The Second Circuit has long held that nondebtor releases are proper only in rare cases where the injunction plays an important part in the debtor’s reorganization plan. See SEC v. Drexel Burnham Lambert Group, Inc. (In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285 (2d Cir. 1992). The Ninth and Tenth Circuits have gone still further, holding that nondebtor releases are prohibited by the Bankruptcy Code, except in the asbestos context. See Resorts Int’l, Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401-02, 1402 n.6 (9th Cir. 1995); Landsing Diversified Props.-II v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund, Inc.), 92 F.2d 592, 600-02 (10th Cir. 1990) (per curiam).

In the Metromedia case, the debtors’ confirmed Chapter 11 plan included provisions that the Second Circuit Court of Appeals held improperly shielded certain nondebtors from suit by creditors. (The provisions in question provided that certain insiders would "receive a full and complete release, waiver and discharge from… all claims, obligations, rights, causes of action and liabilities" related in any way to the debtors and based on any pre-Effective Date act or transaction.) The provisions were supported only by a finding that the insiders had made "material contributions" to the estate. Among other things, there was no finding or evidence that the release was itself important to the Plan, which is what Drexel Burnham at a minimum requires. The findings were insufficient.

Certain creditors appealed, and the district court indicated that relief (if justified on the merits) would not be barred by the doctrine of equitable mootness because effective relief could be afforded without "unraveling the Plan."  Citing the district court’s findings, the appellants did not seek a stay of the confirmation order pending their appeal. While the Second Circuit noted that insufficient findings with respect to the nondebtor releases would ordinarily be remedied by remand to the bankruptcy court, it affirmed the confirmation order because it determined that the appeal had been rendered equitably moot. The Second Circuit reasoned that, when a plan has been substantially consummated, an appeal should be dismissed unless several enumerated requirements are satisfied. A chief consideration is whether a stay is sought, in which case relief will be afforded if it is at all feasible. But if the appellant fails to seek a stay, the court will consider additionally whether that failure renders relief inequitable. In other words, the Second Circuit will "insist that a party seek a stay even if it may seem highly unlikely that the bankruptcy court will issue one." Here, the appellants sought neither a stay nor expedited review. The Second Circuit expressed skepticism as to whether effective relief could truly be fashioned without causing damage to the Plan, as the district court had suggested. But even if it were possible, the Court declined to grant relief to the appellants because, having sought no stay of the confirmation order (and no expedited appeal), the appellants bear the burden of any uncertainty.

Written by: Mette Kurth