The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:
A bankruptcy court in Delaware has held that a broadly-worded release contained in a confirmed Chapter 11 plan insulated a group of LBO participants from fraudulent transfer liability, since the potential defendants were not expressly carved out from the scope of the release. [In re Samson Resources Corp., 2018 Westlaw 4182447 (Bankr. D. Del.).]
FACTS: In the wake of a failed multibillion-dollar leveraged buyout, a group of corporate debtors confirmed a Chapter 11 plan. The plan set up a settlement trust to prosecute the parties responsible for the fatal LBO. It also contained broad third-party releases, releasing the debtors’ “equity holders” and “former affiliates.”
Following confirmation, the trustee commenced adversary proceedings against various individuals and companies responsible for the LBO, asserting fraudulent transfer claims and related causes of action. Many of the defendants moved for summary judgment, claiming that the broad releases insulated them from further liability.
REASONING: The bankruptcy court granted summary judgment as to some of the defendants but not as to others. Some of the key defendants were clearly encompassed within the plain language of the releases. The trustee asserted that this was an absurd result; in a footnote, the court expressed a lack of sympathy for that argument:
Arguing that a plain-meaning application of Plan provisions drafted by the Trustee’s legal predecessor and approved by the Creditors’ Committee might yield a confounding result is of little help to the Trustee here, and only reinforces the impression that the Plan Releases could and should have been appropriately tailored to the relief the parties actually desired and negotiated for.
In reaching its conclusion, the court noted that earlier versions of the plan unambiguously excepted the LBO participants from the scope of the releases but that the final plan did not:
At bottom, the Trustee’s position boils down to, “the Plan just can’t mean what it says.” To vindicate this proposition, the Trustee asks that the Court largely disregard its textual analysis of the Plan and the Confirmation Order and look instead to the tangled and protracted history of the Chapter 11 proceedings. The Trustee’s briefing reflects that no fewer than five separate plans were filed (including a competing plan filed by the Committee) before the submission of the final agreed Plan that enjoyed the support of the Debtors and the Committee. He directs the Court to a host of provisions in prior plan iterations that actually would have operated to carve the Moving Defendants out of the Plan Releases. But those provisions are notably absent from the final Plan confirmed by the Court.
As to some of the other defendants, however, the court held that the key documents were in conflict, paving the way for the admission of extrinsic evidence to clear up the ambiguities:
The Court concludes that there was not an intention to release [the other defendants]. The Disclosure Statement shows that the parties intended for avoidance actions arising from the [LBO] to be preserved for the Trust. There is no dispute that the Complaint filed by the Trustee asserts “Avoidance Actions arising out of or related to” the LBO. Accordingly, the Court finds that [the other defendants] are not Released Parties under the Plan.
AUTHOR’S COMMENT: How did this happen? A multibillion-dollar LBO prosecution crippled by an inadvertently-overbroad release? We will never know for sure, but this looks suspiciously like too many cooks spoiling the broth. There were so many parties involved in drafting the release that no one took ownership of the project.
To continue with the cooking metaphor, this was not a case of too many cooks each adding too many ingredients. Instead, this appears to be a case where none of the cooks added any garlic or any salt, thinking that someone else had already done so. The problem, then, is not one of drafting per se; it is one of managing the collaborative process. This is not a skill that we teach in law school. Perhaps we should.
From a drafting perspective, the court’s solution appears to be sound, at least in hindsight: if specific parties are to be carved out from the scope of the release, those carveouts should be explicit.
These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them.