The Expanding Contours of Permissible Non-Debtor Releases in the Ninth Circuit

Until recently, courts in the Ninth Circuit have generally followed the minority view that non-debtor releases in a bankruptcy plan are prohibited by Bankruptcy Code Section 524(e), which provides that the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”  In the summer of 2020, the Ninth Circuit hinted that its prohibition against non-debtor releases was not absolute, when the court issued its decision in Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020), holding that a plan provision exculpating non-debtors was permissible because it did not “affect obligations relating to the claims filed by creditors and discharged through the bankruptcy proceedings.”  In doing so, the Ninth Circuit found that Bankruptcy Code Section 524(e) does not categorically prohibit all non-debtor releases. 

Although Blixseth only addressed exculpation provisions, it opened the door for other forms of permissible non-debtor releases.  In a recent decision, In re Astria Health, Case No. 19-01189-WLH11, 2021 Bankr. LEXIS 155 (Bankr. E.D. Wash. January 22, 2021),^[1] the Bankruptcy Court for the Eastern District of Washington arguably further expanded the context in which non-debtor releases may be allowed.

While the initial phases of the case “featured several skirmishes with and among the major stakeholders,” eventually the debtors, the unsecured creditors’ committee, the secured creditors, and the post-petition DIP lender agreed to a consensual plan of reorganization.  Upon solicitation, the voting classes accepted the plan by significant margins and the plan was subsequently confirmed.  The plan included a provision exculpating key participants in the plan process, including non-debtor parties, from any post-petition liability relating to the bankruptcy cases and the plan, except with regard to gross negligence or willful misconduct.  The plan also included (i) releases by the debtors and the bankruptcy estates of a similar set of parties, including non-debtors, for all causes of action related to the debtors, the bankruptcy cases, or the plan; and (ii) releases by third parties of similar scope. 

Over the objections of the United States Trustee, the bankruptcy court approved each of the non-debtor release provisions.  The bankruptcy court relied on Blixseth to uphold the exculpation provision because it was appropriately limited to the post-petition acts of parties who actively participated in and contributed to the bankruptcy process, while carving out gross negligence and willful misconduct.  The bankruptcy court also expanded on the Ninth Circuit’s reasoning, expressly holding that non-debtor releases need not be limited to parties owing a fiduciary duty to the bankruptcy estate because any such limitation would conflict with the analogous protections under Bankruptcy Code Section 1125(e), which limits the liability of a broad array of non-debtor parties for acts related to the solicitation of votes.  

In addition, the Astria court went beyond the ruling in Blixseth to approve releases of non-debtors by both the debtor and third parties. The court first considered the release of claims belonging to the bankruptcy estate, finding that such releases, even as to non-debtors, are allowable and should be evaluated pursuant to Bankruptcy Code Section 1123(b)(3)(A), which authorizes “settlement or adjustment of any claim or interest belonging to the debtor or to the estate.” Using the A&C Properties factors,^[2] the court found that the release of estate claims against non-debtors was appropriate because no colorable claim likely existed against any released party and because each of the released parties had contributed to the consensual plan, preventing protracted and costly litigation regarding plan confirmation. 

With regard to the release of claims held by third parties, the court relied on Blixseth to find that Section 524(e)’s prohibition on the release of claims against non-debtors was inapplicable to the non-debtor releases under the plan, because the non-debtor releases did not relate to any “liability common to any debtor and the released parties” (i.e., the released non-debtors were not liable for any liabilities of the debtors) and no party had asserted otherwise.          

The decision in Astria further solidifies Blixseth’s holding that Section 524(e) does not categorically prohibit non-debtor releases in the Ninth Circuit, while expanding the context in which such releases may be allowed to include both debtor and third-party release provisions.  As a result, we can expect to see the inclusion of such releases in bankruptcy plans in the Ninth Circuit going forward, as they may now become more prevalent tools for both debtors and creditors during plan negotiations.

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