Nonconsensual Third-Party Releases Not Limited to Plans of Reorganization

March 29, 2021Herrick Restructuring Review

The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.

A decision in the Delaware District Court allowing nonconsensual third-party releases in plans of liquidation has a surprising origin – the Harvey Weinstein scandal.

In October of 2017, the Weinstein scandal exploded across the nation, bringing to light over 80 sexual assault allegations against Hollywood mogul Harvey Weinstein. Weinstein saw swift retribution: his businesses, The Weinstein Company Holdings and affiliates (the “Weinstein Debtors”), faced multiple lawsuits and filed for chapter 11 bankruptcy in March of 2018. Weinstein himself was arrested two months later. The scandal triggered the #MeToo social justice movement, empowering victims of sexual assault and harassment across the globe to voice their claims. Weinstein was ultimately convicted on two felony counts of sexual assault, and the chapter 11 proceeding involving The Weinstein Debtors is drawing to a close in the Delaware Bankruptcy Court.

On November 17, 2020, the Weinstein Debtors and its Official Committee of Unsecured Creditors (the “UCC”) filed their fourth amended plan of liquidation, which included a comprehensive settlement of all claims related to Weinstein’s sexual misconduct. The settlement provided for nonconsensual third-party releases of the Weinstein Debtors’ insurers and former officers and directors. In exchange, the insurers would contribute $35,214,822.30 for the Weinstein Debtors’ estates and creditors, of which $17,064,525.60 was to be set aside to compensate the holders of sexual misconduct claims, and the former officers and directors would waive certain indemnification and reimbursement rights. The proposed plan was approved by over 86% of those holding general unsecured claims and by 83% of sexual misconduct claimants.

Four sexual misconduct claimants objected to the plan, arguing that the nonconsensual third-party releases of former officers and directors did not satisfy the Third Circuit’s standard for approval. They argued that the releases were not “necessary to the reorganization,” and that the former officers and directors would not be giving fair consideration in exchange. In response, the Weinstein Debtors and the UCC filed a slightly tweaked liquidation plan, but kept the nonconsensual releases. The Bankruptcy Court overruled the pending objection and confirmed the new plan on January 25, 2021. Despite the objectors’ appeal and motion to stay, the plan took effect on February 18, 2021.

On appeal, Judge Maryellen Noreika of the Delaware District Court reviewed the objectors’ arguments that: 1) the Bankruptcy Court erred as a matter of law in approving a plan of liquidation containing nonconsensual third-party releases; and 2) with respect to the nonconsensual third-party releases, the Bankruptcy Court’s factual findings as to necessity, fairness, and exceptional circumstances were clearly erroneous.

Judge Noreika observed that the Third Circuit had not yet decided whether third-party nonconsensual releases are available for liquidating debtors, and cited decisions from the Bankruptcy Courts for the District of Delaware, Southern District of New York, and Eastern District of Virginia that “approved plans of liquidation containing non-consensual third-party releases based upon a showing of fairness, necessity, and exceptional circumstances.” Emphasizing the lack of authority backing the objectors’ arguments, Judge Noreika found that “necessary to the reorganization” could mean that nonconsensual third-party releases are available in plans of liquidation.

Judge Noreika also determined that the Bankruptcy Court had made clear findings on necessity, fairness, and exceptional circumstances and found the objectors would not suffer irreparable harm, ultimately denying the emergency stay motion. The decision to deny the stay also denies the notion of a blanket prohibition on nonconsensual third-party releases in plans of liquidation. The District of Delaware, and the Third Circuit generally, continue to expand allowance of nonconsensual third-party releases, offering more efficient resolutions to complex filings in one of the busiest business bankruptcy forums in the country.

The case is David et al. v. The Weinstein Co., et al., C.A. No. 21-171 (D. Del.)

For more information on this alert or other restructuring & finance litigation matters please contact:

Silvia Stockman at +1 212 592 1583 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.