) for which such Affiliate or Entity is legally entitled to bind such Related Party to the releases contained in the Plan under applicable non-bankruptcy law; provided, however, that in each case, an Entity shall not be a Releasing Party if it: (x) elects to opt out of the release contained in the Plan; (y) timely objects to the Third-Party Release and such objection is not withdrawn before Confirmation; or (z) is an Entity in a voting class whose solicitation package was returned as undeliverable.].
Wheel Pros
Wheel Pros filed a prepackaged chapter 11 bankruptcy on Sept. 8 and is seeking an equitization transaction, converting a significant portion of the company’s debt to equity. Holders of the first-lien claims will receive 85% of equity in reorganized debtor, subject to dilution and a right to fund its pro rata share of the exit term loan facility, in accordance with the terms of a proposed chapter 11 plan. Junior funded debt claims will receive pro rata share of $500,000 cash. General unsecured creditors will be paid in cash in full. Funding for plan distributions in the form of an exit term loan facility of $570mn, backstopped by NewCo first-lien claimholders, in exchange for 15% of the remaining reorganized equity.
Prior to filing for bankruptcy, the company executed a financing transaction in September 2023, under which it raised a $235mn new-money FILO credit facility and executed a $1.4bn discounted debt exchange. According to Covenant Review, the debt exchange was a liability management transaction that included a double-dip structure providing enhanced claims for the participants against existing collateral assets.
The third-party release contained in the proposed chapter 11 plan provides for an opt-out mechanism through the procedure outlined in the solicitation papers or a timely written objection to the plan.
You may choose to opt out of the Third-Party Release. If you opt out of the Third-Party Release, you will not receive a release.
IMPORTANTLY, THE FOLLOWING PARTIES ARE INCLUDED IN THE DEFINITION OF “RELEASING PARTIES” IN THE PLAN AND WILL BE DEEMED TO HAVE EXPRESSLY, UNCONDITIONALLY, GENERALLY, INDIVIDUALLY, AND COLLECTIVELY RELEASED AND DISCHARGED ALL CLAIMS AND CAUSES OF ACTION AGAINST THE DEBTORS AND THE RELEASED PARTIES: (A) EACH DEBTOR; (B) EACH REORGANIZED DEBTOR; (C) EACH CONSENTING STAKEHOLDER; (D) EACH MEMBER OF THE AD HOC GROUP; (E) EACH ABL LENDER AND HOLDER OF AN ABL CLAIM; (F) EACH DIP LENDER AND HOLDER OF A DIP CLAIM; (G) EACH EXIT TERM LOAN FACILITY BACKSTOP PARTY; (H) EACH OF THE EXIT FACILITY LENDERS; (I) EACH OF THE AGENTS/TRUSTEES; (J) ALL HOLDERS OF CLAIMS OR INTERESTS THAT VOTE TO ACCEPT THE PLAN; (K) ALL HOLDERS OF CLAIMS OR INTERESTS WHO ARE DEEMED TO ACCEPT THE PLAN AND DO NOT AFFIRMATIVELY OPT OUT OF THE RELEASES PROVIDED FOR IN THE PLAN; (L) ALL HOLDERS OF CLAIMS WHO ABSTAIN FROM VOTING ON THE PLAN AND WHO DO NOT AFFIRMATIVELY OPT OUT OF THE RELEASES PROVIDED FOR IN THE PLAN; (M) ALL HOLDERS OF CLAIMS OR INTERESTS WHO ARE DEEMED TO REJECT THE PLAN AND WHO DO NOT AFFIRMATIVELY OPT OUT OF THE RELEASES PROVIDED FOR IN THE PLAN; (N) ALL HOLDERS OF CLAIMS OR INTERESTS WHO VOTE TO REJECT THE PLAN AND WHO DO NOT AFFIRMATIVELY OPT OUT OF THE RELEASES PROVIDED FOR IN THE PLAN; (O) CURRENT AND FORMER AFFILIATES OF EACH ENTITY IN CLAUSE (A) THROUGH THE FOLLOWING CLAUSE (P); OR (P) EACH RELATED PARTY IN CLAUSE (A) THROUGH THIS CLAUSE (P); PROVIDED THAT EACH HOLDER OF CLAIMS OR INTERESTS THAT IS PARTY TO OR HAS OTHERWISE SIGNED THE RSA SHALL NOT OPT OUT OF THE RELEASES; PROVIDED, FURTHER, THAT, IN EACH CASE, AN ENTITY SHALL NOT BE A RELEASING PARTY IF IT: (X) ELECTS TO OPT OUT OF THE RELEASES CONTAINED IN ARTICLE VIII.D OF THE PLAN; (Y) TIMELY OBJECTS TO THE RELEASES CONTAINED IN ARTICLE VIII.D OF THE PLAN AND SUCH OBJECTION IS NOT RESOLVED BEFORE CONFIRMATION; OR (Z) IS A NON-RELEASED PARTY (SOLELY IN RESPECT OF THE NON-RELEASED CLAIMS).
Vyaire Medical
The respiratory and ventilator company filed for chapter 11 on June 9 seeking to sell the business. The debtor, sponsor Apax Partners and the ad hoc group of first-lien creditors executed an RSA prior to the filing, with milestones for a 363 sale. The company has secured a sale for $90.5mn and a $5mn to its $45mn DIP facility.
The proposed third-party release includes an opt-out form provided in the solicitation materials or a timely objection to the plan that is not resolved prior to the confirmation order being entered.
An excerpt from Vyaire Medical’s disclosure statement:
The Releasing Parties are each of, and in each case in its capacity as such: (a) the Debtors and the Wind-Down Debtors, as applicable; (b) the Plan Administrator; (c) each Consenting Stakeholder; (d) the Purchasers; (e) the DIP Lenders; (f) the Agents; (g) all Holders of Claims; (h) all Holders of Interests; (i) each current and former Affiliate of each Entity in clause (a) through the following clause (j); and (j) each Related Party of each Entity in clause (a) through this clause (j), for which such Entity is legally entitled to bind such Related Party to the releases contained in the Plan under applicable law; provided, however, that in each case, an Entity shall not be Releasing Party if it: (x) elects to opt out of the release contained in the Plan; or (y) timely objects to the releases set forth in Article VIII.C of the Plan and such objection is not withdrawn or otherwise resolved before the Confirmation Order is entered.
Enviva
Enviva filed for bankruptcy on March 13 in the Eastern District of Virginia seeking to undertake a balance sheet reduction through a combination of cash repayment and debt-for-equity exchange. Still, the wood pellets company intends to exit by the end of 2024 with over $1bn in debt in the post-emergence capital structure. The proposed chapter 11 plan contemplates a full cash payment of the senior secured facility, pro rata share of an equity pool for unsecured noteholders, representing a 7.7%-7.9% recovery, and a cash pool for general unsecured creditors.
The third-party releases contained in the disclosure statement and chapter 11 plan includes a vote-in-favor provision that provides that “you will be deemed to have released certain parties from any claims you may have against them if you vote in favor of the plan.” Likewise, as in Express, all other parties may opt in to such releases through an affirmative opt-in ballot.
An excerpt from Enviva’s disclosures statement:
IF YOU ARE A HOLDER OF A CLAIM OR INTEREST ENTITLED TO VOTE, YOU WILL BE DEEMED TO HAVE RELEASED CERTAIN PARTIES FROM ANY CLAIMS YOU MAY HAVE AGAINST THEM IF YOU VOTE IN FAVOR OF THE PLAN. ALL OTHER HOLDERS OF CLAIMS AND INTERESTS WILL BE DEEMED TO HAVE GRANTED THE RELEASES TO THE EXTENT THEY AFFIRMATIVELY OPT-IN TO PROVIDE SUCH RELEASES. FOR INFORMATION REGARDING THE RELEASES AND INSTRUCTIONS ON HOW TO OPT-IN TO THE RELEASES, PLEASE SEE ARTICLE IX HEREOF.
Diamond Sports
Diamond Sports has filed a request for exclusivity after its first-lien creditors have requested payment in full through the plan. However, according to the last filed plan, the third-party releases in that case requires all creditors to opt out through the solicitation materials or a timely objection to the plan.
An excerpt from Diamond Sport’s disclosure statement:
The Plan provides that all Holders of Claims and Interests that (a) do not affirmatively opt out of the Third-Party Release contained in Article VIII.D of the Plan or (b) do not file an objection with the Bankruptcy Court that expressly objects to the inclusion of such Holder as a Releasing Party under the Third-Party Release contained in Article VIII.D of the Plan will be deemed to have expressly, unconditionally, generally, individually, and collectively consented to the release and discharge of all Claims and Causes of Action against the Debtors and the Released Parties. Any Holder of Claims or Interests that objects to or elects to opt out of the Third-Party Release set forth in Article VIII.D of the Plan will forgo the benefit of obtaining the releases set forth in Article VIII of the Plan.
Incora
Incora is currently considering a mediator in its underlying bankruptcy case after Judge Marvin Isgur ruled in the adversary proceeding that the 2022 uptiering transaction was not effective in stripping liens. According to debtor’s counsel, the second amended plan, which is currently on file, will likely be amended due to negotiations with the 2024/2026 noteholders. However, below is the currently proposed third-party releases in the second amended plan.
The Modified Second Amended Plan provides that certain Entities and Persons will be deemed to have granted the Third Party Release contained in Article VIII.E of the Modified Second Amended Plan. You will be bound by the Third-Party Release if you do not validly and timely opt out of the Third Party Release. For more information about the Third-Party Release, please refer to Section IV.K.4.f of this Disclosure Statement.
For the avoidance of doubt, parties that validly and timely opted out of the Third-Party Release contained in the Modified First Amended Joint Chapter 11 Plan of Wesco Aircraft Holdings, Inc. et al. [Dkt. No. 1223] (the “Modified First Amended Plan”) are deemed to opt out of the Third-Party Release contained in Article VIII.E of the Modified Second Amended Plan.
Jennifer Lappe, J.D.
jennifer.lappe@levfininsights.com
+1 346 256 1345
