February 9, 2022 - This week the LSTA hosted the last in its long-running series of quarterly reviews of bankruptcy developments featuring Richard Levin of Jenner & Block.  After 6 years and over 20 presentations, Rich has decided to call it a day (for these presentations).  Each of these detailed presentations, including a slide deck and case summary, required an incredible amount of work and dedication and we are extraordinarily grateful to Rich for helping to educate our members on the esoteric ins and outs of bankruptcy law over the past six years

Notably, the series went out with a bang, focusing for the first time on only one very important issue:  third party releases (of which we’ve written about extensively).  Third party releases, whereby non-debtor parties are released from a wide swath of liabilities as part of a debtor’s plan of reorganization, have been controversial for decades and there is a deep split among the federal circuits as to whether they are permitted by the bankruptcy code. Mr. Levin began the webinar by tracing the history of the development of third-party release jurisprudence.  Levin then homed in on a series of issues that were adjudicated in the recent district court rulings in Purdue Pharma and Mahwah (f/k/a Ascena).  First, he noted that Judge McMahon in Purdue ruled that under Stern v. Marshall, bankruptcy courts do not have the constitutional authority to approve non-consensual third-party releases.  Similarly, Judge Novak in Mahwah noted that a bankruptcy court does not have the authority to grant third-party releases without the claimants’ consent to the bankruptcy court’s adjudication of the claims. Judge Novak then ruled that the failure of claimants to “opt-out” of the bankruptcy settlement did not constitute consent to Article I adjudication.  On the issue of subject matter jurisdiction, Judge McMahon ruled that the ability to consider third-party releases bankruptcy court was within the (“outer limits”) of the bankruptcy court’s subject matter jurisdiction but then concluded that nothing in the bankruptcy code conferred statutory authority to permit non-debtor third-party releases (and that there was no precedent in the 2nd Circuit to the contrary).  Judge Novak, on the other hand, was bound by 4th Circuit precedent that did recognize such statutory authority, but, applying a seven-pronged test, concluded that the releases in Mahwah did not meet that test.

Mr. Levin and LSTA General Counsel Elliot Ganz discussed at length the deeper (and somewhat unspoken) implications of these two cases, focusing on judicial authority and bankruptcy venue.  With respect to authority, bankruptcy judges naturally strive to get cases resolved and can sometimes stretch beyond their statutory authority to achieve a desired result.  But, as Judge McMahon noted, the Supreme Court, in cases like In re Jevic, has cautioned that courts cannot ignore the words of the statute even to achieve the most noble (and doable) result.  On venue, Judge Novak specifically called out the bankruptcy venue shopping that landed the Mahwah case in the bankruptcy court in Northern Virginia which is known to be very accommodating to retail debtors seeking third-party releases and admonished the court for not engaging in a robust analysis of the third-party release issue.  (And, although Judge McMahon effusively praised the work of bankruptcy judge Robert Drain in the Purdue case, it is well understood that his court was specifically chosen by Purdue because of his history of approving third-party releases).

For a replay of the webinar and the presentation materials, please click here.

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