Restructure This! Podcast Ep. 9
Is it Time to Prohibit Non-Consensual Third-Party Releases in Bankruptcy Proceedings?
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Listen to the original podcast released April 19, 2022 here: https://www.sheppard.com/multimedia-390
Sheppard Mullin’s Restructure THIS! podcast explores the latest trends and controversies in Chapter 11 bankruptcy, commercial insolvency, and distressed investing. For this episode, Ralph Brubaker, the James H.M. Sprayregen Professor of Law at the University of Illinois College of Law, joins us to discuss the use of non-consensual third-party releases in bankruptcy proceedings.
Guests:
Professor Brubaker holds four degrees from the University of Illinois, including his J.D. summa cum laude and an M.B.A. He was on the faculty of Emory University School of Law in Atlanta, Georgia, from 1995 until 2004, when he returned to his alma mater. Professor Brubaker served as Interim Dean of the College of Law from 2008-09 after serving as Associate Dean of Student Affairs the previous two years.
Considered one of the leading bankruptcy scholars of his generation, Professor Brubaker is the Editor-in-Chief and a contributing author for West’s Bankruptcy Law Letter. He is also co-author of a bankruptcy casebook and has written dozens of journal articles and essays. In his most recent article, "Mandatory Aggregation of Mass Tort Litigation in Bankruptcy,” published last month in the Yale Law Journal Forum, Professor Brubaker addressed the inequities of non-consensual third-party releases used in bankruptcy proceedings and argued for their prohibition.
Transcript:
Justin Bernbrock:
On this week's installment of Restructure This!, we welcome Professor Ralph Brubaker, who is the James H.M. Sprayregen Professor of Law at the University Of Illinois College Of law. Professor Brubaker is a renowned bankruptcy scholar and preeminent bankruptcy professor. And he has written profusely on the issues surrounding non-consensual third party releases. As part of today's conversation, Professor Brubaker will share his views and put forth the argument for why non-consensual third party releases should not be allowed. As always, stay tuned for after the interview for a quick rundown of current restructuring news and notable stories.
Justin Bernbrock:
Again, we're joined today by Professor Ralph Brubaker, who is the James H.M. Sprayregen Professor of Law at the University Of Illinois College Of Law, and one of my bankruptcy professors nearly 10 years ago at this point. Professor Brubaker, it's such a pleasure to have you and a real privilege to do this in Champaign, in person. I'll note for the listener that this is the first time that we've recorded a live podcast with an audience. And we're very grateful to have all of you here. So again, Professor Brubaker, thank you.
Ralph Brubaker:
Thanks very much for having me, Justin. And it's a pleasure to have you back at the law school, exactly 10 years after you were a student in my Corporate Reorganizations course here at Illinois.
Justin Bernbrock:
That's right.
Ralph Brubaker:
And yeah, it's a pleasure to have you here and to have some of our students get to sit in on the recording of the podcast. You've got some big fans of the Restructure This! podcast amongst our corporate organization students in particular.
Justin Bernbrock:
That's great, that's great. We hadn't originally thought that it would be something that law students would be interested in. And then I think one of your students forwarded an email about the podcast while we were talking about recording this episode. And so that was a nice validation of the work that we put into this. But let's-
Ralph Brubaker:
Yeah, you've got Restructure This! groupies.
Justin Bernbrock:
Yeah. And we've got merch. We've got merch now. I think we're going to hand it out at the ABI annual spring meeting.
Ralph Brubaker:
Excellent.
Justin Bernbrock:
Yeah. It should be a fun time. So Professor Brubaker, you've been here in Illinois for a while. What got you here? Where did this all start? Well, I know it started here originally, but I think that the listener would like to know how you came to be interested in bankruptcy and restructuring work.
Ralph Brubaker:
Wow. So it did start here in Illinois when I was a student. My academic background was in finance, economics, and accounting. In law school, the one subject matter area that really clicked with me and that I sort of intuitively understood and was drawn to all of the fascinating complexity was bankruptcy and corporate organizations. And my professor for corporate organizations is my colleague, Professor Charles Tabb. And he's been sort of my academic mentor and he and I have written a casebook together and articles. But yeah, it all started here as a student at Illinois. And thereafter I knew, after I took my first bankruptcy class, I knew that this is what I want to do for my career.
Justin Bernbrock:
And do I have it right? You spent time in, did you teach at Emory or?
Ralph Brubaker:
Yeah. So after I graduated from Illinois with both a JD and an MBA, I clerked for a federal judge, Judge Jim Logan, on the 10th Circuit, for a year. Then I worked in the restructuring practice at Squire, Sanders & Dempsey in Cleveland for about five years, now Squire Patton Boggs, working with Chris Meyer. A lot of people know Chris Meyer—fantastic Chapter 11 lawyer. Taught me how to be an attorney. But I kind of knew when I was in law school that I wanted to be an academic. So I taught as a visitor here at Illinois in our Visiting Assistant Professor program, sort of a fellowship program for aspiring law professors. I was the second person in the Illinois’ VAP program. The first was my colleague, Bob Lawless, who's also a world renowned bankruptcy professor. He was the first VAP, and he went off to teach at various places—Missouri, UNLV. He's also now back on the faculty at Illinois. I went from my VAP and taught at Emory Law School in Atlanta for about 10 years until Illinois enticed me to come back to my alma mater. And I've been back since 2004, and it's great to be here.
Justin Bernbrock:
And I think it's, well, I'm very biased that there's virtually no way I could be objective on the subject, but the strength of the bankruptcy faculty at Illinois is—it's incredible. And I think that sometimes it's overlooked at least from a student perspective, perhaps not a scholar perspective. But any students listening to this or those that are interested in bankruptcy—Illinois is certainly a magnet and significant player in the bankruptcy space from an academic perspective.
Ralph Brubaker:
Oh, we certainly like to think so. And we offer, because we have so much faculty strength in the area, we can offer a lot of coursework. At virtually any law school you can get the basic survey bankruptcy class, but in addition to that, we teach advanced classes. I teach an advanced class in corporate reorganization. I teach an advanced class in bankruptcy procedure, which is a very important aspect that not a lot of people fully appreciate, unless, of course, when they're in practice, they realize that federal bankruptcy proceedings, because they're a court process and a federal court process, they implicate a lot of very sophisticated jurisdictional, procedural, federal courts, complex litigation types of issues. And that's the kind of stuff we explore in my bankruptcy procedure course. We offer an international bankruptcy and reorganization class. We offer various seminars. We offer courses in secured credit. We offer courses in consumer practice, consumer protection, consumer bankruptcy.
Ralph Brubaker:
So students who are interested in the area can come out of law school with already a sort of substantial substantive expertise in the area, which is unique. And it's very helpful to them as they sort of launch their careers. A lot of our students clerk for bankruptcy judges. A lot of them go into practices right away with sort of doing sophisticated Chapter 11 work. We have students who do consumer bankruptcy work. But, it opens up a lot of opportunities for students who want to specialize in the area. They can specialize in law school.
Justin Bernbrock:
And I found in my own experience, the bankruptcy procedure class in particular was hugely, hugely valuable, because folks that have not been exposed to things like Stern v. Marshall or some of the other issues that have arisen in the last couple of decades surrounding bankruptcy jurisdiction, are at a significant disadvantage. Because, I mean, there's an argument that bankruptcy is a process writ large. And so the more that you know about the bankruptcy procedure, the better equipped you are to make use of some really interesting tools in the context of a restructuring case. Not all of which will endear you to the bankruptcy judge, particularly if you are seeking to withdraw the reference for example, but certainly others. I think that there's a lot of interesting stuff to talk about in that arena.
Ralph Brubaker:
Yeah. And of course, in effectively representing your clients, you want to bring to bear all of the various moves that are available. And knowing all the nuances with respect to jurisdiction and procedure gives you a lot of moves that if you're not well versed in that sort of stuff, you don't necessarily know how to respond to that. So it does give you a leg up in certain respects. And I think I've heard someone say before that bankruptcy in and of itself is just a process. I wonder where that would've been.
Justin Bernbrock:
Yeah. It's certainly fascinating. Well, you've written an article recently, and I think this article has gotten quite a lot of attention, perhaps because of things going on broadly in the country, in bankruptcy cases. It certainly has gotten significant attention in the bankruptcy and restructuring community specifically. So the title of the article is Mandatory Aggregation Of Mass Tort Litigation In Bankruptcy. What is your fundamental thesis for this article?
Ralph Brubaker:
So, to begin with, this article is a response to an article written by Professor Lindsay Simon at the University of Georgia in the Yale Law Journal. Her article, evocatively entitled, Bankruptcy Grifters, which is exploring this phenomenon of third party entities, individuals in corporations who have not themselves filed bankruptcy, nonetheless, being able to discharge their responsibility, especially for mass tort liability in the context of a debtor who has filed bankruptcy. And she was sort of critically examining that process proposing reforms, because she and I both perceived lots of inequities in the ability of third parties who have not filed bankruptcy to do that. I actually have a more extreme view than hers. Her view was that we should reform the practice, not get rid of it.
Ralph Brubaker:
My long held view is that we should get rid of the practice. That the whole phenomenon that she's charting in her article is attributable to these so-called non-consensual non-debtor or third party releases whereby creditors or shareholders who have direct third party claims against the non-debtor entity, those claims are mandatory released, discharged. And the release, the non-consensual release, binds all creditors and shareholders, whether they've consented to that release or not, even over their express objection. Exactly the same way that a bankruptcy discharge binds all creditors and shareholders with their respective, their claims against the debtor. And these non-consensual third party release provisions in a planned reorganization are typically implemented by a permanent injunction in the confirmation order, preventing any assertion of a released claim, the same way the debtor's discharge is enforced via the statutory discharge injunction. And there is no explicit statutory authorization for that sort of non-consensual third party release, except for certain third party claims in asbestos cases—the Bankruptcy Code explicitly authorizes release with respect to asbestos claims against certain third parties in an amendment enacted in 1994. But other than that, there is no explicit statutory authority.
Ralph Brubaker:
This phenomenon of approving these non-consensual third party releases has been around for a long time. It actually began in the late eighties. The first court of appeals decision that explicitly signed off on it was in the AH Robins reorganization involving mass tort liability of AH Robins in conjunction with the Dalkon Shield contraceptive device. I was in practice at the time. I was—like other Chapter 11 lawyers—I saw the possibilities with this new device and advocated in favor of these non-consensual third party releases in cases that I was involved in, in practice. But at the same time, I was somewhat appalled that this was even possible. I just thought there were so many problems with the practice, that when I became an academic, my first academic project was to sort of take a very deep dive into this practice, the practicalities of it, the theory behind it, the legality of it. And I came away very firmly convinced after having written a sort of book length law review article that it was just totally improper. That it not only violated positive law in lots of ways, but it was also not theoretically or conceptually sound. That the things that it was purporting to accomplish, it wasn't actually accomplishing.
Ralph Brubaker:
So I've been a long time persistent critic of the practice. So when Professor Simon's article was published and the law journal asked me to respond, I viewed it as a perfect opportunity to say, "Well, you're not going far enough, right? This practice is irredeemable, and is beyond reform. You have to prohibit these non-consensual non-debtor releases."
Justin Bernbrock:
I think that it's important to define the scope of your target by distinguishing that which you do not oppose. Because you do go to some length to distinguish types of releases common in Chapter 11 plans that you don't oppose or that you believe are appropriate. Can you speak to those?
Ralph Brubaker:
Yeah. I think that's important also, because the parade of horribles is trotted out oftentimes in objecting to my view, [which] is, well, if you oppose, if you get rid of non-consensual non-debtor releases, all these other practices have to go away. That's just not the case. There are all sorts of releases that are not the least bit controversial, at least as to whether a bankruptcy court has authority to approve them. And so first of all, there's clear authority for the bankruptcy estate’s representative, be it a trustee or a debtor in possession, or even a creditors’ committee, if authorized to pursue claims on behalf of the estate, to compromise claims and causes of action belonging to the estate and give the defendants a release. The court can approve those kinds of settlements under standards announced by the Supreme Court in a case called Protective Committee v. Anderson, and from 1968, and the Bankruptcy Code itself in section 1123(b)(3)(A), expressly provides that a plan of organization can, quote, “provide for the settlement or adjustment of any claim belonging to the estate.” And that includes causes of action that, outside bankruptcy, individual creditors or shareholders might be able to pursue.
Ralph Brubaker:
For example, fraudulent conveyance claims are assertable by individual creditors outside of bankruptcy. But when the debtor who allegedly made a fraudulent transfer files bankruptcy, section 544 of the Bankruptcy Code essentially gives those state law fraudulent conveyance claims to the debtor's estate to pursue on behalf of all creditors, which preempts individual creditors’ fraudulent conveyance claims, which are stayed once the debtor files bankruptcy. And thereafter, the estate representative has exclusive authority to prosecute and, with court approval, to settle those causes of action. That's not at all controversial. The same thing goes for corporate derivative suits that individual shareholders might be able to prosecute outside bankruptcy. Once the corporation files bankruptcy, that cause of action belongs to the bankruptcy estate. Any non-bankruptcy suit on it is stayed, and the bankruptcy process determines the fate of that cause of action.
Ralph Brubaker:
Another uncontroversial kind of release, which is very, very similar to the first, are releases that also prevent individual creditors from going after or interfering with the estate's property rights. So for example, the estate's insurance policies that provide proceeds to cover claims against the debtor. There are all sorts of state laws that permit individual claimants whose claims are covered by insurance to bypass the insured and go directly after the insurance proceeds. Well, those insurance policies and their proceeds are property of the debtor's bankruptcy estate when the debtor files bankruptcy. So, individual creditors sue to try to get at those policy proceeds are stayed, and to fund a plan of organization, the debtor may strike a deal with the insurance company to just pay out the policy limits to the bankruptcy estate. And of course the estate has to be able to fully release the insurance company from any further claims under that policy, which is property of the estate, right?
Ralph Brubaker:
And, that was the Second Circuit's rationale for the insurance injunctions approved in the Manville case back in 1988. And those sorts of insurance injunctions are clearly permissible and should not be at all controversial. There's a very, very similar property of the estate in rem sort of rationale for injunctions protecting purchasers of the debtor's business. For example, in a section 363 sale from creditor claims for successor liability. In fact, most courts now conclude that the Bankruptcy Code itself in section 363(f) expressly authorizes a sale order that's free and clear of successor liability claims. So an injunction protecting the purchaser from those sorts of claims is not at all controversial. So really the only kinds of releases and implementing injunctions that are controversial—and are the target of my criticism—is with respect to direct claims by individual creditors or shareholders against a non-debtor third party for that non-debtor's own conduct that gives rise to a cause of action belonging to those individual creditors or shareholders.
Ralph Brubaker:
So, for example, an allegation that certain individuals within the corporation—or in other entities like affiliates, insurers, other creditors—personally participated in fraud or other kinds of tortious misconduct that injured me, right? And it gives me a cause of action directly against that tortfeasor for their own tortious conduct, right? That cause of action does not belong to the debtor's bankruptcy estate. That cause of action belongs to me personally, right? So the debtor's estate and its fiduciary representatives have no authority whatsoever to prosecute that cause of action belonging to me rather than the estate. That's the holding of the Supreme Court's famous decision in 1972 in Kaplan v. Marine Midland, right? So, the debtor’s estate and its fiduciary representatives—because they have no authority to prosecute that cause of action belonging to me—they also have no authority to compromise that claim belonging to me. Those are the only kinds of claims and causes of action where I oppose a non-consensual release.
Justin Bernbrock:
So setting aside fraud, intentional malfeasance—because I think a lot of practitioners would say, "Hey, our release provision carves out that specific type of harm you're describing." —so, setting those aside, how about a claim by a non-debtor third party creditor against a non-debtor third party shareholder or board member where that shareholder or board member has a direct indemnity from the bankruptcy estate?
Ralph Brubaker:
Typically that direct indemnity—so that's an obligation of the debtor's bankruptcy estate also, but it's also because it rises out of a pre-petition indemnity relationship—is an unsecured claim, right? So there's no problem with being able to deal with that sort of triangular or tripartite claims relationship. In fact, the Bankruptcy Code itself has provisions that deal with that sort of relationship by saying, "Well, the indemnity or contribution claim by the third party is typically disallowed," right? And so the Bankruptcy Code itself contemplates that it's not going to interfere with the direct claim against that third party. And then whatever claim against the bankruptcy estate that arises from that is dealt with the way any other contingent sort of claim is dealt with. They make their claim against the bankruptcy estate and it's either allowed or disallowed and it's given whatever priority it is entitled to.
Justin Bernbrock:
There's been this practice that's developed over time, which has probably made more money for the US Postal Service than any other discrete entity, but it's the concept of the opt-out mechanism. So certain jurisdictions require that when the debtors—or whoever is running the Chapter 11 process—when they are soliciting votes on their Chapter 11 plan, and as part of the disclosure statement, materials that are sent out, there will be a ballot, and in the ballot you can either accept or reject the plan. And in a separate section that will enable the voter to opt out of the release. And bankruptcy courts have said, "This is a mechanism that is acceptable to grant these sweeping releases because you're giving the creditor body an opportunity to opt out." Now we can talk about practically what that means and how efficacious the process is, but do you oppose or object to the opt-out theory?
Ralph Brubaker:
So, taking a step back from opt-out, opt-out is one permutation of what are regarded as consensual releases. And I also don't object to truly consensual releases. And I think all courts would likely agree that if an individual creditor or shareholder consents to a release or compromise of its third party non-debtor claim, then the bankruptcy court can approve that consensual release, at least to the extent that the bankruptcy court has jurisdiction over the claim that's being released. So really the only controversy surrounding so-called consensual releases is what's necessary for that release to be considered consensual. The opt-out as a means of consent really comes from analogy to class action practice, which is where it comes from.
Ralph Brubaker:
But if consider it without regard to the class action practice, what you're really asking the court to do is approve a settlement, right? And typically when you're asking a court to approve a settlement, you're just operating on normal contract law principles: I have agreed to release whatever claim I have in exchange for whatever it is you've offered me for that release. And typically contractual consent or agreement does not arise, and we don't infer it from inaction on the part of one of the contracting parties. In fact, that's first year contract law. Silence or inaction—it cannot constitute an acceptance of an offer. Right away, then, saying, "Well, if you fail to opt out, you've agreed to a release," should give us pause, right? The reason that class action law has said that is sufficient is because class action creates this representation litigation process where it has all sorts of due process requirements. . . and there is an analogy to non-debtor release practice, right, because notice what's happening with non-debtor releases, as it's a kind of representational settlement process also.
Ralph Brubaker:
So for the criteria used to approve non-consensual, non-debtor releases is often that the released party is making some sort of substantial contribution to the debtor's bankruptcy estate in exchange for the release. So we are sort of imposing this release on the creditors, even if they haven't agreed to it. So notice it is creating a kind of representational settlement process. Somebody else is negotiating and proposing and compromising the individual creditor’s claim, whether they have agreed to it or not. So you have something analogous going on in the class action context. But in the class action context, and it's required for purposes of due process, you have to have an adequate unconflicted litigation representative, right, who is only pursuing the interests of those individual plaintiffs, representing them in that process.
Ralph Brubaker:
Lack of an adequate representative for the individual claimants in that process violates due process. And they can't be bound by that process if they don't have an adequate litigation representative. So the first difficulty for non-consensual, non-debtor releases is that nobody has ever appointed a litigation representative for them in this process. And again, the Kaplan case says the trustee or debtor in possession—they can't be the representative. And that case also said to the extent that there is going to be such sort of representational assertion of these creditors’ direct third party claims, only Congress can authorize that. Congress has never explicitly authorized any litigation or settlement process representative for these claims. So that raises a big problem in and of itself. And that's the basis on which class action procedure has said, well, when we do have this sort of adequate litigation representative, who is a fiduciary protecting the interest of individual plaintiffs, then they can agree on behalf of individual plaintiffs. As long as we allow the individual plaintiffs an ability to remove themselves from that process and say, "I don't want this person representing me in that process," which is the opt-out that you've talked about. But, what precedes the opt-out right, and our comfort with the opt-out, is the due process litigation representative that is absent in the bankruptcy process.
Ralph Brubaker:
And of course the other thing that's absent in the bankruptcy process with respect to non-consensual, non-debtor releases is the opt-out, right? If you've got non-consensual, non-debtor releases, that's the whole point. You can't opt out, right? So, could you go to an opt-out system? Well, you might be able to, if it was authorized by Congress and it replicated these due process protections that you have in class action procedures. But, the bankruptcy process doesn't do that. So that's my difficulty with the opt-out as a means of saying, well, that's a sufficient indication of consent by claimants to bind them to a compromise of their claims.
Justin Bernbrock:
I was thinking here just about how there might be a real significant business development opportunity to go market ourselves as litigation claimant representatives. It's like a whole new role in a bankruptcy case. This is terrific.
Ralph Brubaker:
It could well be. It could well be. There are some potential difficulties with that, given that Congress has never expressly authorized that. If, in fact, non-consensual, non-debtor releases go away, then of course, there's lots of potential for consensual deals, right? Because you will get a very large percentage of claimants who will agree to compromises of their claims on sort of an aggregate basis. It's thereafter how you implement those deals and what's necessary to get people to sign off on the deals. And you do need somebody that is taking the lead in negotiating, because you can't negotiate with every individual creditor. You do need people who take the lead in negotiating, whether or not they can bind people in the absence of an opt out. Even if it's an opt-in, you still need adequate representation in that process to be comfortable with some sort of aggregate litigation settlement process.
Ralph Brubaker:
So yes, of course there's a big role to be played by counsel that will represent the interest of creditors if you're proposing some sort of. . . and I think that's the next logical progression, right? You should be able to settle these claims. It's just a matter of the means by which you do so and the rights of individual claimants to remove themselves from the settlement and pursue their claims on their own, the claims that belong to them. And yes, of course there's a big role to be played by counsels who represent the interests of those sort of parties.
Justin Bernbrock:
In your mind, is there a critical mass of consent that could drag along a non-consenting minority, or does every creditor subject to this type of release ought to have the ability to opt out of it, not be subject to it?
Ralph Brubaker:
So, you really have to go back to our traditions on the circumstances under which someone else can take my property away from me, right? A cause of action, the Supreme Court has recognized, is property for purposes of due process. And the circumstances under which we force people to give up property without their consent are very, very limited. Of course, one that we're all familiar with is in bankruptcy, right? But to do that, the debtor has to sort of make all of its assets available and under the control of the bankruptcy court. And individual claimants have the right to sort of prove up and liquidate the amount of their claim to establish their rights in the debtor's property. In that process, yes, we will bind dissenters and say, if we've worked out a deal with respect to how to divvy up the debtor's property that we've got in the control of the court, to the extent that there's a minority, then we're going to sort of bind the minority to the will of the majority with respect to that.
Ralph Brubaker:
But there's all sorts of protections built into that process for the individual dissenters, like absolute priority and best interests of creditors, for making sure that they can get at least the amount that they would get in a liquidation of all the debtors assets, right? When you move away from that, then the rationale for letting other people sort of take away an individual creditor’s right to litigate, there really is no justification, especially if—which is often the case with these non-debtor release—especially if the defendant is solvent, and has the wherewithal to pay all claims in full. There's really no rationale for letting a majority of claimants bind a minority to a forced settlement of their claims.
Justin Bernbrock:
So shifting gears a bit here, I know your article focuses on the release practice in the context of mass tort. I know that as a fundamental matter, your opposition to such releases is not limited to this type of case. I'm curious, given the population of those harmed in a mass tort situation—I mean, there are current things today that are very significant. Purdue Pharma is an example where the harmed population is broad.
Ralph Brubaker:
Yes.
Justin Bernbrock:
And that was the case in Dalkon. It's in the asbestos cases, but as you mentioned, the Supreme Court, or sorry, Congress has modified the Bankruptcy Code to account for that. There are other scenarios. And in fact, these types of releases virtually appear in every case—
Ralph Brubaker:
Which is one of the problems.
Justin Bernbrock:
And in cases it's very common to cite 10 or 15 of the most recent Chapter 11 cases in that jurisdiction as having approved these types of releases. There were no appeals brought to those situations. And I think we're seeing some interesting developments, particularly in the Eastern District of Virginia, Southern District of New York, on these topics. Does the population of those subject to the releases matter?
Ralph Brubaker:
Well, I'm not sure that it does. So, tell me more about why you think that would make a difference.
Justin Bernbrock:
Well, I guess the fundamental question is, is the identity or perhaps publicity, surrounding something like the opioid crisis in the United States, or those that are impacted by powder that was produced, I mean, it's everyday people. It's not funds or banks or companies that are trading securities, which there's another category of very significant claims that arose in ‘08, ‘09, that I want to talk about in a moment. But, is it that it is average people, everyday people that are subject to these releases—is that a factor? I mean, because I do sense that Purdue Pharma in particular—there is a human element, that is, there's a through line in the opinions where it seems to me, at least, that the identity of the victim class is relevant to that decision.
Ralph Brubaker:
I think that's very perceptive, and I think that's a big part of why this issue is gaining a lot of attention right now. You've got a lot of people paying attention to this for the first time, even though this practice has been around 30 years or more. There's been a lot of furor and outrage over the fact that this could even be possible because of cases like the one you've mentioned. And I think that's why we're talking about it now. Of course, if in fact there's no power to do this, it doesn't matter the identity of the claimant, but it has in fact brought a lot of attention to the issue itself. So much so that you've got a segment on a John Oliver episode discussing third party releases, right? If John Oliver is talking about third party releases, something is probably wrong.
Ralph Brubaker:
And it's to such an extent that there are bills being introduced in Congress to prohibit third party releases. And you've had a circuit split over the permissibility of this practice going by 30 some years. I think the recent furor triggered by this human element, no doubt, is what I think has caused judges to take a fresh look at this practice. I'm convinced that is what caused the district court judge in the Purdue Pharma case, that all this furor over the third party release practice caused the district court judge in that case to take a fresh look at the practice. Because she had only a few years before sort of said things that were directly contrary to what she ultimately concluded in her decision in the Purdue Pharma case. She clearly took a fresh look at the practice and ultimately came away saying this just is not permissible.
Ralph Brubaker:
So I think that is in fact what's going on right now, right? That's why we're even talking about it. And I think that that will probably play a role in whether the Supreme Court decides to finally take up this circuit split and resolve it, right? Again, the circuit split has been around forever. They've denied cert consistently, but given all of the attention that's being paid to the practice now, I think, it probably increases the likelihood that the Supreme Court might actually take up this circuit split and resolve it on whether this practice is permissible or not.
Justin Bernbrock:
So, I want to come at the problem from a slightly different angle and I'll use as my reference point, the Residential Capital bankruptcy case in which Judge Glenn granted pure non-debtor, third party non-consensual releases, most significantly, I think, to Ally Financial, who was the debtor's parent company, and was subject to RMBS and CMBS suits, as well as wrongful foreclosure suits, and a whole host of claims and causes of action across the country, frankly. And they funded $2.1 billion into the estate. And that settlement currency provided the recovery in a lot of instances to the funded debt holders and to others. And that's—I think we can all agree, I mean—it's a very big case. And the debtor at the time was solvent and sold its platform for a significant amount of money.
Justin Bernbrock:
There's a belief, I think, that non-debtor third parties who are interested in a bankruptcy case, perhaps its portfolio company, perhaps its direct subsidiary, will say, "You know what, I'm not going to fund $2.1 billion. I don't care who's mediating. I don't care who's involved. I'm going to sit back and I'm just going to play defense." And I think that there's a concern that there won't be as an efficient use of the Chapter 11 process because the quote unquote “deep pocket” or the sort of master fund element who is really seeking this release in exchange for a significant contribution to the estates, will say they're just not interested in paying that money. And I appreciate that your article and your perspective is one that really speaks to the law and to what the Bankruptcy Code says and to what ought to be the case in practice. I'm curious as to whether you've thought about—I know you have thought about, but—your ideas on whether there can still be incentives for these entities to make meaningful contributions and continue to have an efficient reorganization process given these challenges.
Ralph Brubaker:
Yeah, and I appreciate that very much. Part of what you have to try to separate is the negotiating dynamics under the law when non-consensual releases are permissible and what the negotiating dynamics would be if they were impermissible. So in the world we live in now where they are permissible, the way that you establish the necessity of the release, the standard is it's necessary to the reorganization, which doesn't mean that it's necessary to prevent liquidation of an operating debtor; as applied, it means it's necessary to do this particular deal. Well, if that's the standard, it's really impenetrable on whether the person would in fact make a contribution or do a deal if releases were impermissible, right? Because under the law as is, it's essentially a negotiating script for non-debtor parties who have something that the debtor, the estate, wants. It's a negotiating script for them to say, "Well, the only way I'll get a release is if I say, ‘Well, it's an absolute deal breaker, non-negotiable condition for me to do anything—that I get a non-consensual release.""
Ralph Brubaker:
So it makes it very hard to penetrate what their behavior would be if they couldn't make that demand. Would that mean that there's no deal that's possible? I am very skeptical, right? They have their own independent incentives for doing what they want to do, making an investment, because they think it will return for them. And it's hard to establish this empirically or via mathematical modeling or whatever. But my instincts tell me that whatever they're willing to put in to get that non-consensual release, it's because if they didn't have the non-consensual release, they think they would have to pay more. And again, the claims that are being bargained over here are not claims that belong to the parties that are bargaining them away.
Ralph Brubaker:
So, you're right, of course, they can very easily give them away for less than they're actually worth because if they can't prosecute them, they're not going to get anything from those claims. So they're perfectly willing to bargain them away for less than their full value. The bargaining dynamics in a world in which non-debtor releases are permissible, as opposed to the bargaining dynamics in a world in which non-debtor releases are not permissible, tell me that the world doesn't come to an end if non-debtor releases are not permissible. Deals will still get done because you have to get deals done. What will change is the terms on which the deals are done.
Justin Bernbrock:
Yeah. I tend to think that that's right. Albeit apocryphal from the strict Bankruptcy Code perspective, what if a practice developed that was analogous to the asbestos channeling injunction? What if that developed as a way to channel certain third party non-debtor claims to some certain pot of money whereby there is something in exchange for this release? Does that change the analysis at all?
Ralph Brubaker:
No, because that's just describing the current practice. And the so-called channeling, it's a very long channel, is what my colleague, John Patel, called it. It's not a channel at all, really, right? When it's not an in rem claim, it's an in personam claim, it's somebody for their own liability, the claim isn't channeled anywhere. It's just extinguished, right? And after the non-debtor release is entered, they no longer have a claim against that released party. They only have a claim against the debtor entity, which extinguishes a lot of accountability for non-debtor third parties, right? Even if a non-debtor third party filed bankruptcy in order to get that kind of discharge of their debts, individual creditors could still insist on liquidating their claim against the debtor's estate, which would involve the possibility that they would put on evidence of what that non-debtor third party actually did to make them liable to me. Through this non-consensual non-debtor release practice, the so-called channeling, there's no channeling at all. It extinguishes the claim against the non-debtor third party, so they thereafter don't have to face any public accountability through a trial that examines evidence of what it is that they did that might make them liable to individual creditors.
Justin Bernbrock:
Well, this has been incredibly fascinating, I know, for me and I hope for those that are assembled here. I have to ask you a final question, which has nothing to do with your article, and it has nothing to do with bankruptcy, but it is a tradition we've developed on the podcast. If you were not the James H.M. Sprayregen Professor of Law at the University of Illinois, College of Law, what would Ralph Brubaker do? Assuming. . .no limitations. It's a sort of world without end, pure. What would you do?
Ralph Brubaker:
So I could finally live my dream of being a male underwear model.
Justin Bernbrock:
There you go. All right. I think that's certainly the most interesting one we've had thus far. Well, Professor Brubaker, again, truly, truly thank you very much for this opportunity. Thank you for all that you taught me when I was sitting in a classroom like this 10 years ago, as you mentioned. And it's really, really very kind of you to do this.
Ralph Brubaker:
Thank you, Justin. It's been an honor to be on your podcast, and thanks very much for being here.
Robert McLellarn:
In current restructuring news, this past Monday, a little known Texas holding company called InfoW, LLC filed for Chapter 11 protection in the Southern District of Texas. The debtors claim they have no business operations or income producing assets, but this company does actually own the domain name for conspiracy website, infowars.com, that it licenses to radio host, Alex Jones. The debtors' financial distress stems from comments regarding the Sandy Hook shooting and subsequent litigation that was commenced against them. Debtors filed an emergency motion to appoint trustees of what they call the 2022 FSS Litigation Settlement Trust, which holds all of the equity in the debtors. The motion further states that Alex Jones owned the debtors prior to the bankruptcy filing and assigned his interests to the settlement trust. This case certainly seems like one sure to receive more attention in the coming months.
Contact Information:
Professor Ralph Brubaker’s Bio: https://law.illinois.edu/faculty-research/faculty-profiles/ralph-brubaker/
Resources Mentioned:
Article: Mandatory Aggregation of Mass Tort Litigation in Bankruptcy
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