In
re Metromedia Fiber Network, Inc. (2nd
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
3rd
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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