Publication Date

2023

Abstract

“Non-debtor releases” are bankruptcy orders that extinguish claims against a party other than a bankrupt debtor over the objection of the creditor. Also known as “third-party releases,” the legality of these orders is one of the most important and controversial issues in bankruptcy law specifically and business law generally. The split in the courts over the propriety of non-debtor releases stretches back thirty-five years. However, the United States Supreme Court is poised to resolve the split this term in the Purdue Pharma bankruptcy. In two prior articles published in 2006 and 2009, I argued that third-party releases are permissible under the Bankruptcy Code. But I no longer believe that to be the case. This article presents my revised perspective.

The paper sets forth three basic arguments. First, bankruptcy courts grant non-debtor releases using the general equitable powers provided by sections 105(a) and 1123(b)(6) of the Code. But orders issued via those statutes that implement general bankruptcy policies rather than another specific section of the Code may not contravene substantive non-bankruptcy law. Third-party releases are policy orders that violate substantive non-bankruptcy law. Releases are thus beyond the scope of the two equitable powers statutes.

Second, pro-release authorities contend that section 524(e) of the Code does not bar non-debtor releases. But the interpretive approach they employ to justify this claim results in section 523(a) of the Code not prohibiting the release of non-dischargeable claims. The latter conclusion is deeply implausible because it is universally rejected by lower federal courts and inconsistent with principles of statutory construction consistently endorsed by the Supreme Court. Therefore, via reductio ad absurdum, section 524(e) bans third-party releases.

Third, even if non-debtor releases are statutorily permissible, the best interest of creditors test contained in section 1129(a)(7) of the Code mandates that the debtor’s plan of reorganization promise payment in full on all claims subject to the release. I defended this proposition in my first two articles. The current piece recaps and updates the analysis contained in my earlier work.

Document Type

Article

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Available at: https://lawrepository.ualr.edu/faculty_scholarship/298