665 B.R. 704
Bankr. D. Del.2024Background
- Smallhold, Inc. (a specialty mushroom farming company) filed for Chapter 11 bankruptcy in the District of Delaware, with Monomyth as the DIP lender and equity acquirer.
- The proposed plan included third-party releases for certain creditors and equity holders, with the issue centering on whether silence or failure to opt out constituted consent.
- The plan solicited votes from general unsecured creditors (Class 2) and provided a mechanism to opt out of the third-party release; unimpaired creditors and equity holders (who were to be paid in full or unimpaired) were deemed to accept but were not given an opt-out.
- Supreme Court’s decision in Purdue Pharma clarified that nonconsensual third-party releases are not authorized by the Bankruptcy Code but did not resolve the validity of consent via silence/opt-out.
- The U.S. Trustee objected to plan confirmation, arguing the opt-out mechanism was improper after Purdue Pharma and that affirmative creditor consent was required for third-party releases.
- The Court’s prior precedent (Arsenal) permitting opt-out by default was reconsidered in light of the Purdue Pharma decision.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can third-party releases be imposed based on a creditor's failure to opt out (silence)? | Purdue and ordinary contract law require affirmative consent for third-party releases; opt-out is insufficient. | Pre-Purdue, silent non-objection could constitute consent; opt-out is administratively practical and previously approved. | After Purdue, affirmative consent required; opt-out by silence does not suffice. |
| Are unimpaired creditors and equity holders, who do not vote, bound by third-party releases? | No, because they were never given a means to affirmatively consent. | Notice and opportunity to object suffice for consent. | Court finds silence/omission is insufficient for consent; releases cannot be imposed on these groups. |
| Is a creditor’s act of voting (for or against) without opting out sufficient for consent to releases? | Only affirmative action evidencing consent (including a clear vote, with disclosure and opt-out opportunity) can bind creditor to a release. | Voting combined with opt-out opportunity satisfies consent. | Voting plus clear opt-out option is sufficient affirmative consent for those creditors. |
| Can the plan's prior solicitation order (approved pre-Purdue) bar the U.S. Trustee's challenge? | Purdue is intervening controlling authority warranting reconsideration. | Law of the case: order should remain binding. | Purdue’s significance allows reconsideration for Class 2 and unimpaired, but not for the specific treatment of the DIP lender (Class 1), which was settled via negotiation. |
Key Cases Cited
- Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024) (Supreme Court held bankruptcy courts cannot confirm plans with nonconsensual third-party releases)
- In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000) (set high standards for nonconsensual third-party releases in bankruptcy)
- In re Washington Mutual, Inc., 442 B.R. 314 (Bankr. D. Del. 2011) (affirmative consent is necessary for third-party releases)
- In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000) (exculpation of estate fiduciaries approved)
- In re Emoral, Inc., 740 F.3d 875 (3d Cir. 2014) (debtor can resolve estate claims impacting third parties)