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Decided: July 25, 2014

The Fourth Circuit affirmed the district court, and held that the National Heritage Foundation (“NHF”) failed to demonstrate exceptional circumstances to justify the enforcement of the Release Provision in its Chapter 11 reorganization plan.

Appellee, the NHF, is a non-profit public charity. In 2009, Appellee filed for Chapter 11 bankruptcy, and the bankruptcy court approved a plan containing a non-debtor release provision that claimed to release Appellee, and several appellee-related committees and directors, from liability in connection with the bankruptcy. The lower court ruled that the release provision was invalid, and NHF appealed.

In its reasoning, the Fourth Circuit addressed the six factors used to determine the validity of a release provision set forth in Class Five Nevada Claimants v. Dow Corning Corp. Those factors are the following:

(1) There is an identity of interests between the debtor and the third party . . . ; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization . . . ; (4) The impacted class, or classes, has overwhelmingly voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; [and] (6) The plan provides an opportunity for those claimants who choose not to settle to recover in full.

The Court addressed each factor in turn. First, the Court determined that the presence of an indemnity obligation between the debtor and the released parties weighed in favor of the Appellee. However, the Court determined that all of the other factors weighed against the Appellee. NHF failed to satisfy the second factor because none of the released parties made any financial contribution to the reorganization. Appellee failed to satisfy the third factor largely because it provided little, or no, evidence that investor lawsuits would imperil the Appellee’s reorganization. On the fourth factor, Appellee failed to satisfy because the class most affected by the release provision was not given the opportunity to accept or reject the plan. Appellee failed to satisfy the fifth factor because of an absence of a mechanism for affected donors to pursue claims post-bankruptcy. Finally, Appellee failed to satisfy the sixth factor because, similar to the fifth factor analysis, NHF did not provide a mechanism to pay donor claims outside of the bankruptcy proceedings. Accordingly, the Fourth Circuit affirmed the lower court ruling because the totality of the Corning factors weighed against the Appellee.

Full Opinion

Chris Hampton