623 B.R. 793
Bankr. E.D. Wash.2021Background
- Debtors (hospital system) filed chapter 11 in May 2019; operations included three hospitals and clinics; one hospital and some clinics later closed.
- Major secured creditor Lapis became DIP lender; initial debtor–Lapis plan prompted objections from the unsecured creditors’ committee.
- Parties negotiated a three‑way global settlement (debtors, Lapis, committee); revised plan was widely accepted by voting classes.
- The confirmed plan contained: (1) an exculpation clause covering postpetition acts by key participants (carving out gross negligence and willful misconduct); (2) releases by the estates of certain claims; and (3) nondebtor third‑party releases tied to creditor vote + no opt‑out.
- The U.S. Trustee objected that the exculpation and release provisions were overbroad and inconsistent with Ninth Circuit precedent; the court overruled objections and confirmed the plan on December 23, 2020.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the plan's exculpation clause is permissible in scope | UST: clause is overbroad temporally and as to covered parties | Debtors/Lapis: clause limited to postpetition acts, participants played central roles; carveout for gross negligence/willful misconduct | Court: exculpation appropriately tailored under §1123(b)(6); postpetition scope and party list acceptable; carveout sufficient |
| Whether estate claims may be released via the plan | UST: releases improperly shelter insiders and may be routine giveaways | Debtors/Lapis: releases are settlements under §1123(b)(3)(A); no colorable claims identified; consummation serves creditors' interests | Court: estate releases approved as settlements after applying A&C Props. factors and heightened scrutiny for insiders; releases fair and in creditors’ interest |
| Whether §524(e) bars nondebtor releases | UST: §524(e) precludes discharging nondebtor liability | Debtors/Lapis: §524(e) only prevents extinguishing claims tied to the debtor's discharged debt; releases here do not implicate co‑debtor liability | Court: followed Blixseth — §524(e) inapplicable where releases are not on debt shared with debtor; nondebtor releases permissible |
| Whether creditor assent mechanism (vote + no opt‑out) renders nondebtor releases coerced | UST: structure may coerce releases or improperly bind creditors | Debtors/Lapis: releases are truly voluntary (must vote for plan and not opt out); no penalties or rewards tied to release | Court: release mechanism is consensual and noncoercive; therefore permissible |
Key Cases Cited
- Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020) (approved broad postpetition exculpation language and clarified §524(e) does not categorically bar nondebtor releases)
- Martin v. Kane (In re A & C Props.), 784 F.2d 1377 (9th Cir. 1986) (factors for approving settlements/releases on behalf of estate)
- United States v. Energy Res. Co., 495 U.S. 545 (1990) (section 1123(b)(6) provides residual plan authority and flexibility)
- In re Drexel Burnham Lambert Grp., 134 B.R. 493 (Bankr. S.D.N.Y. 1991) (insider settlements/releases warrant heightened scrutiny)
- In re PG&E Corp., 617 B.R. 671 (Bankr. N.D. Cal. 2020) (discussion of consensual third‑party releases and related standards)