beware

Chapter 11 plans routinely contain provisions either releasing, or enjoining litigation against, various stakeholders involved in the case, particularly where the plan contemplates an infusion of cash by those stakeholders.  With few exceptions, the provisions of a confirmed chapter 11 plan are binding upon all creditors, whether or not they vote in favor of the plan.  Accordingly, it is important for creditors to review Chapter 11 plan releases carefully.

In the rent case of Iberiabank v. Geisen (In re FFS Data, Inc.), 776 F.3d 1299 (11th Cir. 2015)(http://media.ca11.uscourts.gov/opinions/pub/files/201411473.pdf) the bank creditor made a pre-petition loan for $10.6 million (“Loan”) which was guaranteed by FFS Data, Inc. (“Corporate Debtor”) and its president (“Debtor’s President”).  Shortly prior to the Corporate Debtor’s bankruptcy, the borrower defaulted on the Loan.  The bank creditor agreed to forbearance against the borrower and the Debtor’s President to provide them with an opportunity to sell the real property securing the Loan and if the property sold, the bank creditor would be permitted to proceed with an action against the guarantors, including the Debtor’s President, for any deficiency.  The bank creditor filed a claim in the Corporate Debtor’s bankruptcy estate for $10.6 million.

The Corporate Debtor proposed a chapter 11 plan and among other concessions, the Debtor’s President contributed $750,000 to the bankruptcy estate and agreed to release more than $1 million of his claims against the bankruptcy estate.  In return, the proposed plan contained a broad release provision for the Corporate Debtor and the Debtor’s President.  The bank creditor did not object to the proposed plan, attend confirmation or appeal the confirmation order.  Thereafter, the creditor bank sued the Debtor’s President on his guaranty and the Debtor’s President responded that the Plan released him from his personal guaranty of the Loan.  The creditor bank sought to reopen the bankruptcy case and moved for a determination that its claims against the Debtor’s President were not released.  The bankruptcy court denied the creditor bank’s motion, the district court affirmed, and the bank creditor appealed.

The U.S. Court of Appeals for the Eleventh Circuit (“Court”) held that the lender’s claims against a bankruptcy debtor’s president, who had personally guaranteed a loan, were released by the general release incorporated in the Corporate Debtor’s confirmed chapter 11 plan of reorganization.  The Court determined that the release was not limited to claims against the Debtor’s President solely in his capacity as an officer and/or director of the Corporate Debtor.  Further, the Court further declined to adopt the Fifth Circuit’s requirement that a release of third-party guarantor be “sufficiently specific” in order to have res judicata effect, but notwithstanding, found that the release was sufficiently specific, as it identified the Debtor’s President and stated that it was a general release of all claims.

The lesson of this case is that Chapter 11 creditors should review releases very carefully, ensure that plan releases are limited to the Debtor’s obligations only, and where releases are broadly worded to include third-party obligors, file objections for non-consensual releases or where they believe clarification is needed on the scope of the release.