Bankr. N.D. Texas Notes Split Re Bankruptcy Court's Power to Grant Nondebtor Release

Per In re Wool Growers Central Storage Co., Slip Copy, 2007 WL 2088303 (Bankr.N.D.Tex. Jul 19, 2007) (NO. 06-60055-RLJ-11):

While the bankruptcy court may, through plan approval, modify the debtor-creditor relationship, the circuits are split regarding the bankruptcy court's power to approve a nondebtor release that, in effect, modifies the relationship between a creditor and a nondebtor third-party. FN3 The courts differ in how broadly or narrowly they interpret section 105(a). See Joshua M. Silverstein, Hiding in Plain View: A Neglected Supreme Court Decision Resolves the Debate over Non-Debtor Releases in Chapter 11 Reorganizations, 23 Emory Bankr.Dev. J. 13, 44-90 (2006) (stating that the pro-release courts interpret section 105 broadly, while the anti-release courts interpret section 105 narrowly). Furthermore, a court's interpretation of section 524(e) of the Bankruptcy Code plays a significant role as to whether or not the court will approve a nondebtor release. See id. Section 524(e) states that "discharge of a debt of the debtor does not affect the liability of any other entity on ... such debt." The anti-release courts interpret section 524(e) as expressly prohibiting nondebtor releases, while the pro-release courts believe the opposite to be true. See Silverstein, supra at 42-44. There are two main types of nondebtor releases: consensual nondebtor releases and non-consensual nondebtor releases.

FN3. Decisions granting nondebtor releases include: Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 985 (1st Cir.1995); SEC v. Drexel Burnham Lambert Group, Inc. ( In re Drexel Burnham Lambert Group, Inc.), 960 F.2d 285, 293 (2d Cir.1992); In re Am. Family Enters., 256 B.R. 377, 408 (D.N.J.2000); In re Master Mortgage Invest. Fund, Inc., 168 B.R. 930, 934-37 (Bankr.W.D.Mo.1994); In re Transit Group, Inc., 286 B.R. 811, 815-18 (Bankr.M.D.Fla.2002); In re Heron, Burchette, Ruckert & Rothwell, 148 B.R. 660, 685 (Bankr.D.D.C.1992).

Decisions rejecting nondebtor releases include: In re Boston Harbor Marina Co., 157 B.R. 726, 729-31 (Bankr.D.Mass.1993); In re Texaco, Inc., 84 B.R. 893, 900 (Bankr.S.D.N.Y.1988); In re Arrowmill Dev. Corp., 211 B.R. 497, 500, 504-06 (Bankr.D.N.J.1997); Feld v. Zale.


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