In the recent decision of In re Genco Shipping & Trading Ltd., the United States Bankruptcy Court for the Southern District of New York approved certain non-consensual third-party releases granted by unimpaired creditors and equity holders, to the extent that they complied with the US Court of Appeals for the Second Circuit’s standard for approval of these releases.
Background and Analysis
The prepackaged plan presented by Genco included:
- Releases granted by the Debtors and exculpation for released parties.
- An injunction provision to implement the releases, exculpation and discharge provided under the plan.
- Releases granted by non-debtor third parties (Third-party Releases).
The US Trustee and the Equity Committee objected to the Third-party Releases on various grounds. The Court held that the Third-party Releases were permissible if they satisfied the standard set out by the Second Circuit in Deutsche Bank AG v. Metromedia Fiber Network, Inc. The Metromedia standard considers whether:
- The releases are important to a debtor’s plan.
- The claims are channeled to a settlement fund rather than extinguished.
- The enjoined claims would indirectly impact the debtor’s reorganization by way of indemnity or contribution.
- The released party has provided substantial contribution.
- The plan otherwise provides for full payment of the enjoined claims.
The Court agreed with the US Trustee’s argument that simply classifying a party as unimpaired does not automatically mean that a third-party release is permissible and does not need to satisfy the Metromedia standard. In this vein, the Court approved (i) consensual releases, (ii) third party releases for claims that would trigger indemnification or contribution claims against the debtors, (iii) releases to parties who provided substantial consideration to the reorganization. The Court declined to grant releases for indemnification obligations that arose out of the debtor’s restructuring support agreement or the plan, reasoning that it would enable parties to create indemnification obligations merely to gain the protection of a third party release.
This decision clarifies that non-consensual third-party releases are not automatically granted by unimpaired parties solely because of their status as unimpaired, but must satisfy the same standard that applies to impaired parties. If this standard is met, unimpaired parties can be required to grant a third-party release without voting on the plan or otherwise consenting to, or having the opportunity to opt out of, granting the release. However, it is unlikely that a non-consensual third-party release will be granted arising out of a restructuring support agreement or plan negotiations.
Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP. Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.