The U.S. Trustee assigned to Novation Companies’ case filed with the U.S. Bankruptcy Court an objection to confirmation of the First Amended Joint Chapter 11 Plan of Reorganization of Novation Companies and Novastar Mortgage.
The trustee asserts, “Debtors Novation Companies and Novstar Mortgage seek broad immunity from liability for an assortment of non-debtors, such as Novation’s officers and directors, the Creditors’ Committee, bankruptcy professionals, and the third-party seller of a business entity Novation intends to purchase. The Fourth Circuit has made clear that these types of immunity provisions are disfavored and are to be permitted only in the most extraordinary and unusual circumstances, none of which exist here. Here, the Plan is being used by the individuals responsible for authoring the Plan and others with influence in the authoring of the Plan to shield themselves from potential liability solely for their own personal benefit (an unabashedly improper use of such provisions and of a Chapter 11 Plan). Novation cannot satisfy the Fourth Circuit test for allowing these types of immunity provisions in a Chapter 11 Plan….Novation is incorrect that consent provides a stand-alone basis to permit the inclusion of these types of immunity provisions in a Chapter 11 Plan. Second, even if consent were sufficient to allow confirmation of a plan with such provisions, the procedure Novation proposes to “impute” alleged consent upon the affected parties is wholly inadequate to support any legitimate finding of the requisite consent. Indeed, the proposed procedure is designed more as a trap for the unwary than as a realistic means of demonstrating true consent. All of which again demonstrates that the true motivations at play are the personal protection of the Plan’s individual authors.”
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