Nondebtor Releases in Chapter 11 Reorganizations: A Limited Power

Article excerpt

Introduction
I. The History of Nondebtor Releases and Injunctions
     A. Basics of a Chapter 11 Proceeding
        1. Bankruptcy Courts' Traditional Exercise of Jurisdiction
           Under Chapter 11
        2. Bankruptcy Courts' Equitable Powers Under Section
           105
     B. Which Nondebtor Third Parties Request Releases and
        Injunctions?
II. Seminal Decisions and Reasons for and Against Nondebtor Third
      Party Releases and Injunctions
      A. Judicial Disagreement on the Treatment of Nondebtor
         Third Party Releases and Injunctions in Chapter 11 Plans
         1. Seminal Pro-Release Decisions
            a. In re Johns-Manville Corp
            b. In re Drexel Burnham Lambert Group, Inc
            c. In re A. H. Robins Co
         2. Seminal Anti-Release Decisions
            a. In re American Hardwoods, Inc
            b. In re Continental Airlines
      B. Arguments for and Against Granting Nondebtor Releases
         and Injunctions to Insiders and Insurers in Chapter 11
         Plans
         1. Should Insiders Be Granted Nondebtor Releases or
            Injunctions?
            a. Arguments for Allowing Releases and Injunctions
               to Insiders
            b. Arguments Against Allowing Releases or
               Injunctions to Insiders
         2. Should Debtors' Insurers Be Granted Nondebtor
            Releases or Injunctions?
            a. Arguments for Granting Releases and Injunctions
               to Insurers
            b. Arguments Against Granting Releases and
               Injunctions to Insurers
III. The Limited Power of Bankruptcy Courts to Grant Nondebtor
     Releases and Injunctions
     A. Policy Considerations Dictate that Injunctions and
        Releases Be Granted to Insurance Companies in Mass Tort
        and Class Action Cases, Subject to Several Caveats
     B. Policy Considerations and a Changing Landscape Dictate
        that Releases and Injunctions Not Be Granted to Debtors'
        Insiders
        1. Shift Towards Pre-Arranged Bankruptcies and Use of
           Turnaround Management Renders the Insider
           Assistance and Cooperation Justification for Insider
           Releases and Injunctions Moot
        2. Shift Towards Pre-Arranged Bankruptcies and Use of
           Turnaround Management Renders the Contributing
           Nondebtor Justification for Insider Releases and
           Injunctions Moot
        3. Need to Obtain Releases from Indemnity and
           Contribution Claims is an Illusory Justification for
           Granting Insider Releases and Injunctions
        4. Two Caveats to Refusing Releases and Injunctions to
           Insiders: Temporary Stays and Consensual Releases .......
Conclusion

INTRODUCTION

On April 20, 2010, an explosion at BP p.l.c.'s ("BP") Deepwater Horizon oil rig (the "Rig") caused a massive oil gush 5000 feet below sea level, resulting in the largest environmental disaster in United States history and the largest oil-related disaster in the world. (1) As a result of the explosion, eleven workers were killed, seventeen others were seriously injured, (2) and thousands more in the Gulf area suffered, and continue to suffer, financial losses. The extensive scope of the injuries and economic losses has led to the filing of thousands of claims and hundreds of class actions against BP and other potentially responsible parties for economic damages, environmental cleanup costs, and other losses. (3) BP insiders, including Anthony B. Hayward, the former Chief Executive Officer ("CEO") of BP and former Executive Director of the Board of Directors, face numerous derivative liability suits for breach of fiduciary duties to the company and its shareholders. (4) Transocean Ltd., the company that owned and operated the Rig, which it leased to BP, also faces liability for the disaster. (5) In addition, Cameron International Corporation ("Cameron"), the company that manufactured the blowout preventer that failed to function on the Rig, is confronted with potential liability. …