Court Rejects Creditors’ Due Process Challenge to Release of Bankrupt Debtor’s Affiliates

In Jackson v. Le Centre on Fourth, LLC (In re Le Centre on Fourth, LLC), 2021 U.S. App. LEXIS 33845 (11th Cir. Nov. 15, 2021), the Eleventh Circuit rejected creditors’ due process challenge to the release afforded to the debtor’s affiliates in a confirmed Chapter 11 plan.

The creditors were plaintiffs in a tort suit filed after Willie Jackson was struck and injured by a vehicle driven by a hotel valet driver. Jackson and his wife sued the owner of the hotel property, Le Centre on Fourth, LLC, and several of its affiliates. Before the bankruptcy court confirmed Le Centre’s Chapter 11 plan, Le Centre’s lawyer sent the debtor’s creditors, including the Jacksons’ lawyer, a disclosure statement explaining the proposed plan. The disclosure statement said that “CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN,” and explained that any person who voted for the plan or abstained from voting would be deemed to have released “the Released Parties.” The initial disclosure statement did not define “Released Parties,” but did say that the bankruptcy court had the authority to release non-debtor parties and that “the non-Debtor releases in the Plan are to individuals and entities which are affiliates of the current members and managers of the Debtor,” because an action against those parties would “in essence be a suit against the Debtor and [would] deplete assets of the Debtor’s estate.” The disclosure statement also included the date set for the confirmation hearing. The Jacksons’ attorneys concededly received the disclosure statement, but did not object to the plan, appear at the hearing, or take any other action.

The bankruptcy court confirmed the plan, specifically addressing the releases of non-debtor parties—at least some of which had been named as defendants in the Jacksons’ complaint—and determining that the releases were integral to the debtor’s reorganization. Thereafter, Le Centre and the released non-debtors moved in state court to dismiss the Jacksons’ claims against them. In response, the Jacksons moved the bankruptcy court to clarify that neither the confirmation order nor the confirmed plan precluded the Jacksons from proceeding against the released parties nominally, so as to reach their insurers. The Jacksons argued that the confirmation order reached only the debtor and its affiliates, and not their insurers, and that applying the releases to their claims would violate due process because they had not received notice of the proposed release in the form required by Bankruptcy Rule 2002. The bankruptcy court denied the motion, and the district court affirmed. The Jacksons appealed.

The Eleventh Circuit, in an opinion written by Judge Jill Pryor and joined by Judges Jordan and Tjoflat, affirmed. Reviewing the due process argument de novo, the court noted that Bankruptcy Rule 2002 requires that if a bankruptcy plan “provides for an injunction against conduct not otherwise enjoined under the Code,” like the release in favor of non-debtors, then a creditor “must receive notice that includes a conspicuous statement that the plan proposes a discharge injunction, a brief description of the injunction, and the identity of the entities subject to the injunction,” supplied 28 days before confirmation. The question was not whether the rule applied, but “whether due process required that the Jacksons receive notice in compliance with the procedural requirements of Rule 2202(c)(3) even though they received actual notice of the same information in a different form.” To answer that question, the court looked to United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010). There, the Supreme Court held that a creditor who received actual notice of the filing and contents of the debtor’s plan in a Chapter 13 case was afforded due process notwithstanding the debtor’s failure to meet the requirements of Bankruptcy Rules 7001, 7003, 7004, and 7008, which the Court characterized as “procedural.” “Given the Supreme Court’s rejection of a nearly identical argument in a very similar bankruptcy context,” the Eleventh Circuit held, “the Jacksons’ argument must fail.”

The court also rejected the Jacksons’ argument that—even if the discharge injunction were valid—it did not extend to nominal claims against the non-debtor released parties. Reviewing for an abuse of discretion the bankruptcy court’s decision not to modify its order to permit nominal claims, the court held that, “[a]ssuming that § 524(e) [of the Bankruptcy Code] grants bankruptcy courts the authority to allow nominal claims against released non-debtors, we are not convinced that the bankruptcy court had to do so in this case.” Under the court’s decision in SuVicMon Development, Inc. v. Morrison, 991 F.3d 1213 (11th Cir. 2021), a plaintiff may proceed nominally against a discharged debtor only if the suit is necessary to recover against a third party and there is “sufficient certainty ‘that maintaining suit against the debtor will not place any economic burden on the debtor, such that the debtor’s fresh start will not be interfered with.’” The Jacksons met the first requirement, because Kentucky law, which governed their claims, required them to sue the insured in order to reach the insurer. But given the indemnification agreements between the debtor and the other released parties, “we cannot conclude that the bankruptcy court abused its discretion by determining that the Jacksons’ nominal claims [against the debtor’s released affiliates] could result in an economic burden on Le Centre.” 

Posted by Valerie Sanders.

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