The Ninth Circuit Clarifies its Position on Third-Party Releases in Bankruptcy
Many Ninth Circuit courts, including Arizona Bankruptcy Courts, have relied on previous Ninth Circuit decisions primarily In re Lowenschuss and In re American Hardwoods, Inc. to prevent a bankruptcy plan from impacting obligations of non-debtors.
However, the Ninth Circuit in Blixseth v. Credit Suisse allowed for an exculpation clause that protected certain non-debtor parties from claims that could be made as it related to actions taken within the bankruptcy proceeding from parties who did not consent to the release. The Ninth Circuit relied on section 105(a) of the Bankruptcy Code that provides a bankruptcy court may “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [Chapter 11]” and section 1123 details the contents of a bankruptcy plan. In making this ruling, the Ninth Circuit clarified that section 524(e) constrains the power of 105(a) “by ensuring that no third party is released from its obligations for the underlying debt” and because the exculpation clause did not affect the claims for the debt, it was permissible.
The decision in Blixseth certainly clarifies that section 524(e) does not categorically limit non-consensual third-party releases and encourages bankruptcy courts to use section 105(a) as needed to further the purpose of the Bankruptcy Code as limited by the plain language of 524(e). The bankruptcy attorneys at Mesch Clark Rothschild are available to discuss the benefits to both Debtors and Non-Debtors of a potential chapter 11 bankruptcy in Arizona.