In this episode of the Lowenstein Bankruptcy Lowdown, Bankruptcy
& Restructuring Department Vice Chairs David M. Posner and Brent Weisenberg examine a recent
decision from the U.S. District Court for the Southern District of
New York that takes a hard look at third-party releases and opt-out
mechanisms in Chapter 11 plans. Building on the Supreme Court's
Purdue Pharma ruling, the court held that a creditor's
silence—or failure to check an opt-out box—does not
constitute consent to release claims against non-debtors. Their
discussion highlights why opt-out releases are increasingly
vulnerable, how courts are defining "consent"
post-Purdue, and what debtors and plan proponents should consider
if they want third-party releases that will withstand appellate
scrutiny.
Third-party releases are a hot topic in Chapter 11 cases, and
this video is a follow-up from the one we did earlier this year on
the same topic. In our earlier video, we discussed a case which
held that under certain circumstances, silence equals consent in an
opt-out scenario.
David M. Posner: The court held that you
cannot treat creditor silence or their failure to check an opt-out
box as consent to give up claims against non-debtors. Because of
that, the court struck the third-party releases from the
plan.
Brent, unpack that in plain English.
Brent Weisenberg: Sure. After the Supreme
Court's decision in Purdue Pharma, courts cannot approve
nonconsensual third-party releases. The only way a plan can include
releases of claims against non-debtors is if their releases are
consensual.
So, the key question is: what counts as consent? In this case,
the plan used an opt-out approach. Creditors receive ballots or
notices saying essentially, "You will be deemed to release
your claims unless you check this box to opt out." While some
creditors did opt out, the majority of the creditors did not check
the box. The debtors argued that that meant those creditors
consented. The Bankruptcy Court overruled the U.S. Trustee and
found that the releases were consensual, in part because the court
concluded that federal law, not state law, applies to determine
whether a third-party release was consensual.
David, why did the court disagree?
David M. Posner: First, under basic contract
principles, silence is not acceptance. Whether you look to state
law or general federal contract law, the rule is the same. You
normally need an affirmative manifestation of assent—words or
conduct that clearly shows, "Yes, I agree." Simply not
mailing back a form or not checking a box is usually not enough,
and there is no special duty here requiring creditors to
respond.
Second, the court rejected the analogy to class action
practice, where opt-out can be enough if the Rule 23 safeguards are
followed. This wasn't a certified class action; those
procedures and protections didn't apply, so you can't
import that opt-out logic into a Chapter 11 plan's third-party
releases.
Third, the court said that consenting to the Bankruptcy
Court's jurisdiction is not the same thing as consenting to
release your separate claims against non-debtors. Jurisdiction to
hear cases doesn't magically create consent to give up your
rights.
Putting that all together, the court found that these were
nonconsensual third-party releases. And because Purdue says
non-consensual releases are not authorized, the court struck the
releases and the related injunction provisions and sent the case
back for further proceedings.
Brent Weisenberg: Here's the takeaway:
plans that rely on opt-out checkboxes
to bind creditors to third-party releases are increasingly on
shaky ground. And certainly, what jurisdiction you in may very well
determine whether you can obtain a third-party release utilizing an
opt-out mechanism. If you want certainty in obtaining valid
third-party releases–that will be upheld–you may want
to consider an affirmative explicit consent.
Think opt-in, not opt-out. Clearly notice matters, but notice
alone won't convert silence into consent.
David and I and the Lowenstein team will continue to keep our
eyes on the developing case law. Until then, we'll see you
soon.
