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Behrmann v. National Heritage Foundation, Inc.

John R. Berhmann v. Nat'l Heritage Foundation, Inc., ___ F.3d ___ (4th Cir. 2011) (Case No.:10-2015); 2011 U.S. App. LEXIS 24454
The United States Court of Appeals for the Fourth Circuit (the “Fourth Circuit”) held that equitable relief in the form of non-debtor release provisions in a plan of reorganization is permissible in certain circumstances; however, in confirming the plan at issue the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”) failed to make sufficient findings of fact in support of its conclusion that the case warranted such equitable relief. Absent these specific findings of fact, the Fourth Circuit found that meaningful review of the decision was not possible and vacated and remanded for further proceedings consistent with its decision. In finding that non-debtor release provisions are permissible, the Fourth Circuit also rejected the Appellant’s contention that the confirmed plan failed to satisfy the requirements of the Bankruptcy Code. First, the Appellants, certain holders of general unsecured claims, argued that the plan was not filed in good faith and failed to satisfy the requirements of 11 U.S.C. Section 1129(a) because it was orchestrated to provide “clemency” for the debtor’s directors and officers by way of the release provisions. The Fourth Circuit found, however, that the Bankruptcy Court, which had examined the totality of the circumstances surrounding the formulation of the plan, did not commit clear error in finding that the debtor filed the plan in good faith. Second, the Appellants argued that the confirmed plan violated 11 U.S.C. 524(e), which, according to the Appellants, foreclosed approval of the release provisions. In rejecting this argument, the Fourth Circuit affirmed its ruling in Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694 (4th Cir. 1989) (“A.H. Robins”) wherein it permitted the bankruptcy court to enjoin suits against the debtor’s directors and lawyers on the grounds of equity, and specifically noted that “11 U.S.C. section 105(a) gives the bankruptcy court the power to issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title, and confers equitable powers upon the bankruptcy courts.” Id. at 701. Accordingly, the Fourth Circuit held that there was no merit to Appellants’ blanket assertion that non-debtor releases are never permissible by operation of § 524(e). Finally, in reviewing case law from other circuits, as well as its own holding in A.H. Robins, the Fourth Circuit concluded that a bankruptcy court is authorized to approve non-debtor releases “where circumstances warrant.” In this regard, the Fourth Circuit found the various tests advocated by other courts to be “instructive” in considering whether to approve non-debtor releases, but stopped short of adopting a specific test. See In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (seven factor test requiring (1) identity of interests between debtor and nondebtor, (2) that the non-debtor contribute substantial assets to reorganization, (3) that the injunction be “essential” to reorganization, (4) that the impacted class “overwhelmingly” accept the plan, (5) that the plan provide for mechanism to pay all classes affected, (6) that the plan provides for opportunity to claimants to recover in full and (7) that the bankruptcy court make a record of specific factual finding in support of the injunction); In re Railworks Corp., 345 B.R. 529 (Bankr. D.Md. 2006) (four factor test requiring, (1) overwhelming approval for the plan, (2) a close connection between the enjoined causes of action and causes of action against the debtor, (3) that the injunction be essential to reorganization and (4) that the plan provides for payment of substantially all claims affected by the injunction). Ultimately, however, the Bankruptcy Court’s failure to make “specific factual findings” explaining why it approved the non-debtor releases precluded the Fourth Circuit from affirming the decision.
Procedural context:
The Appellants, certain holders of general unsecured claims, appealed the Bankruptcy Court’s order confirming of the debtor’s plan of reorganization that contained various non-debtor releases. The United States District Court for the Eastern District of Virginia affirmed the Bankruptcy Court's confirmation order. On appeal, the Fourth Circuit vacated the judgment of the District Court and remanded.
Following the entry of a $6 million state court judgment against it, the National Heritage Foundation, Inc. (the “Debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The Debtor filed a plan of reorganization seeking to enjoin certain causes of action against various individuals, the Debtor and the official committee of unsecured creditors (the “Committee”). Initially, the plan contained release provisions that prevented potential claimants from asserting claims that accrued on or before the effective date of the plan against the Debtor, the Committee and “certain individuals closely connected with the Debtor and the Committee”. The Bankruptcy Court denied these release provisions as being overly broad. Consequently, the Debtor narrowed the release provisions to enjoin claims against the debtor, the Committee, certain designated representatives of the Committee, officers, directors or employees of the Debtor, the Committee, or their successors and assigns. The revised release only enjoined actions brought by “parties in interest that had filed a proof of claim” or were given notice of the bankruptcy proceeding and only applied with respect to claim arising out of the debtor's business operations through the effective date of the plan. The Bankruptcy Court approved the revised release provisions determining in its written order and oral findings of fact, that they were “essential” to the Debtor’s reorganization given the Debtor’s “unique circumstances”, an “essential means” for implementing the plan, “integral” to the transactions contemplated in the plan, provided a “material benefit” to the Debtor, its estate and creditors, that there was “potential for mischief” among parties whose claims were disallowed, and “important to the plan’s objective,” while being consistent with the Bankruptcy Code. The Bankruptcy Court, however, failed to support these conclusions with specific factual findings. The Appellants appealed the confirmation order and obtained a temporary stay enforcement of the release provisions. The District Court affirmed.
Before Traxler, Chief Judge, and Agee and Diaz, Circuit Judges (opinion by Judge Diaz)

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