In re Aegean Marine Petroleum Network Inc., 599 B.R. 717 (S.D.N.Y. 2019)
The Bankruptcy Court for the Southern District of New York (the “Court“) denied debtors’ request to release potential claims of third parties on a nonconsensual basis as part of the debtors’ chapter 11 plan. The Court found that, under Second Circuit precedent, in certain rare circumstances a bankruptcy court may impose an involuntary release of third-party claims. However, nonconsensual releases should be granted only where barring a specific identified claim is important to accomplish a particular feature of the restructuring.
Debtors’ chapter 11 plan provided a number of protections to their directors, officers, creditors, and other parties. The protections included certain non-consensual releases of third-party claims. These non-consensual releases would release, bar and enjoin all claims that certain third parties – including creditors and stockholders of the debtors – may have against (1) Mercuria Asset Holdings (Hong Kong) Limited (which was the acquiring party under the plan and the debtor-in-possession lender) and its officers, advisors, and other associated professionals and entities and (2) certain individuals on the audit committee of the debtors’ board of directors. The releases would be imposed on the third parties without their consent. The SEC and the bankruptcy trustee filed objections.
The Court did not approve the non-consensual third-party releases. It noted that, while a bankruptcy court has in rem jurisdiction over a debtor’s property and has authority over claims made against a debtor’s estate, as a general rule bankruptcy courts do not have authority over property of third parties or third-party claims that are not claims against the estate or estate property. Bankruptcy courts have subject matter jurisdiction over “civil proceedings” related to a bankruptcy case, but there must be an actual proceeding that is pending. In this case, there was no pending “proceeding” relating to the third-party releases – the proposed releases were releases of potential claims for which no actual proceeding existed. Moreover, the bankruptcy court must also have personal jurisdiction over the third parties whose claims would be released. With certain limited exceptions which the Court found did not apply, in order for a bankruptcy court to have personal jurisdiction over a party, the party must receive formal service of process (which was not given to the third parties in this case).
The Court further noted that, even if a third-party claim were to be asserted as part of a proceeding pending before the Court over which it had subject matter and personal jurisdiction, courts generally do not have the power to force parties to release their claims, and two parties cannot by agreement between themselves release a claim that belongs to a third party – a claim that belongs to a third party may be resolved only through litigation on the merits or on terms to which the third party agrees. The Court acknowledged that certain Courts of Appeal, including the Second Circuit, have held that bankruptcy courts have the power to impose involuntary releases in certain circumstances and cited In re Metromedia Fiber Network, Inc., 416 F.3d 136, 141-43 (2d Cir. 2005). However, the Court noted that in Metromedia the Second Circuit held that involuntary releases should only be approved if they are an important part of a reorganization plan and are proper “only in rare cases”. The Court further noted that a few other Courts of Appeal have held that bankruptcy courts lack the power to grant nonconsensual third-party releases of the type proposed by the debtors in this case.
The Court concluded that, as found by the Second Circuit in Metromedia, involuntary releases should be imposed only in extraordinary cases where a particular release is essential and integral to the reorganization itself. The fact that a person made a positive contribution to the restructuring does not in itself justify granting that person a nonconsensual release – a nonconsensual release should not be granted unless barring a specific claim is important to accomplish a particular feature of the restructuring. The Court found that, in this case, the debtors did not identify any particular third-party claims that, if pursued, would undermine the restructuring. The debtors therefore failed to prove facts that would be necessary to support the releases.
Article courtesy of Margaret G. Parker-Yavuz of Akin Gump Strauss Hauer & Feld LLP.