Literal Meaning of Release Provisions Enforced Over the Objection of Plan Proponents

Reprinted with permission from the September 13, 2018 issue of The Legal Intelligencer. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

The bankruptcy plan confirmation process typically requires intensive negotiations involving numerous creditor groups and other parties-in-interest. As a result, the scope of the releases embedded within a plan is subject to multiple reviews by such parties and then approval by the bankruptcy court. Even after all of that review, however, as was shown in a recent U.S. Bankruptcy Court for the District of Delaware opinion, the final releases may not accurately reflect the intentions of the parties, much to the disappointment of the drafters. Nevertheless, as Judge Brendan Shannon has now made clear—words matter—and you may be strictly held to those in the release, even if the result was not intended.

In Samson Resources v. Samson Energy, Judge Shannon granted a motion for summary judgment in favor of certain defendants who were inadvertently released by the debtors’ confirmed Chapter 11 plan. The plan itself was “the result of protracted and hard-fought negotiations between the Debtors and the Creditors’ Committee, achieved only through the intense efforts of the parties and a judicial mediator.” The “central feature” of the plan that led to the committee’s support—required for confirmation—was the creation of a post-confirmation trust that would bring suit against the debtor’s former owners, and certain related entities.

By way of background, over three years prior to the debtors’ petition date the former owners sold the debtors through an LBO to a consortium of investors for approximately $7.2 billion. After the debtors’ plan was confirmed, the trustee of the post-confirmation trust filed a complaint against the former owners, alleging in part that the LBO constituted a constructively fraudulent transfer, as it left the debtors insolvent and without the capital necessary to survive. Each of the defendants moved for summary judgment, claiming that they fit the definition of “released parties” under the plain language of the plan. They argued that, as released parities, they were immune from the lawsuit at bar and that the court “should not, and cannot, look to extraneous sources beyond those documents [i.e., the plan and the confirmation order] to construe and interpret the plan’s release provisions or to identify the intent of the parties in proposing and supporting the plan during the Chapter 11 case.”

The trustee argued that one of the central premises of the plan was the very lawsuit before the court, that there was never an intent to release the defendants, and “to the extent that they may technically fall within the definition of ‘released party,’ that is the result of imprecise language or scrivener’s error.” Indeed, the trustee explained that “even cursory examination” of the record outside of the plan and confirmation order—such as the parties’ representations to the court during the confirmation hearing—would make it clear that the defendants were never meant to be released. Further, the trustee submitted that the inclusion of two of the defendants in the plan’s schedules of retained causes of action created ambiguity that required the examination of parol evidence to glean the intent of the plan language.

The court underpinned its analysis by stating “unless there is ambiguity, the terms of the confirmation order and the plan are controlling and the court is not free to look to material beyond the provisions of the confirmation order and the plan.” Additionally, the court noted that under applicable New York law a “release must reveal an unmistakable intent of the parties to release the causes of action asserted in the complaint … Any release purporting to excuse a party from its misconduct must survive close judicial scrutiny.” With these principles in mind, Judge Shannon turned to the plan’s release provisions. Indeed, the debtors defined “released parties” in the plan in “a single sentence containing 332 words, over a dozen clauses, 38 commas and at least eight separate provisos.” What’s more, “the scope of these releases, as set forth in the plan and approved by the confirmation order, could hardly be broader or more all-encompassing.” Despite the dense language of the plan’s release provisions, the court found that the plan expressly released two of the defendants despite the debtors’ intentions to the contrary and, therefore, granted the motion for summary judgment as to those entities. Two defendants were found to explicitly not fall within the definition of “released party” as ambiguity between the release provisions of the Plan in contrast to the plan supplement and disclosure statement (both of which explicitly retained causes of action against those entities) permitted the court to look at parol evidence. This extrinsic evidence made clear that the debtors never intended to release those defendants. As to the remaining defendants, the court found that there were still genuine issues of material fact that required the motion to be denied.

While the trustee’s suit against certain of the defendants survived the motion for summary judgment, two entities that were never intended to benefit from the releases were found to be released parties due to the expansive and complex release language. The court thus rejected the trustee’s position, which it boiled down to “the plan just can’t mean what it says,” and warned that “once a plan is confirmed and the order becomes final, the parties’ rights, obligations, and expectations are fixed.”

From a practitioner perspective, the Samson Resources case is a cautionary tale. Attorneys, especially plan proponents, should ensure that they know exactly who benefits from a plan’s release and for what potential cause of action. Failure to do so could lead to the inadvertent loss of valuable claims. While it is unclear how other courts will rule under similar circumstances, there is now at least persuasive authority for mistakenly released parties to rely upon when arguing that a court should adhere to the “plain” language of a confirmed plan. Should this notion firmly take hold in the District of Delaware, it is hardly unthinkable that other jurisdictions would follow suit.

From a policy perspective, Judge Shannon’s ruling is an interesting development. Arguably, the Samson Resources ruling simply seeks to hold the drafters of Chapter 11 plans accountable for their own language. If, as a byproduct, release provisions in future plans become more comprehensible, all the better. Plans of reorganization are meant to be understood; voting on such plans is meant be informed. However, the plan confirmation process is complex, as are the resulting plans. Most seasoned Chapter 11 professionals can likely imagine at least one case in which they were involved where similarly Kafkaesque releases passed through confirmation. As such, the sprawling release provisions that have become common in modern Chapter 11 practice are difficult for even experienced bankruptcy attorneys to interpret, let alone for any layman stakeholder or nonbankruptcy counsel. Maybe it is time for practitioners to revisit what is often “canned” language to see how it can be simplified to ensure all parties fully understood its meaning and that it implements the intended goal.

Francis J. Lawall (LAW’85), a Partner in Pepper Hamilton’s Philadelphia office, focuses his practice on national bankruptcy matters and workouts, as well as complex bankruptcy litigation matters.

Kenneth A. Listwak is an Associate in the Corporate Restructuring and Bankruptcy Practice Group in Pepper Hamilton’s Wilmington office.

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