Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020)
Article courtesy of David Simonds and Edward McNeilly (both of Hogan Lovells)
In Blixseth v. Credit Suisse, the Ninth Circuit Court of Appeals, for the first time, affirmed the validity of a narrowly tailored exculpation clause that released a lender from certain potential claims against it arising from the bankruptcy proceedings and not with respect to the debtor’s discharged debts themselves. The Ninth Circuit held that section 524(e) of the Bankruptcy Code, which establishes that “discharge of a debt of the debtor does not affect the liability of any other entity on…such debt” does not bar narrowly tailored exculpation clauses covering conduct arising out of the bankruptcy case.
The appeal arose out of the long-running saga of the Yellowstone Club bankruptcy. In 2000, Timothy Blixseth (“Blixseth”) and his then wife, Edra Blixseth, formed the Yellowstone club as an “exclusive ski and golf community” in Big Sky, Montana. In 2005, representing that he was planning to take the Yellowstone Club global, Blixseth borrowed $375 million from Credit Suisse and other lenders. Blixseth offered the assets of companies related to the Yellowstone Club as security for the loan. Blixseth and Edra Blixseth divorced in 2008 and Edra Blixseth became an indirect owner of the Yellowstone companies. Mainly due to Blixseth’s financial mismanagement, it became impossible to repay the loan, so Edra Blixseth decided to take the companies through chapter 11 bankruptcy cases, with the intention of selling the assets to a real estate company called CrossHarbor Capital Partners, LLC (“CrossHarbor”).
The bankruptcy cases were highly contentious and litigious, but ultimately culminated in a global settlement among Credit Suisse, CrossHarbor and the Debtors. This arrangement was ultimately embodied in a Third Amended Joint Plan (the “Plan”), which was approved by the bankruptcy court in June 2009. Section 8.4 of the Plan contained the following exculpation clause (the “Exculpation Clause”):
None of [the Exculpated Parties, including Credit Suisse, CrossHarbor, and Edra Blixseth], shall have or incur any liability to any Person for any act or omission in connection with, relating to or arising out of the Chapter 11 Cases, the formulation, negotiation, implementation, confirmation or consummation of this Plan, the Disclosure Statement, or any contract, instrument, release or other agreement or document entered into during the Chapter 11 Cases or otherwise created in connection with this Plan; provided, however, that nothing in this Section 8.4 shall be construed to release or exculpate any Exculpated Party from willful misconduct or gross negligence as determined by a Final Order or any breach of the Definitive Agreement or any documents entered into in connection therewith.
After more than a decade of litigation over the Exculpation Clause, the Ninth Circuit finally ruled on its validity.[1]
The Ninth Circuit held section 524(e) of the Bankruptcy Code did not bar a narrow exculpation clause that focused on actions of various participants in the plan approval process and relating only to that process. The Ninth Circuit distinguished its prior decisions[2] barring non-debtor releases as violating section 524(e) because those cases “all involved sweeping non-debtor releases from creditors’ claims on the debts discharged in the bankruptcy, not releases of participants in the plan development and approval process for actions taken during those processes.” The Ninth Circuit, in Blixseth, emphasized the bankruptcy court’s finding that the releases granted to Credit Suisse and others were “narrow in both scope and time,” only covered parties “closely involved” in drafting the Plan and did not release parties “from willful misconduct or gross negligence.”
The Ninth Circuit thus joins Second, Third, Fourth, Sixth, Seventh and Eleventh Circuits in allowing exculpation provisions of non-debtors in chapter 11 plans. However, Blixseth, on its face, narrowly circumscribes the scope of permitted exculpation clauses. Based on the distinction drawn in Blixseth between exculpation of claims arising out of the bankruptcy process and claims against non-debtors arising out of the debt of the debtor discharged during the bankruptcy proceedings, the Ninth Circuit may continue to bar or significantly limit plan provisions that purport to extinguish a non-debtor’s claims against non-debtor third parties for debts of the debtor discharged by the bankruptcy proceedings. More cases before the Ninth Circuit Court of Appeals and the Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) will be needed in order to determine whether the Ninth Circuit and the BAP will broaden the types of releases and exculpation clauses permitted in a chapter 11 plan or will continue to narrowly construe the scope of permitted exculpation clauses.
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[1] The Exculpation Clause had been before the Ninth Circuit in 2015. In Blixseth v. Yellowstone Mountain Club, LLC, 609 F. App’x 390, 391-2 (9th Cir. 2015), the Ninth Circuit had held that Blixseth’s challenge to the Exculpation Clause was not equitably moot and had remanded to the district court with instructions to consider the merits of Blixseth’s challenge to the clause. But on remand, the district court did not rule on the merits of Blixseth’s challenge to the clause and instead dismissed his challenge on the grounds of equitable mootness, thus causing the most recent appeal to the Ninth Circuit.
[2] Underhill v. Royal, 769 F.3d 1426, 1432 (9th Cir. 1985) (reorganization plan could not discharge liability of non-debtor shareholder of debtor corporation for securities law violations); In re American Hardwoods, Inc., 885 F.2d 621, 626 (9th Cir. 1989) (district court did not err in concluding that it lacked power to enjoin bank permanently from enforcing its state court judgment against non-debtor guarantors of debtor corporation’s debt); Resorts Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401-02 (9th Cir. 1995) (bankruptcy court lacked power to confirm plan that provided for global release to non-debtor affiliates and family members of debtor because the release provision violated section 524(e) of the Bankruptcy Code).
