March 06, 2020 Articles

Nonconsensual Third-Party Releases: Using the Bankruptcy Process to Eliminate Claims of Non-Debtors

Whether bankruptcy courts have the power to effectively release and enjoin claims of creditors against non-debtor entities without the consent of such creditors has led to a split among the circuit courts.

By John Arrastia and Angelo Castaldi

Traditionally, a principal aim of the Chapter 11 debtor-in-possession was, and is, to enjoy the benefit of the Bankruptcy Code’s reorganization provisions to restructure its affairs and obtain a discharge of its pre-petition debts through a plan of reorganization. For some time, debtors-in-possession have also sought, with varying degrees of success, to use the bankruptcy process to obtain releases of valuable claims of creditors against non-debtor third parties. This issue of whether bankruptcy courts have the power to effectively release and enjoin claims of creditors against non-debtor entities without the consent of such creditors has led to a split among the circuit courts.

A principal aim of the Chapter 11 debtor-in-possession was, and is, to enjoy the benefit of the Bankruptcy Code’s reorganization provisions.

A principal aim of the Chapter 11 debtor-in-possession was, and is, to enjoy the benefit of the Bankruptcy Code’s reorganization provisions.

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