DIAZ, Circuit Judge.
On remand following an earlier appeal in this case, a bankruptcy court ruled that the non-debtor release provision in National Heritage Foundation's Chapter 11 reorganization plan was unenforceable. The district court affirmed. On appeal to this court, NHF argues that the courts below erred, claiming that the facts and circumstances surrounding its bankruptcy are sufficiently unique to justify the release. Finding insufficient evidence to support NHF's contentions, we affirm.
A detailed recitation of the facts underlying this case is contained in our previous opinion,
NHF is a non-profit public charity
In 2009, NHF filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code after a state court entered a multimillion dollar judgment against it. After multiple revisions, the bankruptcy court approved NHF's Fourth Amended and Restated Plan of Reorganization (the "Plan"). The Plan contained a Non-Debtor Release Provision covering NHF; the Official Committee of Unsecured Creditors (the "Committee") and its members; any designated representatives of the Committee; and any officers, directors, or employees of NHF, the Committee, or their successors and assigns (collectively, the "Released Parties"). The Release Provision provided that the Released Parties
J.A. 1059.
Certain NHF donors—the appellees in this case—challenged the Plan's confirmation on the ground that the Release Provision was invalid. The district court affirmed the bankruptcy court's confirmation of the Plan.
On the first appeal, we vacated that portion of the district court's judgment affirming the Release Provision, holding that the bankruptcy court failed to make sufficient factual findings to support its conclusion that the Release Provision was essential.
A different bankruptcy court judge considered the case on remand. That court gave the parties the option of reopening the record to present more evidence, but they declined to do so. Reviewing the then-existing record, the bankruptcy court made factual findings with respect to each of the
We review the legal conclusions of the bankruptcy court and district court de novo.
Based on the record before us, we conclude that NHF has failed to carry its burden of proving that the facts and circumstances of this case justify the Release Provision. Like the courts below, we consider the evidence with respect to each
Under the first
We conclude that NHF has demonstrated an identity of interests between itself and the Released Parties. Under the terms of its bylaws, NHF must advance legal expenses and indemnify its officers and directors for "any action . . . in which such person may be involved by reason of his being or having been a director or officer of" NHF. J.A. 868. No security is required to ensure the covered parties repay NHF for any advanced expenses.
The second
None of the Released Parties in this case made any financial contribution to the reorganization. NHF nonetheless argues that its officers and directors satisfied this requirement by promising to continue serving NHF.
As an initial matter, there is no evidence in the record to support NHF's assertion that its officers and directors actually promised to continue serving NHF.
The third
NHF primarily contends that the risk of litigation from its donors, whose numbers run in the thousands, renders the Release Provision essential, as NHF would likely have to indemnify its officers and directors for their legal expenses should such suits arise.
Although we are sympathetic to NHF's concern about the possibility of donor suits, the evidence does not suggest that its reorganization is doomed without the Release Provision. NHF has provided little to no evidence regarding the number of likely donor claims, the nature of such claims, or their potential merit. NHF's vice president, Janet Ridgely, stated that NHF insiders are concerned about donors bringing suit, but that is simply too vague to substantiate the risk of litigation.
Nor does the fact that a prior judgment against NHF was, by itself, sufficient to trigger bankruptcy establish that donor litigation, should it materialize, would imperil NHF's reorganization. Based on the dearth of evidence in the record, we can only speculate as to the potential impact of any donor suits on NHF's financial bottom line.
NHF also argues that the Release Provision is essential because its current officers and directors may refuse to serve without such a release. In support, it points to Ridgely's testimony that the continued service of NHF's officers and directors is critical to the reorganization, and that a fear of third-party suits "might render [them] unwilling to serve." J.A. 949.
We find no error in the bankruptcy court's finding that the risk of officer-and-director flight in this case is minimal. Although not irrelevant, Ridgely's statement is hardly conclusive evidence that NHF's officers and directors would leave without the Release Provision. And as the bankruptcy court noted, the risk of NHF's insiders "abandon[ing] ship" is particularly low, given that most of them are members of a single family.
The bankruptcy court also correctly found that the Release Provision itself provides little inducement for these individuals to stay. NHF's insiders have already been exposed to whatever liability they may have for their pre-petition conduct, and the release does not shield them from liability going forward. And even if NHF's officers and directors do leave, NHF has not suggested that it would face difficulty recruiting new personnel.
If this failure of proof were not enough, the severability clause contained in NHF's Reorganization Plan cements our view that the Release Provision is not essential. That clause provides that the Plan would remain in effect "[s]hould
Under these circumstances, we do not believe NHF has carried its burden of demonstrating that the Release Provision is essential to its reorganization. This failure weighs strongly against the validity of the Release Provision.
To satisfy the fourth
In this case, the Release Provision most directly impacted the class of individuals who made donations to NHF's Donor-Advised Funds (the "donor class"). Under applicable bankruptcy rules, the donor class's support for the Plan was presumed without a formal vote because, under its terms, donor claims were eligible for full payment with interest. NHF maintains that the donor class's presumed support for the plan weighs in favor of the Release Provision, and that, regardless, the class's support for the Plan is irrelevant because its donors are not actually creditors.
We recognize that there is some uncertainty regarding whether an unimpaired class's presumed support for a reorganization plan is sufficient to satisfy this
In any event, we need not resolve this question today. Even if NHF is correct, this factor only marginally weighs in its favor, and it would not alter our ultimate conclusion that NHF has failed to demonstrate that the circumstances warrant the Release Provision. Creditor support does not make up for the fact that most of the other
Under the fifth
For example, we have upheld a release provision in a reorganization plan when the debtor created a separate fund to settle, among other things, untimely claims or those that otherwise failed to comply with applicable procedures.
The absence of such a mechanism here weighs against the Release Provision. Any donor claims not filed or allowed during the bankruptcy proceedings have simply been extinguished. Thus, NHF's plan lacks an important element of the plan endorsed in
To be sure, NHF provided notice and opportunity for donors to file claims against it during the bankruptcy proceedings. But NHF has provided no evidence—in the form of expert testimony or otherwise—that this process adequately protected the donors' interests. NHF certainly did not encourage donors to participate in the bankruptcy process.
The final substantive
Our analysis of this factor largely overlaps with the preceding factor. To that effect, we reiterate the import of NHF's failure to provide any mechanism to pay donor claims outside of the bankruptcy proceedings. As the bankruptcy court found, "the very purpose of the Release Provision[] is to . . . preclud[e] any recovery from third party sources outside of the Plan."
Our review of the record shows that one factor—the possibility that NHF will have to indemnify its officers and directors for litigation expenses—weighs clearly in favor of the Release Provision. But NHF has failed to provide sufficient evidence that it faces a strong possibility of suits that would trigger its indemnity obligation, much less that such suits would threaten its reorganization. And an 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."
In sum, we agree with the district court that NHF has failed to demonstrate that it faces exceptional circumstances justifying the enforcement of the Release Provision in its Reorganization Plan.
We emphasize that our decision is ultimately rooted in NHF's failure of proof rather than circumstance alone. A debtor need not demonstrate that every
We also note that NHF is not without options should circumstances change—in particular, if damaging donor suits do materialize. For example, NHF can petition the bankruptcy court to reopen the case.
At this point, however, NHF has not made the necessary showing to support the risk of donor litigation, nor has it carried its broader burden of justifying the non-debtor release in its Reorganization Plan.
For these reasons, we affirm the district court's judgment.