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Michael Evrard-Vescio

On 25 September, Judge Craig Goldblatt of the US Bankruptcy Court for the District of Delaware became the latest jurist to weigh in on what constitutes consent for third-party releases. In his opinion for In Re Smallhold, a Subchapter V small business bankruptcy, Goldblatt highlighted the tension between consent and default, and why the latter is never sufficient to achieve the former.

Bankruptcy courts across the country have chimed in on the issue, after the Supreme Court’s landmark decision in Harrington v. Purdue Pharma held that the bankruptcy code does not allow for the release of a creditor’s claim against a non-debtor without the consent of the parties.

In his decision, Judge Goldblatt explains that “After Purdue Pharma, a third-party release is no longer an ordinary plan provision that can properly be entered by ‘default’ in the absence of an objection.” Under traditional contract principles, a party that hasn’t responded to an offer within a certain period of time cannot ordinarily be deemed to have accepted the agreement. Most judges would deem acceptance under these conditions as default, as opposed to consent.

Default is relevant with respect to consent for third-party releases, because when a party doesn’t affirmatively opt-out of the third-party releases, they are held to the default standard provided. While an opt-out alone coupled with default isn’t sufficient to create consent, an opt-out in conjunction with an affirmative act is. In the case of Smallhold, this affirmative act was voting on Chapter 11 plan confirmation.

Judge Goldblatt divides the creditors into two categories: those who were unimpaired and didn’t receive a ballot to vote on the plan, and those that did vote with an opt-out clause contained within their ballot. The Judge held that “the unimpaired equity holders and creditors whose claims will be paid in full and thus were not given the opportunity to vote cannot be said to have consented to the releases.” Therefore, no release can be granted with respect to the equity holder and creditor interests until proper consent has been obtained.

Judge Goldblatt then further explained that for the second group of creditors, “The Court is satisfied that under these circumstances, the affirmative act of voting, coupled with clear and conspicuous disclosure and instructions about the consequences of the vote and a simple mechanism for opting out, is a sufficient expression of consent to bind the creditor to the release under ordinary contract principles.” Whether these creditors voted for or against the plan, they have taken an action approving the third-party releases through their decision to not opt-out. What underpins this reasoning isn’t the opt-out clause itself, but the clear and conspicuous notice provided through the voting process.

In his opinion, Judge Goldblatt goes out of his way to avoid fully foreclosing the potential for an opt-out to create consent for the purposes of a third-party release. The judge carefully crafts a very small exception under rule 23(b)(3) of the Federal Rules of Civil Procedure.

Under this provision, a named representative is authorized to act on behalf of a class, subject to the rights of unnamed members to receive notice and opt out. When a court “certifies a Rule 23(b)(3) class action, a bankruptcy court can and should treat an estate fiduciary as a class representative, giving that representative the authority to bind absent class members, subject to those members receiving individual notice and being afforded the opportunity to opt out.” Judge Goldblatt suggests that the binding power of the representative provides added weight to opt-out clauses, perhaps providing a lifeline to future third party releases.

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Delaware becomes latest bankruptcy court to weigh in on third-party releases

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