The Release Of Third Parties From Debts In Bankruptcy Not Allowed

In the Chapter 11 bankruptcy case of Bigler LP, the bankruptcy judge denied confirmation for the bankruptcy plan because it included language that was overly broad in releasing third parties from liability.

In effect, Articles VIII and X of the plan … prevent creditors and shareholders from pursuing most potential claims or causes of action against debtors and third parties of debtors including, inter alia debtor’s directors, officers, financial advisors, and attorneys; the committees and their members and professionals; and Pilgrim Interests, Ltd. (solely in its capacity as guarantor under the Guarantee agreements).

The purpose of the bankruptcy is to give the debtors directly involved in the Chapter 11 bankruptcy a fresh start.  So releasing third parties from liability does not serve the purpose of the bankruptcy.  And while bankruptcy will cover certain parties such as directors, officers, committee members and professionals, it will not release them from all “causes of action.”  For example, if the debtor or related parties engaged in negligent behavior during their Chapter 11 bankruptcy, the creditors could pursue action through the court.  But the language of the Chapter 11 bankruptcy plan in this case seems to release everyone from all types of actions, which is too broad according to the bankruptcy court.

When creating a bankruptcy plan that will be considered fair and reasonable, the corporate debtor needs to work closely with their bankruptcy attorney to write specific language that adheres to the standards set forth by the bankruptcy law.  Failure to do so could result in the repeated denial of their bankruptcy plan confirmation, as was the case in the Bigler bankruptcy.