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Fourth Circuit Strikes Plan’s Non-Consensual Third-Party Release

The Fourth Circuit Court of Appeals, in National Heritage Foundation v. Highbourne Foundation, 2014 U.S. App. LEXIS 12144 (4th Cir. June 27, 2014), recently held a Chapter 11 plan's non-consensual, third party release of non-debtors invalid because the release lacked adequate factual support. The court applied the Sixth Circuit's test for non-debtor releases from Class Five Nevada Claimants v. Dow Corning Corp. (In re Dow Corning Corp), 280 F.3d 648, 658 (6th Cir. 2002) and struck the release of the debtor's officers and directors. Finding that only one Dow Corning factor -- the identity of interests between the debtor and the Released Parties due to an expansive indemnity provision -- had been met, the Fourth Circuit held that the debtor had not established "exceptional circumstances" justifying the non-debtor release. "[A]n indemnity obligation is not, by itself, sufficient to justify a non-debtor release. If it were, third party releases would be the norm, not the exception, in Chapter 11 cases." The court advised that a debtor need not demonstrate that every Dow Corning factor weighs in its favor to obtain approval of a non-debtor release, but warned that adequate factual support must be shown to warrant such "exceptional relief."

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