Release of Chapter 11 Plan Proponent Overbroad and Impermissible

Chapter 11 plans in complex restructurings routinely contain provisions either releasing, or enjoining litigation against, various stakeholders involved in the case, particularly where the plan contemplates an infusion of cash from an existing creditor or insurance company to fund distributions, or is predicated in part on the settlement of a major dispute between the debtor and a significant creditor or shareholder. The validity of such releases or injunctions, however, has often been disputed in the courts. Two areas that continue to be a magnet for controversy concern: (i) a provision in a chapter 11 plan purporting to enjoin actions against or release entities other than the debtor; and (ii) the scope of the release or injunction. Both of these were the subject of a ruling recently handed down by the First Circuit bankruptcy appellate panel. In Whispering Pines Estates, Inc. v. Flash Island, Inc. (In re Whispering Pines Estates, Inc.), the court reversed an order confirming a