2008 Chapter 11 Open Forum: Year In Review

E. Settlements and Releases

• In re Quay Corp., 372 B.R. 378 (Bankr. N.D. Ill. July 2007) (Schmetterer, J.)
• Proposed settlement and chapter 11 plan did not unfairly discriminate or shift the risk of non-payment. One individual unsecured creditor objected to a proposed settlement between the debtor and another unsecured creditor under which the debtor, through its proposed plan, granted to the settling creditor a lien on all of its property and the right of first refusal if the debtor wished to sell its business. The proposed plan also placed the settling creditor into its own class separate and apart from all other unsecured creditors. The court overruled the objections and confirmed the plan, reasoning that the settlement and plan terms did not violate the "shifting of the risk" test for determining whether a plan unfairly discriminates against one class of creditors in violation of section 1122(a). See In re Armstrong World Indus., 348 B.R. 111 121 (D. Del. 2006); see also Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 AM. BANKR. L.J. 227 (1998).

In re Wool Growers Central Storage Co., 371 B.R. 768 (Bankr. N.D. Tex. July 2007) (Jones, J.)

Confirmation of a plan purporting to release non-debtor directors and officers was denied. As a result of a mediation settlement between the debtor, its directors, and the unsecured creditors' committee, the chapter 11 debtor proposed a plan containing a provision releasing the non-debtor directors from all potential claims in exchange for the directors' $2,625,000 contributions to be distributed through the plan. One unsecured creditor objected, asserting that it held a claim against the directors,⁴⁹ and that it did not consent to the releases. Under Fifth Circuit case law, a plan providing for the discharge of non-debtor entities cannot be confirmed because the discharge injunction under section 524(a) cannot relieve non-debtors from their own liabilities to third parties. See 11 U.S.C. S 524(e). And, said the court, even under Fifth Circuit dicta, which the court read as potentially allowing non-debtor releases under certain circumstances, the plan as proposed did not present those circumstances. Accordingly, the court denied confirmation.

F. Unfair Discrimination

* Kurak v. Dura Auto. Sys., Inc. (In re Dura Auto. Sys., Inc.), 379 B.R. 257

(Bankr. D. Del. Dec. 2007) (Carey, J.) A plan's discrimination based upon a subordination agreement was "fair." Certain holders of subordinated notes objected to a plan which proposed to pay about 55% of senior note holders' claims using newly issued stock following a rights offering. A provision of the indenture agreement, known as the "X-Clause," was sufficiently vague such that the

⁴⁹ The court held that the claims here belonged to the objecting creditor because, under Texas law, when a company forfeits its corporate charter, all claims against the directors of the company (arising during the period when the charter had been forfeited which would ordinarily be derivative actions belonging to the company) belong to individual creditors.