National Heritage Foundation, Inc. v. Highbourne Foundation

Citation:
No. 13-1608 (4th Cir. June 27, 2014)
Tag(s):
Ruling:
The Circuit Court affirmed the bankruptcy court's ruling that the non-debtor release provision in the debtor's Chapter 11 reorganization plan was unenforceable.
Procedural context:
On remand following an earlier appeal, the United States Bankruptcy Court for the Eastern District of Virginia ruled that the non-debtor release provision in the debtor's chapter 11 reorganization plan was unenforceable. The District Court affirmed and finding insufficient evidence to support the appellant's contention, the Circuit Court affirmed.
Facts:
The debtor, National Heritage Foundation, Inc. ("NHF"), a non-profit public charity, filed its Fourth Amended and Restated Plan of Reorganization (the "Plan") that was approved by the bankruptcy court. Certain of NHF's donors challenged the Plan on the ground that the non-debtor release provision (the "Release Provision") was unenforceable. The Release Provision covered NHF, the Official Committee of Unsecured Creditors and its members and any designated representatives, and any officers, directors or employees of NHF, the Committee or their successors and assigns. The provision provided that these parties "shall not have or incur, and are hereby released from, any claim, obligation, cause of action, or liability to any party in interest who has filed a claim or who was given notice of the Debtor's Bankruptcy Case (the "Releasing Parties") for any act or omission before or after the Petition Date through and including the Effective Date in connection with, relating to, or arising out of the operation of the Debtor's business, except to the extent relating to the Debtor's failure to comply with its obligations under the Plan." The Court found that NHF failed to sustain its burden of proving that the facts and circumstances of its case justified the Release Provision. The Fourth Circuit determines whether non-debtor releases are appropriate by considering six substantive factors enumerated in Class Five Nevada Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002). These factors include: (1) There is an identity of interests between the debtor and the third party; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization ...; (4) The impacted class, or classes, has overwhelming voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; and (6) The plan provides an opportunity for those claimaints who choose not to settle to recover in full. Id. at 658. Upon review of the record, the Circuit Court found that only the first factor weighed in favor of the Release Provision because NHF would have to indemnify its officers and directors (two released parties) for any action brought against them by reason of having been a director or officer of NHF. The Court found that "an indemnity obligation is not, by itself, sufficient to justify a non-debtor release." In sum, the debtor failed to demonstrate that its case constituted the exceptional circumstances necessary to justify the Release Provision. The Court noted that it was the dearth of evidence rather than the particular circumstances that failed the debtor in this case because it did not provide adequate factual support for the Dow Corning factors.
Judge(s):
Circuit Court, Diaz (author), Wilkinson and Agee Bankr. E.D.V.A., Trenga

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