Aegean Marine Petroleum Network Inc (fka ANWWQ)

[makinezmoney]

$ANW: Judge-Wiles issues statement on Litigation-claims process


Most of it against the debtors.

In a nutshell........ No impact on claims by shareholders.


Litigation claims proceed, US appointed trustee resumes process.



Docket #520


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MICHAEL E. WILES
UNITED STATES BANKRUPTCY JUDGE


I have before me the Debtors’ request that I confirm their chapter 11 plan of
reorganization (the “Plan”). Objections have been filed by the Securities and Exchange
Commission and by the Office of the United States Trustee regarding certain third-party releases
that the Debtors have asked me to impose on a non-consensual basis.
By way of background: the Plan provides a number of protections to the Debtors’
directors, officers, and various other parties. These include both consensual and non-consensual
releases, exculpation provisions and injunctions.
First, the Plan provides for various consensual releases that will be binding only on the
following persons as releasors: (i) creditors who were entitled to vote and who voted in favor of
the Plan; (ii) creditors and holders of interests who did not vote for the Plan (or who were not
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eligible to vote) but who nevertheless have submitted forms in which they affirmatively elected
to grant the requested releases; and (iii) certain other parties who have agreed to give releases in
connection with the Plan, including parties who consented to give releases through their joinder
in a Plan Support Agreement that the Court previously approved. I have received no objections
to the consensual releases.
Second, in section 9(b) of the Plan the Debtors have agreed to release all of their own
claims against a broad group of released parties. The releases by the Debtors cover virtually any
kind of claim that might have been asserted by the Debtors, although the releases do carve out
certain defined litigation claims and securities law claims that parties will still have the right to
pursue. The Debtors’ releases of their own claims will have the effect of releasing any derivative
claims that creditors or shareholders might have filed with respect to the released matters, and
the Plan so states.
It is often the case that a Bankruptcy Court is asked to enforce a debtor’s own releases by
issuing an injunction that prevents third parties from asserting claims that belonged to the estate
and that were released by the debtor, and the Plan in this case includes such an injunction. These
are sometimes described as third-party releases or as injunctions against third-party claims, but
that is not really an accurate characterization of what they are. Injunctions of this kind are more
properly described as injunctions against interference with a debtor’s court-approved decisions
about the disposition of claims that belonged to the debtor. See, e.g., MacArthur Co. v. JohnsManville Corp. (In re Johns-Manville Corp.), 837 F.2d 89 (2d Cir. 1988) (confirming that it was
appropriate to enjoin creditors from pursuing claims that belonged to the debtors and that the
debtors had released). Injunctions of this kind do not take away claims that belong to third
parties; they just enforce the debtors’ releases of the debtors’ own claims.
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I have received no objections to the proposed releases of the Debtors’ own claims, or to
the injunction against efforts by third parties to enforce claims that belonged to the estate and
that are being released by the Debtors.
Third, the Plan in this case includes an exculpation provision that is meant to insulate
court-supervised fiduciaries and some other parties from claims that are based on actions that
relate to the restructuring, with the exception of claims that are based on allegations of fraud,
willful misconduct, or gross negligence. To some extent, these exculpation provisions are based
on the theory that court-supervised fiduciaries are entitled to qualified immunity for their actions.
See In re PWS Holding Corp., 228 F.3d 224, 246 (3d Cir. 2000); In re A.P.I., Inc., 331 B.R. 828,
868 (Bankr. D. Minn. 2005), aff'd sub nom. OneBeacon Am. Ins. Co. v. A.P.I., Inc., No. CIV. 06-
167 (JNE), 2006 WL 1473004 (D. Minn. May 25, 2006); Pan Am Corp. v. Delta Air Lines, Inc.,
175 B.R. 438, 514 (S.D.N.Y. 1994). While the reported case law is thin, however, I think that a
proper exculpation provision is a protection not only of court-supervised fiduciaries, but also of
court-supervised and court-approved transactions. If this Court has approved a transaction as
being in the best interests of the estate and has authorized the transaction to proceed, then the
parties to those transactions should be not be subject to claims that effectively seek to undermine
or second-guess this Court’s determinations. In the absence of gross negligence or intentional
wrongdoing, parties should not be liable for doing things that the Court authorized them to do
and that the Court decided were reasonable things to do. Cf. Airadigm Commc’ns., Inc. v. FCC
(In Re Airadigm Communs., Inc.), 519 F.3d 640, 655-57 (7th Cir. 2008) (approving a plan
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was limited to conduct during the bankruptcy case and noting that the effect of the provision is to
require “that any claims in connection with the bankruptcy case be raised in the case and not be
saved for future litigation.”).
In this case, the proposed definition of exculpated parties includes not only the Debtors,
the Committee and their respective advisors and employees, but also Mercuria (which is the
acquiring party and the debtor-in-possession lender), the debtor-in-possession agents and lenders,
the prepetition secured credit facility agents and lenders, and the unsecured notes indenture
trustees. The proposed exculpation provision in the Plan provides generally that each exculpated
party shall have no liability to anyone for any claim “related to any act or omission based on”
(1) the Chapter 11 cases, (2) the restructuring support agreement, (3) the court-approved
disclosure statement, (4) the Plan, (5) the Plan supplement, or (6) “any restructuring transaction,
contract, instrument, release, or other agreement or document created or entered into in
connection with the disclosure statement or the Plan,” all of which is subject to a general
exclusion for claims that are determined in a final order to have constituted actual fraud, willful
misconduct, or gross negligence.
I think, as I said during argument, that to some extent, the wording of this provision is too
broad. Certainly, for example, the exculpation provision should not bar the enforcement of
contracts that were entered into in the course of the case and that were approved by the Court,
but literally that is what the proposed language would do. I believe that an appropriate
exculpation provision should say that it bars claims against the exculpated parties based on the
negotiation, execution, and implementation of agreements and transactions that were approved
by the Court.
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The United States Trustee does not object to the exculpation provision of the Plan insofar
as it relates to the Debtors and the members of the Official Committee of Unsecured Creditors,
and their respective advisors, but it has objected to the inclusion of parties such as Mercuria who
are not estate fiduciaries. I believe that if the exculpation is limited, as described above, then it is
not problematic, and that it is appropriate for the reasons that I have already stated.
The Plan in this case therefore provides for a number of consensual releases, which I
have been told will be binding on ninety-nine percent of the unsecured creditors; it provides for
broad releases of the Debtors’ own claims, which thereby bar derivative claims; and it provides
an exculpation provision which, under my rulings, protects people from claims based on their
negotiation, execution and implementation of transactions that I approved.
In addition to all of the foregoing, however, the Debtors have asked me to impose certain
non-consensual releases that would be binding even if the releasing parties did not agree to
provide such releases. These proposed releases do not involve claims against the Debtors
themselves. Nor are they limited to claims that are derivative in nature and that are pursued in
the name and stead of the Debtors. They also are not limited to transactions that occurred during
the bankruptcy case or that this Court has supervised and previously approved. Instead, the
proposed involuntary releases would immunize certain parties from all claims that are owned
directly by creditors, stockholders, or other parties in interest (not by the Debtors) and that relate
in any way to the Debtors, with no exceptions for claims alleging fraud or willful misconduct.
There are two groups in whose favor the Debtors ask that these non-consensual releases
be imposed. One group is Mercuria and its officers, advisors, and other associated professionals
and entities. Mercuria, as I mentioned, provided prepetition credit to some of the Debtors. It
also is the acquiring party under the Plan, and it provided debtor-in-possession financing during
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this case. The other group is made up of three individuals who joined the audit committee of the
Debtors’ board of directors on or after May 2018. The Debtors ask me to rule that all claims that
any creditor or stockholder may have against these entities and individuals should be released,
barred and enjoined without the consent of the holders of those claims.
Some Circuit Courts of Appeal have held that bankruptcy courts lack the power to grant
nonconsensual third-party releases of the kind that the Debtors seek here. See, e.g, Bank of N.Y.
Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d 229, 251-
53 (5th Cir. 2009); Resorts Int’l., Inc. v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401-
02, 1402 n. 6 (9th Cir. 1995); Matter of Zale Corp., 62 F.3d 746, 760 (5th Cir. 1995); Landsing
Diversified Props.-II v. First Nat’l Bank and Trust Co. of Tulsa (In re W. Real Estate Fund, Inc.),
922 F.2d 592, 600-02 (10th Cir. 1990) modified sub nom. Abel v. West, 932 F.2d 898 (10th Cir.
1991). Other Courts of Appeal, including the Second Circuit Court of Appeals, have held that
bankruptcy courts have the power to impose involuntary releases, but that such involuntary
releases should be imposed “only in rare cases.” In re Metromedia Fiber Network, Inc., 416
F.3d 136, 141-43 (2d Cir. 2005) (holding that involuntary releases should only be approved if
they are an important part in a reorganization plan, and that they are proper “only in rare cases”);
see also SE Prop. Holdings, LLC v. Seaside Eng’g 7 Surveying (In re Seaside Eng’g &
Surveying, Inc.), 780 F.3d 1070, 1078 (11th Cir. 2015) (holding that releases and bar orders are
permitted but “ought not to be issued lightly, and should be reserved for those unusual cases in
which such an order is necessary for the success of the reorganization, and only in situations in
which such an order is fair and equitable under all the facts and circumstances”); Nat’l Heritage
Found., Inc. v. Highbourne Found., 760 F.3d 344, 347-50 (4th Cir. 2014); Behrmann v. Nat’l
Heritage Found., 663 F.3d 704, 712 (4th Cir. 2011) (holding that involuntary releases should be
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imposed “cautiously and infrequently”); Class Five Nev. Claimants v. Dow Corning Corp. (In re
Dow Corning Corp.), 280 F.3d 648, 657-58 (6th Cir. 2002); Mernard-Sanford v. Mabey (In re
A.H. Robins Co., Inc.), 880 F.2d 694, 700-02 (4th Cir. 1989).
Debtors in chapter 11 cases before me frequently seek third-party releases, and they are
often presented as though the involuntary imposition of a third-party release is no big deal. I
disagree. In order to put the issue in context, it is worth pausing for a minute to note just what an
extraordinary thing it is for a court to impose an involuntary third-party release and how different
that is from what courts ordinarily do.
A bankruptcy court has in rem jurisdiction over a debtor’s property and the disposition of
that property. But third-party claims belong to third parties, not the estate. As a general rule, a
bankruptcy court has no power to say what happens to property that belongs to a third party,
even if that third party is a creditor or otherwise is a party in interest. See Callaway v. Benton,
336 U.S. 132, 136-41 (1949).
A bankruptcy court’s in rem jurisdiction also gives it authority over claims that are made
against an estate. However, the third-party claims that are the subject of the proposed releases in
this case are not claims against the estate or against property of the estate. A bankruptcy court
has no in rem jurisdiction over such third-party claims. See Johns-Manville Corp. v. Chubb Ind.
Ins. Co. (In re Johns-Manville Corp.), 600 F.3d 135, 153-154 (2d Cir. 2010) (holding that a
bankruptcy court did not have in rem jurisdiction over a third party’s direct claims against a nondebtor insurer).
It is often argued that bankruptcy courts have broad subject matter jurisdiction over “civil
proceedings” that are “related to” a bankruptcy case, see 28 U.S.C. §§ 157, 1334 – as though
imposing an involuntary release is somehow analogous to an exercise of the court’s power to
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rule on a proceeding that is pending in front of it. But there are many problems with that
reasoning and with that analogy.
First, sections 157 and 1334 gives bankruptcy courts subject matter jurisdiction over
“civil proceedings” that are related to a bankruptcy case. However, when third-party releases are
proposed there is rarely any “proceeding” pending at all. Instead, the court is asked to exercise
power over a potential claim for which no actual proceeding exists.
Second, sections 157 and 1334 just describe the scope of a bankruptcy court’s potential
subject matter jurisdiction. Subject matter jurisdiction alone is not enough to give a court power
over a litigation claim or over a proceeding. Instead, in addition to an actual proceeding, the
court needs to have personal jurisdiction over the relevant parties.
We are very accustomed, in the bankruptcy court and during the bankruptcy process, to
giving creditors notice of things we propose to do, and in the context of the exercise of our
statutory “in rem” jurisdiction such notice is sufficient. But we are not talking here about a
disposition of the Debtors’ own assets, or of the resolution of claims over which we have in rem
jurisdiction. Instead we are talking about issuing a ruling that extinguishes one non-debtor’s
claim against another non-debtor.
In other contexts, the Supreme Court has made clear that as a matter of due process,
notice is not enough to confer personal jurisdiction over a party, or over its claims, or to give the
court power over those claims. Instead, a formal service of process is required. See, e.g., Martin
v. Wilks, 490 U.S. 755, 763-64 (1989) (“a party seeking a judgment binding on another cannot
obligate that person to intervene; . . . Joinder as a party, rather than knowledge of a lawsuit and
an opportunity to intervene, is the method by which potential parties are subjected to the
jurisdiction of the court and bound by a judgment or decree”)(citations omitted); see also Chase
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Nat’l. Bank v. City of Norwalk, Ohio, 291 U.S. 431 (1934) (“[t]he law does not impose upon any
person absolutely entitled to a hearing the burden of voluntary intervention in a suit to which he
is a stranger”). The need for a formal service of process is a well-established prerequisite to the
exercise of jurisdiction. See Hansberry v. Lee, 311 U.S. 32 (1940).
The Supreme Court has recognized some limited exceptions to the need for a formal
service of process, but they do not apply here. The exercise of a bankruptcy court’s in rem
powers is one such exception. See Martin v. Wilks, 490 U.S. 755, 762 n. 2 (1989). But this
exception applies only when the bankruptcy court is exercising in rem authority. As noted
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who hold such claims. Instead, the Court has before it a motion to extinguish third party claims,
made primarily at the behest of the people who would be the beneficiaries of the releases.
The Supreme Court’s decision in Stoll v. Gottlieb, 305 U.S. 165 (1938) sometimes is
cited for the proposition that a release of third-party claims, coupled only with notice and not
with any other formal process, is sufficient to confer jurisdiction. In Stoll, a court approved a
plan of reorganization that provided for the cancellation of a third party’s guaranty of a debt.
The affected creditor later filed a proceeding in state court seeking to enforce the guaranty, and
also filed a request in the federal court for a modification of the order that had cancelled the
guaranty, alleging that the court did not have the power to cancel the guaranty. That request to
modify the confirmation order was denied, and no appeal was taken. However, the state court
later held that the bankruptcy court had lacked jurisdiction to cancel the guaranty.
On review, the Supreme Court made clear that it expressed no opinion as to the power of
the bankruptcy court to cancel the third-party guaranty or as to the propriety of the procedures
that were followed by the court in doing so. Id. at 171 n.8. Instead, the Supreme Court
presumed for purposes of its analysis that the lower court’s exercise of jurisdiction to approve
the release was improper. Id. at 171. The Supreme Court held that, even if the lower court had
been incorrect when it found that it had jurisdiction to release the guaranty, the lower court’s
denial of the creditor’s petition to modify the confirmation order – a determination from which
the creditor never appealed – was res judicata and “settled the contest over jurisdiction.” Id. at
171. The disappointed creditor could only obtain review of that determination (even if it was
incorrect) by direct appeal, and not through a collateral proceeding in a state court. Id. at 171-72.
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The decision in Stoll presumed that the bankruptcy court lacked jurisdiction to release a
third-party claim. The Court did not endorse third-party releases, and did not endorse a “notice”
procedure to effectuate them.
Third, even if there were a proceeding pending in front of me in which a third-party claim
were asserted, and even if I had proper subject matter jurisdiction as well as personal jurisdiction
over the affected parties, that would not mean that I would have the power to impose an
involuntary release. In the American system, litigants have the right to assert claims so long as
they meet pleading standards and Rule 11 standards. When a court has jurisdiction over a claim,
that means the court has the power to resolve the claim on its merits. The Supreme Court has
held that a court has no power to dictate settlement terms or to force parties to release their
claims. See United States v. Ward Baking Co., 376 U.S. 327, 334 (1964) (confirming that a court
lacked authority to enter a “consent judgment” to which the Government did not consent, and
that in the absence of the parties’ agreement the court’s power was limited to the resolution of
the case on the merits). Similarly, the Supreme Court has held that two parties cannot, by
agreement, dispose of claims that belong to a third party. Local No. 93, Int’l Ass’n of
Firefighters, AFL-CIO C.L.C. v. City of Cleveland, 478 U.S. 501, 529 (1986). Instead, a claim
that belongs to a third party may only be resolved through litigation on the merits, or on terms to
which the third party agrees. Id.
Fourth, we should not lose sight of the fact that when we impose involuntary releases we
do not provide claimants with other procedural and substantive rights that they ordinarily would
have. The Federal Rules of Bankruptcy Procedure require the commencement of adversary
proceedings, with formal service of process, when a money judgment is sought against a third
party, or when a court is asked to rule upon a third party’s interest in property, or when a court is
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asked to make a declaration of the third party’s rights, or when a court is asked to issue an
injunction. But these procedures are not applied when third-party releases are sought. The court
is asked to take a third party’s property without any hearing on the merits and without any of the
discovery or other rights that a litigant usually would have. See In re Digital Impact, 223 B.R. 1,
13 n. 6 (Bankr. N.D. Okla. 1998) (noting that a third-party release has “the effect of a judgment –
a judgment against the claimant and in favor of the non-debtor, accomplished without due
process.”). Involuntary releases also result in a taking of property without a formal hearing to
ensure that the affected party has received proper compensation. In fact, when a court is asked to
award a third-party release in a bankruptcy case, it is often asked to do so based only on the
contributions that a proposed releasee has purportedly made to the reorganization process
generally, rather than the benefits to be provided directly to the persons whose claims are being
released. But even in those instances in which powers of eminent domain authorize an
involuntary taking of property, due process requires that the claimant receive compensation that
is based on the actual value of the property being taken from them. See, e.g., First English
Evangelical Lutheran Church of Glendale v. Los Angeles Cty., Cal., 482 U.S. 304, 322 (1987).
Finally, proposed third party releases often present the anomalous situation in which the
beneficiary of a third-party release asks for broader protection than he or she could have obtained
in his or her own bankruptcy case. For example, debtors often seek to free officers and directors
from potential securities law claims; in fact, that is one of the types of potential claims for which
the Debtors seek involuntary releases in this case. Under Section 523(a)(19) of the Bankruptcy
Code, however, liabilities for violations of the securities laws are not dischargeable so long as
the violations result in a judgment or settlement either before or after the bankruptcy case is
filed. We therefore have the odd situation where we are being asked to use an unwritten
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authority to release non-debtor officers and directors from claims when the Bankruptcy Code
would bar us from giving similar relief to those persons if they were debtors in their own cases.
See Metromedia, 416 F.3d at 142 (noting the potential abuse of using third-party releases to
permit a non-debtor to shield itself from liability without a bankruptcy filing and without the
safeguards of the Bankruptcy Code).
The issues I have described above ought to illustrate just how extraordinary a thing it i
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during argument today, third-party releases are not a merit badge that somebody gets in return
for making a positive contribution to a restructuring. They are not a participation trophy, and
they are not a gold star for doing a good job. Doing positive things in a restructuring case – even
important positive things – is not enough. Nonconsensual releases are not supposed to be
granted unless barring a particular claim is important in order to accomplish a particular feature
of the restructuring. See Metromedia, 416 F.3d at 143 (holding that a finding that a party had
made a “material contribution” to a case was not enough and that the approval of releases
requires a finding that the releases themselves are “important” and “necessary” to a plan).
In the Residential Capital case that was cited to me, for example, there was a huge
overlap between claims that Residential Capital was making against its parent company and
claims that various other parties were making against the parent. In that case, the parent
company did not want to settle the claims made by Residential Capital unless the overlapping
third-party claims were also barred. In that context, the Court was able to make a determination
as to whether the settlement with the debtor, and the funds that would be made available to the
third parties as a result of that settlement, justified the third-party release. In re Residential
Capital, LLC, No. 12-12020 (MG) (Bankr. S.D.N.Y. Dec. 11, 2013) [Docket No. 6065].
Similarly, in the original Johns-Manville bankruptcy the court channeled certain future claims to
a court-approved trust, in order to induce insurers to contribute policy proceeds to the trust. The
court was able to assess the claims that were being released, to see the direct connection between
those claims and the contributions that were being made, and to decide not only whether the
rights of affected parties were being protected, but whether the terms of the restructuring really
depended on those releases.
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I do not have any of that here. I have only suggestions that Mercuria and the members of
the audit committee did things that were positive to the process. I have no suggestion that what
they did provided a specific recovery to the people whose claims would be taken, or any
evidence that would allow me to judge the value of the claims that would be taken away.
Parties often argue to me that claims being released would just be nuisance claims and
that I should go ahead and order a release without worrying that I am doing anything that is
really harmful to the releasing parties. The parties in this case have made that argument before
me today. But if the claims that are the subject of the proposed releases would be without merit,
that begs the question of why they should be released at all. The teaching of Metromedia is that
releases should be given only when they are an important part of a reorganization. By definition,
it cannot be said that the release of a meritless or nuisance claim is essential or integral to
anything. Getting a release may be a comfort the parties would like to have, but releases are not
supposed to be imposed involuntarily just to make people feel better. They are supposed to be
ordered only when they are actually important and necessary to the accomplishment of the
transaction before the Court.
I will turn now to the particular releases that the Debtors seek in this case. For the most
part the Debtors have not identified specific claims that they believe must be barred in order to
enable the reorganization. Metromedia cautioned that the bankruptcy courts are to be
particularly skeptical of broad and general releases that are not tied, in a demonstrated way, to
something that the reorganization needs to accomplish. Here, no particular third-party claims
have been identified that, if pursued, would undermine the restructuring and the deals that are
part of that restructuring.
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As to Mercuria, the Debtors themselves have released their claims based on pre-petition
activities. The Plan also includes an exculpation provision that covers Mercuria’s involvement
in transactions that I approved during the course of the bankruptcy case. Many of the parties in
interest have agreed to release their claims against Mercuria, and I have been told today that
ninety-nine percent of the unsecured creditors have consensually released their claims against
Mercuria. The Debtors have cited to pre-bankruptcy loans and to an exclusivity agreement to
which Mercuria was a party prior to the bankruptcy case. But given that the Debtors have
released their own claims, which has the effect of barring derivative claims, I am at a loss to
understand what claim is left as to which Mercuria needs protection. The creditors of the entities
to whom Mercuria made pre-bankruptcy loans are being paid in full. The indenture trustees,
who represent the parent company’s unsecured noteholders, have granted releases to Mercuria,
and as I noted, an overwhelming percentage of the individual noteholders have done so too.
The parties are not able today even to identify a specific claim against Mercuria that is
outstanding and that could be pursued. I am left with the suggestion that nobody can really think
of anything, or certainly not anything that they think would have merit, but that it is nevertheless
somehow important to this reorganization for me to impose a broad third-party release. In
substance, this amounts to a suggestion that I should give releases unless I can come up with a
good reason not to do so. I think that is the opposite of the approach that Metromedia commands
me to take, and that ordinary due process considerations require me to take.
The governing case law requires me to consider not only the contributions made by the
proposed releasees, but also the particular claims that are to be released, whether the releasing
parties are otherwise getting recoveries on those released claims, and the fairness of the releases
from the point of view of the people upon whom the releases are to be imposed. See, e.g., Dow18-13374-mew Doc 520 Filed 04/08/19 Entered 04/08/19 13:44:50 Main Document
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Corning, supra. If, as is the case here, the relevant claims and the owners of the claims cannot
even be identified, then there is a failure of proof of the facts necessary to support the proposed
involuntary releases.
The Debtors have also argued that the members of the audit committee could be
subjected to amended securities law claims based on certain events that occurred prior to the
bankruptcy case. I am told that these would be without merit, and that I should bar them to give
the directors peace of mind as a reward for the service that they provided during the case.
However, I have no record in front of me that would permit me to conclude that any and all
potential claims against the audit committee members for their pre-bankruptcy conduct would be
without merit.
I am told that the directors in this case had to navigate through many troubles, and that in
return they have earned the right to be freed of litigation claims relating to pre-bankruptcy
matters. Frankly, that just does not follow. There are plenty of officers and directors of nonbankrupt companies who have to steer their companies through difficult situations. I am sure
that they would also like to dispose of potential litigation claims against them as a reward for the
work that they have done. But that is not recognized as a ground on which to terminate litigation
claims outside of bankruptcy. There is no reason why it should constitute an excuse to terminate
litigation claims just because a company is emerging from bankruptcy.
If the argument is that the directors have done a spectacular job, then maybe they should
ask for a bonus, and maybe they would be entitled to one. At least such a bonus would be
payable by the entities for whom the relevant directors did their work. When the Debtors argue
that the audit committee members have earned peace of mind here, they essentially are saying
that the audit committee members should be given a bonus that would not be paid by the
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Debtors, but that instead would be involuntarily assessed against the third parties who own the
claims to be released. Some of those might be shareholders who, as things stand, are likely
getting no benefit from the Plan and from the underlying work that allegedly justifies the
releases.
This is not a proper way to reward good work. I do not mean to demean the work done
by the members of the audit committee. I have no reason to doubt that they did exceptional work
and that they faced extraordinary challenges. But the directors did what they were paid to do,
and that does not mean they are entitled to releases of third-party claims, particularly when those
releases really are not necessary or important to the accomplishment of the restructuring
transactions. See Nat’l Heritage Found., Inc., v. Highbourne Found., 760 F.3d 344, 348 (4th Cir.
2014) (services by officers and directors did not constitute the sort of contribution that would
justify third-party releases); Gillman v. Continental Airlines (In re Cont’l Airlines), 203 F.3d
203, 215 (3d Cir. 2000) (denying approval to third-party releases of claims against officers and
directors when there was no evidence that the success of a reorganization bore any relationship
to the proposed releases); In re Washington Mut., Inc., 442 B.R. 314, 349-350 (Bankr. D. Del.
2011).
I have also been told that the audit committee members are beneficiaries of
indemnifications from the Debtors as to claims that might be made against them. This just
means that, to the extent the directors believe they have earned protections against lawsuits, the
directors already have them. Some courts have justified releases of officers and directors on the
ground that the releases are necessary to protect the debtors from indemnification claims that the
directors and officers might make. However, I fail to see how the possibility of an
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indemnification claim is a proper justification to take away the rights that claimants may have to
pursue claims that they own directly against the officers and directors.
Assume here, for example, that shareholders might have securities law claims against the
audit committee members. If the Debtors were liable for against any similar claims, the Debtors
presumably would argue that their own liabilities are subordinated under section 510(b) of the
bankruptcy code. If claimants have the right to recover from individual directors, there is no
reason why they should be deprived of those potential recoveries. That does not change just
because the Debtors have elected, for their own reasons, to affirm their indemnification
obligations to the members of the audit committee. If anyone believes that the indemnifications
would have the effect of making the Debtors liable for claims that otherwise should have been
subordinated, then perhaps the correct answer should be to subordinate the indemnity claims –
not to extinguish the third-party claims against the directors.
To the extent that the directors in this case have indemnification rights, that just makes
clear that there is no reason from their perspective why a release of the claims against them is
necessary or important to the reorganization process.
For the foregoing reasons, I will not approve the consensual releases. I will approve a
modified version of the exculpation provision that I have described, but the request for the
imposition of involuntary third-party releases will be denied.
Dated: New York, New York




April 8, 2019
s/Michael E. Wiles
Honorable Michael E. Wiles
United States Bankruptcy Judge