In re Metromedia Fiber Network, Inc. case brief

 In re Metromedia Fiber Network, Inc. (2^nd Cir. 2005)

 

Facts: Two big banks challenge a largely implemented confirmed plan in Chapter 11 of Metromedia Fiber Network and its subsidiaries. A District court confirmed the order on appeal. Appellants argue that releases in the plan improperly shield certain non-debtors from suit by creditors. Kluge trust would forgive approximately $150M in unsecured claims against Metromedia, convert $15.7M in senior secured to equity, invest approximately $12.1M in reorg debtor, and purchase up to $25M of unsold stock in the debtor’s offering. In return, the Kluge Trust would receive 10.8% of common stock, and a full and complete release waiver and discharge from any holder of a claim of any nature and liability arising out of or related to Metromedia or a subsidiary based on the effective date. Appellants challenge the release.

Issue: Were the third party releases proper? No!

Holding: Must show uniqueness for discharge by nondebtors. However, the court affirmed on ground of equitable mootness, because no stay of the plan had been obtained pending appeal.

Analysis: “in bankruptcy cases, a court may enjoin a creditor from suing a 3^rd party so long as the injunction plays an important part in the debtor’s reorg.” Such a release is proper only in rare cases. §524(g) authorizes releases in asbestos cases when certain conditions are met. Second, release lends itself to abuse. Courts have allowed releases when the estate receives proper consideration, enjoined claims were channeled to a settlement fund, enjoined claims would indirectly impact the reorg by way of indemnity or contribution. Also may be tolerated if affected creditors consent. The bankruptcy court erred because there is insufficient evidence to show the need for the release.

Equitable mootness: Often a nondebtors release presents the bankruptcy court and the parties with the prospect of a successful resolution of a large case and the salvage of an important business. It effectively halts appellate review, giving the bankruptcy courts vast discretion in achieving that happy result by approving nondebtor’s releases.

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