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Shelter from the Storm: Examining Chapter 11 Plan Releases for Directors, Officers, Committee Members, and Estate Professionals

Westlaw: Norton Journal of Bankruptcy Law and Practice
September 1, 2011, Ryan M. Murphy

A Chapter 11 discharge is an involuntary release arising by operation of law that relieves a debtor from liability existing at plan confirmation. This discharge represents a powerful and sweeping equitable tool. Therefore, it generally is limited only to those entities which file for Chapter 11 protection and make their assets available to creditors. It is becoming increasingly prevalent, however, for Chapter 11 plans to attempt to expand the scope of the discharge provided by the Bankruptcy Code to encompass releases for nondebtor
third parties.

Substantial debate persists over the propriety of a Chapter 11 plan releasing nondebtors from claims of third parties, such as a debtor's directors and officers, committee members or estate professionals. Existing jurisprudence on this topic lacks uniformity among jurisdictions as courts have attempted to craft flexible standards to suit the array of circumstances that arise in Chapter 11 cases. This inconsistency in approach creates the unintended byproduct of uncertainty for Chapter 11 actors, specifically directors and officers, as to the protection from liability which will be available upon confirmation.

This article canvasses the existing state of the law concerning nondebtor releases in Chapter 11 plans, with a particular focus on the permissible scope of such releases for directors, officers, committee members, and estate professionals. The recent decision from the Delaware Bankruptcy Court in In re Washington Mutual, Inc., which denied or restricted proposed releases for a debtor's directors, officers, committee members, and estate professionals is discussed in-depth. The Washington Mutual decision provides a modicum of guidance as to the extent to which such releases will be approved in the Chapter 11 plan context. Due to the conflicting authority and case specific nature of such determinations, however, this issue largely remains a hotbed of uncertainty for bankruptcy practitioners.

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