The question of whether a debtor’s plan of reorganization can include non-consensual releases for non-debtor parties has been hotly contested for several years, with circuit courts oftentimes split. In his recent decision on the topic in the Aegean case, New York Southern District Bankruptcy Judge Michael E. Wiles explored the limitations on such releases even in permissive jurisdictions such as the Second Circuit.
Specifically, as discussed further in this article by Mayer Brown attorneys Barbara Goodstein, Joaquin C De Baca, and Anastasia Kaup, Judge Wiles emphasized that such releases “are not a merit badge that someone gets in return for making a positive contribution to a restructuring … not a participation trophy, … not a gold star for doing a good job.” Instead, permissible non-consensual, third-party releases must among other things, be tailored to particular claims and must be tied to specific actions taken by the third party as part of a debtor’s restructuring.