Vol 8 (2011) - Issue 4

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Enforcement by US Courts of Releases Granted in Foreign Insolvency Proceedings

Given the uncertain and relatively difficult road that debtors or trustees must travel to acquire an enforceable, non-consensual, non-debtor third party release in the United States, one might expect that the path to obtaining an injunction from a US bankruptcy court in support of a third party release sanctioned by a non-US court to be littered with even more obstacles. Indeed, one has not always been able to take for granted that the release or discharge of even a debtor itself by a non-US court will be given effect in the United States. As explained below, however, a trend toward granting injunctive relief in support of judicial decrees releasing third parties in non- US insolvency proceedings may be emerging, at least in bankruptcy courts, such as those sitting in New York and Delaware, that have been friendlier toward nondebtor third party releases in plenary cases.



Availability of non-debtor, third party releases in US chapter 11 cases

US courts do not speak with a unified voice on the question of the scope and availability of non-debtor third party releases in bankruptcy proceedings. The US Bankruptcy Code itself provides that a general discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt, and courts are divided as to whether this section establishes a general prohibition on granting third party releases except in the limited circumstances where the release in question complies in all respects with the provisions of section 524(g) of the Bankruptcy Code. Section 524(g) authorises the court to grant third party releases in connection with the approval of a plan of reorganisation that establishes a special trust for the channelling of claims of present and future victims of asbestos exposure. The rather complicated legislative framework for asbestos claim channelling injunctions, which specifically provides for, among other things, the appointment of a legal representative to negotiate on behalf of 'future claimants' and requires the court to determine that any third party release is fair and equitable in light of the contribution made to the special trust by the third party, is based on the procedures developed in the Johns-Manville Corp. and In re UNR Industries, Inc. bankruptcies.

This exceptional statutory remedy for asbestosrelated claims is drafted in an extremely narrow fashion. By its express terms, section 524(g) does not even apply in situations where a debtor is confronted with future mass tort claims that do not result from asbestos exposure, and there is absolutely no legislative guidance on the propriety of third party releases in situations where a debtor is not confronted with any significant future mass tort liability. Hence, the law of third party releases in US bankruptcy cases where the statutory exception does not apply remains unsettled. Some courts prohibit third party releases altogether.