662 B.R. 220
Bankr. W.D.N.Y.2024Background
- Tonawanda Coke Corporation filed for Chapter 11 bankruptcy in October 2018, after ceasing operations and incurring over $282 million in unsecured claims, mostly from alleged toxic emissions.
- The debtor completed liquidation and proposed a plan with about $300,000 available for distribution to unsecured creditors.
- The plan included a broad release of liability for various non-debtor third parties, with creditors able to "opt out" of this release.
- The U.S. Trustee objected to the disclosure statement, arguing that such third-party releases require affirmative creditor consent ("opt in"), not just an opportunity to "opt out."
- The bankruptcy court deferred ruling until the Supreme Court decided Harrington v. Purdue Pharma L.P., which addressed similar issues regarding third-party releases in Chapter 11 plans.
- The court ultimately had to decide whether the plan's opt-out mechanism satisfied the legal standard for creditor consent.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument (Debtor) | Held |
|---|---|---|---|
| Is an opt-out permitted for third-party releases in Chapter 11? | Must be affirmative opt-in; opt-out insufficient | Opt-out is sufficient consent | Opt-out is not sufficient; affirmative written consent is required |
| Is the plan confirmable if consent for releases is by opt-out? | No, as it does not provide valid consent | Yes, as opt-out satisfied consent | Plan not confirmable as proposed |
| Does state law (NY) require affirmative consent for releases? | Yes, writing signed by creditor needed | Not necessary if there's an opt-out | Writing signed by creditor is required |
| Should disclosure statement be approved despite this issue? | No, misleading on plan confirmability | Yes, remaining objections resolved | Disclosure statement not approved |
Key Cases Cited
- Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024) (Supreme Court held that third-party releases in bankruptcy require affirmative consent from impacted creditors)
- Matter of Tanenbaum Textile Co. v. Schlanger, 287 N.Y. 400 (1942) (New York law requiring written, signed consent for discharge of obligations)
- In re Arch Hospitality, Inc., 530 B.R. 588 (Bankr. W.D.N.Y. 2015) (Consent and failure to object are not synonymous in bankruptcy proceedings)