575 B.R. 475
Bankr. D. Colo.2017Background
- Fourteen related Chapter 11 cases (jointly administered) for Midway Gold entities; Debtors sold major assets (Spring Valley, other projects) and propose a liquidating plan.
- Debtors' remaining estate: cash from sales, Tonopah project, personal property, and causes of action; plan creates a Liquidating Trust and Trustee to pursue assets and distribute proceeds.
- Senior secured lender (Commonwealth Bank of Australia) and subordinate lender (Hale Capital) are primary stakeholders; extensive settlements underpin the Plan and purported consideration for releases.
- Plan contains broad exculpation (Article IX.C), debtor releases (Article IX.B), and third‑party non‑debtor releases with an opt‑out mechanism (Article IX.D).
- United States Trustee (UST) objects, arguing (inter alia) that Tenth Circuit precedent bars non‑debtor releases, that the opt‑out is inadequate, and that certain exculpation/release language is overbroad and beyond the court’s jurisdiction.
Issues
| Issue | UST's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether Tenth Circuit law categorically forbids third‑party non‑debtor releases | Western Real Estate and Abel forbid permanent releases that protect non‑debtors from independent liability | Majority of circuits allow limited third‑party releases under §105(a) in rare circumstances; releases here are narrow/postpetition and consensual | Court: Western Real Estate is binding but not an absolute bar; third‑party releases may be permitted in limited, fact‑specific circumstances but must respect §524(e) and jurisdictional limits |
| Whether court has subject‑matter (“related to”) jurisdiction to approve broad third‑party releases | The releases sweep beyond matters affecting the estate; many released claims do not affect debtor’s property or administration, so no "related to" jurisdiction | Releases relate to postpetition conduct in the case and were integral to plan settlements; opt‑out/consent supports jurisdiction | Held: Court lacks "related to" jurisdiction over many of the third‑party claims as drafted; releases must be tied to disputes that could conceivably affect the estate (e.g., indemnity or identity of interest) |
| Whether the Plan’s exculpation and debtor releases are permissible as written | UST: exculpation and debtor releases are overbroad (reach prepetition conduct, professionals’ avoidance claims, and non‑fiduciaries); advice‑of‑counsel carveouts impermissible | Debtors: provisions are narrow, exclude gross negligence/willful misconduct/fraud, and are essential consideration for settlements | Held: Debtor releases (debtor/estate settlements) may be approved but must be narrowed (no non‑debtor releasing parties); exculpation must be limited to estate fiduciaries and acts in the Chapter 11 case, remove blanket advice‑of‑counsel immunity; provisions as written are impermissible |
| Whether the Plan’s opt‑out mechanism and consensual releases cure jurisdictional or fairness concerns | Debtors: opt‑out and solicitation gave adequate notice; many creditors accepted or had opportunity to opt‑out | UST: consent/opt‑out cannot create jurisdiction; opt‑out procedures may be inadequate for non‑voting classes | Held: Consent/opt‑out does not cure lack of subject‑matter jurisdiction; opt‑out cannot be used to bootstrap jurisdiction over unrelated third‑party claims |
Key Cases Cited
- In re Western Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990) (Tenth Circuit held permanent injunction against non‑debtor was improper where it discharged non‑debtor’s independent liability; §524(e) limits such injunctions)
- Abel v. West, 932 F.2d 898 (10th Cir. 1991) (modified Western Real Estate in related proceedings concerning scope of injunctions against non‑debtors)
- In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (third‑party releases permissible only in "unusual circumstances" and set out multi‑factor test for injunctions against non‑debtors)
- In re Airadigm Commc’ns, Inc., 519 F.3d 640 (7th Cir. 2008) (§105(a) can authorize third‑party releases in limited, appropriate circumstances related to reorganization)
- In re Combustion Eng’g, Inc., 391 F.3d 190 (3d Cir. 2004) (§105(a) cannot create subject‑matter jurisdiction; court cannot assume jurisdiction to enjoin claims outside its statutory reach)
- Law v. Siegel, 571 U.S. 415 (2014) (§105(a) cannot be used to override explicit Code provisions)