629 B.R. 516
Bankr. M.D. Fla.2021Background:
- Debtors (Stein Mart entities) filed Chapter 11 on August 12, 2020 and proposed a liquidating Chapter 11 plan that would wind down operations, distribute proceeds under Chapter 7 priorities, then dissolve the debtors.
- The plan forewent purchase of a $2.8 million D&O "tail" policy to preserve funds for unsecured creditors; the Creditor’s Committee supported the plan as the best recovery path for unsecured creditors.
- The plan contains broad releases: (1) a Debtors’ mutual release, (2) a Third-Party Release covering many non-debtors (with an opt-out box on a mailed/online form), (3) a broad non-opt-out Exculpation Clause, and (4) a permanent injunction barring enforcement of released claims.
- Unsecured creditors overwhelmingly voted to accept; shareholders did not get a voting class; some unsecured creditors opted out of the Third-Party Release; it is unclear whether shareholders opted out.
- The U.S. Trustee and the SEC objected to confirmation, attacking the Third-Party Release (consent and consideration), the Debtors’ Release, and the Exculpation Clause; the court held a confirmation hearing and issued findings.
- The court held the Third-Party Release and Debtors’ Release are consensual/acceptable but found the non‑opt‑out Exculpation Clause nonconsensual and failing the Eleventh Circuit’s Dow Corning factors; as a result the court refused to approve the exculpation clause and denied confirmation of the combined plan.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Third‑Party Release is "consensual" under Florida contract law | U.S. Trustee/SEC: opt‑out procedure insufficient; shareholders did not give valid consent | Debtors: opt‑out form and solicitation constitute express/manifested consent | Court: opt‑out procedure meets Florida offer/acceptance rules; Third‑Party Release is consensual and approved |
| If nonconsensual, whether the Third‑Party Release satisfies Dow Corning factors for a nonconsensual bar order | UST/SEC: fails Dow Corning (not necessary, shareholders uncompensated, liquidation context) | Debtors: release is necessary to effect settlements and maximize recoveries | Court: assuming nonconsensual, Third‑Party Release would fail Dow Corning; but here it is consensual so no bar order analysis required |
| Whether the Debtors’ mutual release is supported by consideration | UST/SEC: release is overbroad and unsupported | Debtors/Cred. Comm.: mutual release is part of release‑for‑release bargain tied to creditor recoveries (including $2.8M D&O saving) | Court: Debtors’ Release is supported as a consensual release (consideration via reciprocal releases) and approved |
| Whether the Exculpation Clause is permissible (consent and Dow Corning) | UST/SEC: clause is nonconsensual, overbroad, exceeds §1125(e) safe harbor and should fail Dow Corning | Debtors: exculpation is needed to protect post‑petition actors and enable wind‑down | Court: Exculpation Clause is nonconsensual (no opt‑out), is too broad (excepts only actual fraud), fails Dow Corning, and will not be approved; confirmation denied on that basis |
Key Cases Cited
- In re Seaside Eng’g & Surveying, Inc., 780 F.3d 1070 (11th Cir. 2015) (adopting Dow Corning factors and explaining limits on nonconsensual bar orders/exculpation)
- In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (formulated seven‑factor test for nonconsensual bar orders)
- Sec. & Exch. Comm’n v. Quiros, 966 F.3d 1195 (11th Cir. 2020) (discussing court authority to issue bar orders in bankruptcy/receivership contexts)
- In re Winn‑Dixie Stores, Inc., 356 B.R. 239 (Bankr. M.D. Fla. 2006) (limits and exceptions appropriate for exculpation clauses)
- In re Enron Corp., 326 B.R. 497 (S.D.N.Y. 2005) (exculpation and exceptions—gross negligence/willful misconduct/fraud analysis)
- In re SunEdison, Inc., 576 B.R. 453 (Bankr. S.D.N.Y. 2017) (consent to releases governed by contract principles; acceptance may be express or by conduct)
- In re Monticello Realty Investments, LLC, 526 B.R. 902 (Bankr. M.D. Fla. 2015) (debtor bears burden to prove §1129 elements by preponderance)
- Basner v. Bergdoll, 284 So. 3d 1122 (Fla. 1st DCA 2019) (Florida standards for acceptance: absolute, identical, in prescribed mode/time)
- Rosen v. Florida Ins. Guar. Ass’n, 802 So. 2d 291 (Fla. 2001) (definition of release under Florida law)