May 30, 2019 – The U.S. Trustee assigned to the PHI, Inc. cases objected [Docket No. 576] to the Debtors' Disclosure Statement, raising concerns about "impermissible release and exculpation provisions" included in the Debtors' Plan and Disclosure Statement; concerns amplified by the Debtors' choice of "opt-out" releases….and yet further exacerbated as to crammed down classes that are likley never even to know as to their requirment to opt-out. On May 29, 2019, the Judge hearing the ShopKo cases stunned an assembled courtroom with his refusal to confirm the Debtors' Plan (we cover this story separately) based on similar arguments as to whitewashing potential liability with releases, especially when it is crammed down (not allowed to vote) parties being forced to accept the loss of the right to proceed with claims against released parties. These and similar arguments are being made by objecting parties on what has become a weekly basis and may fundamentally impact the use of broad release and exculpation clauses in Debtor Plans.
The present objection states, “The Disclosure Statement and the Debtors’ First Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Plan,” Docket Entry No. 495) contain impermissible release and exculpation provisions in contravention of Bank of N.Y. Trust Co. v. Off’ Unsecured Creditors’ Comm…Moreover, the release provisions are “opt-out” releases and, therefore, nonconsensual for those parties who are not solicited or who otherwise do not vote on the Plan because there is no bargained for exchange or meeting of the minds with regard to the releases. The United States Trustee also requests that language be added to the Disclosure Statement and Plan that provides that no party shall be released from any causes of action or proceedings brought by any governmental agencies in accordance with their regulatory functions…A plan is patently unconfirmable when confirmation defects cannot be overcome by creditor voting and the confirmation defects relate to matters upon which the material facts are not in dispute or have been fully developed at the disclosure statement hearing…The Court should decline to approve the Disclosure Statement until and unless the release provisions are modified so that they comply with 11 U.S.C. § 524(e), which was never intended to protect non-debtor parties from ‘any negligent conduct that occurred during the course of the bankruptcy.’… In SunEdison, the debtors argued that the warning in the disclosure statement and on the ballots regarding the potential effect of silence gave rise to a duty to speak, and the nonvoting creditors’ failure to object to the plan or reject the plan should be deemed their consent to the release. The court rejected this argument because the debtors failed to show that the nonvoting creditors’ silence was misleading or that the nonvoting creditors silence signified their intention to consent to the release (finding that silence could easily be attributable to other causes).
This is particularly true with regard to the classes of creditors and claimants who are presumed to reject the Plan and, therefore, will never be solicited such that they might opt-out. These classes of creditors and claimants will never even be given the chance to opt-out of the release and, thus, will have it imposed on them without being given the opportunity to consent or not consent (even by way of the opt-out provision). Thus, the pretext of “consent” by failure to opt-out falls away…The Debtors should modify the Disclosure Statement and the Plan to clarify that no party shall be released from any causes of action or proceedings brought by any governmental agencies in accordance with their regulatory functions, including but not limited to criminal and environmental matters.”
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