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Decided: June 27, 2014

The Fourth Circuit held that the Non-Debtor Release Provision provided in the National Heritage Foundation’s (NHF) Chapter 11 reorganization plan was unenforceable, which affirmed the bankruptcy and district courts’ holding.

NHF, a non-profit public charity, filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code.  The bankruptcy court approved an amended plan which included a Non-Debtor Release Provision (the Release Provision).  The Release Provision essentially released NHF, its officers, directors, and employees from any liability arising out of NHF’s business, other than failure to follow the reorganization plan.  NHF donors appealed the bankruptcy court’s confirmation of the Release Provision; the donors averred that the provision was invalid.  On remand, the bankruptcy court concluded that the Release Provision was unenforceable and NHF appealed the decision.

Within the Fourth Circuit non-debtor releases are enforceable, but are to be approved “cautiously and infrequently.”  Behrman v. Nat’l Heritage Found., 663 F.3d 704, 712 (4th Cir. 2011).  The Court has instructed bankruptcy courts to consider the six factors provided in In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002).  The six factors include whether (1) there is an identity of interests between the debtor and third party; (2) the non-debtor has contributed substantial assets to the reorganization; (3) the injunction is essential to reorganization; (4) the impacted class has overwhelmingly voted to accept the plan; (5) the plan provides a mechanism to pay for all, or most, of the class or classes affected by the injunction; and (6) the plan provides the opportunity for those claimants who choose not to settle to recover in full.  The Fourth Circuit concluded that only the first factor weighed in NHF’s favor.  Therefore, the Non-Debtor Release Provision was unenforceable.

Full Opinion

Amanda K. Reasoner