MEMORANDUM OPINION

SAVAGE, District Judge.

In this appeal from the Bankruptcy Court's refusal to approve, as part of a reorganization plan, a third party release provision that would have precluded the Bondholders from bringing any claims against the indenture trustee, we must decide whether the Bankruptcy Court erred in determining that the notice to the Bondholders was inadequate. As a corollary, we must decide whether the Bondholders' acceptance of the third party release during the settlement motion process constituted a consensual release, and whether the plan should have been confirmed with the third party release provision.

Factual and Procedural Background1

In 1992, Lower Bucks Hospital ("LBH")2 entered into a multi-party municipal bond financing transaction to refinance some of its outstanding debt obligations and to finance capital improvement projects. The Borough of Langhorne Manor Higher Education and Health Authority (the "Authority") issued the bonds and loaned the bond proceeds to LBH. In the Loan and Security Agreement, LBH granted broad indemnification rights to the Authority which, in turn, assigned most of its rights to the original indenture trustee, Continental Bank.3 The Bank of New York, Mellon Trust Company ("BNYM") is the successor to Continental Bank.

Two agreements from the bond financing transaction are relevant. In the Loan and Security Agreement, which governs the relationship between LBH and the Authority, LBH agreed to indemnify the Authority against "any and all claims" arising out of the financing transaction.4 The scope of the indemnity is broad and requires LBH to assume and pay for the defense of any claim against the Authority. It excludes only claims for "malfeasance or nonfeasance in office, bad faith, gross negligence, wilful misconduct, fraud or deceit."5 In another section of the Loan and Security Agreement, LBH agreed to indemnify the Trustee, now BNYM as successor to Continental Bank, against "any liabilities" arising out of its powers and duties.6 Excluded are liabilities caused by the Trustee's "gross negligence, or wilful misconduct."7

The Trust Indenture, which defines the respective rights and obligations of the Authority and the Indenture Trustee, originally Continental Bank and later BNYM, limits the Trust Indenture's liability to the Bondholders to conduct that is willful or negligent.8

On January 13, 2010, LBH filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.9 At that time, LBH owed approximately $26 million to the Bondholders in outstanding principal, plus accrued interest.

On April 30, 2010, LBH commenced an adversary proceeding against BNYM, contending that the security interest created by the Loan and Security Agreement was not perfected at the time of LBH's bankruptcy because BNYM and its predecessors had failed to file valid UCC-1 financing statements after LBH changed its name in 1997 and 2006.10 BNYM filed the financing statements properly identifying the debtor on October 16, 2009, more than three years after the second name change. LBH contended that because BNYM perfected its security interest within ninety days of LBH's filing its Chapter 11 petition, any lien created by BNYM was avoidable under the Bankruptcy Code. Thus, if LBH prevailed in the adversary proceeding, the Bondholders would lose their secured creditor status under 11 U.S.C. § 547(b).

On August 12, 2011, after more than a year of litigation, BNYM and LBH reached a settlement of the adversary proceeding. The settlement stipulation provided that in return for deeming the Bondholders secured creditors, the debt owing them would be reduced from $26 million to $8.15 million. As part of the settlement, LBH and BNYM gave mutual releases and agreed to dismiss the adversary proceeding as of the effective date of the reorganization plan.11 The settlement stipulation also contained a provision that purported to release BNYM from "any and all claims and causes of action arising under or in any manner related to the Bond Documents... by any and all parties, including without limitation all Bondholders...."12 This provision is central to the dispute in this appeal.

On September 14, 2011, the Bankruptcy Court held a hearing to consider approval of the settlement. During the hearing, the Court specifically noted that it did not view the settlement as having any preclusive effect on suits by the Bondholders against BNYM for actions outside the Bankruptcy Court.13 Nonetheless, that day, the Court entered the parties' proposed order, including the provision releasing all claims against BNYM.14

Neither LBH nor BNYM brought to Bankruptcy Judge Eric Frank's attention the third party release provision and its significance at the September 14, 2011 hearing.15 LBH's counsel did not mention the third party release.16 When Judge Frank voiced concerns about making findings concerning BNYM and its relationship to the Bondholders, LBH's counsel deferred to BNYM's attorney, who mentioned the third party release in passing.17 The attorneys did not advise Judge Frank that among the claims to be settled were the Bondholders' claims against BNYM.18 Only when Becker, who held $90,000 of the bonds at issue, moved for reconsideration and objected to confirmation of the plan did Judge Frank become aware of the significance of the third party release.

On September 27, 2011, LBH filed a proposed plan of reorganization and a disclosure statement. The relevant third party release provision was embedded in both of these documents — page forty-two of the single-spaced forty-seven page proposed plan, and page fifty-five of the single-spaced sixty-two page disclosure statement.19 After Judge Frank approved the disclosure statement the next day, BNYM sent a notice to the Bondholders reporting that the disclosure statement had been approved by the Court. In October 2011, ninety-five Bondholders holding approximately $13.5 million of the bonds at issue, voted on the proposed plan. Of those, ninety Bondholders, holding less than half the value of all outstanding bonds at issue, voted to accept the plan. Five Bondholders, including Becker, who held $90,000 of the bonds at issue, voted to reject it.

On October 14, 2011, Becker filed a class action in the United States District Court for the Eastern District of Pennsylvania against BNYM and its predecessor, JP Morgan Trust Co., asserting claims for negligence, and breaches of fiduciary and contractual duties for failing to perfect a security interest in the collateral backing the bonds.20 On November 10, 2011, in the Bankruptcy Court, Becker filed an objection to LBH's proposed plan on the ground that the third party release was "an impermissible, non-crucial, non-debtor third party release[ ]."21 He also asserted that the accompanying disclosure statement failed to clearly and conspicuously identify the third party release provision to the Bondholders, depriving them of a fair opportunity to object or vote against it.

On November 16, 2011, the Bankruptcy Court entered an order, sua sponte, severing the issue of whether the proposed plan should contain the third party release provision from the remainder of the proposed plan.22 Characterizing the order as a correction of a clerical error in its prior order dated September 14, 2011, the November 16 order specified that no portion of the September 14 order should be considered as waiving or releasing any claims that the Bondholders may have against BNYM.23

On December 7, 2011, the Bankruptcy Court confirmed the proposed plan without the third party release provision.24 Subsequently, on March 2, 2012, the Bankruptcy Court held a hearing to determine whether the third party release provision should be included in the confirmed plan of reorganization. In a comprehensive opinion issued on May 10, 2012, Judge Frank concluded that the third party release could not be included because it had not been adequately disclosed or explained to the Bondholders. Judge Frank rejected BNYM's contention that the adequacy of the disclosures should not be revisited because that issue was resolved when the order approving the settlement was entered on September 14, 2011.25

In this appeal, BNYM challenges the Bankruptcy Court's finding that the notice to the Bondholders of the third party release was inadequate.26 It contends that notice was adequate because it was provided to the Bondholders numerous times. Specifically, in addition to the disclosures made pursuant to the Bankruptcy Code, BNYM provided the Bondholders with eight notices of the developments in LBH's bankruptcy, including the adversary proceeding. Some of those notices attached the settlement stipulation and the summary of the terms, which included the third party release. BNYM also argues that the Bondholders consented to the third party release when they failed to object to the motion to confirm the settlement stipulation. Finally, BNYM contends that the third party release was an essential component of a global settlement that was both fair and equitable to the Bondholders, and necessary to the success of LBH's reorganization, satisfying the standards for approval of non-consensual third party releases in Chapter 11 reorganization plans.

In response, Becker urges affirmation of the Bankruptcy Court's findings. He contends that the third party release "cannot be valid unless it comports with the requirements of Federal Rule of Bankruptcy Procedure 3016(c)," which it does not.27 Alternatively, he argues that the Bankruptcy Court lacks subject matter jurisdiction to enter an order approving the third party release because it affects the legal relationship between two non-debtors.

Standard of Review

The district court reviews the bankruptcy court's "legal determinations de novo, its factual findings for clear error[,] and its exercise of discretion for abuse thereof." In re Reilly, 534 F.3d 173, 175 (3d Cir. 2008) (quoting In re Trans World Airlines, Inc., 145 F.3d 124, 130-31 (3d Cir.1998)), rev'd on other grounds, Schwab v. Reilly, ___ U.S. ___, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010). Where the bankruptcy court's decision involves a mixed question of law and fact, the district court must segregate the legal and factual determinations, and apply the appropriate standard of review to each. In re Montgomery Ward Holding Corp., 326 F.3d 383, 387 (3d Cir.2003).

The bankruptcy court's factual findings will not be disturbed unless they are clearly erroneous. In re IT Grp., Inc., 448 F.3d 661, 667 (3d Cir.2006); Fed. R. Bankr.P. 8013. A factual finding is clearly erroneous if the district court is firmly convinced, based on all the evidence, that the bankruptcy court made a mistake. Gordon v. Lewistown Hosp., 423 F.3d 184 (3d Cir.2005); Fed. R. Bankr.P. 8013 advisory committee's note (according the same weight to a bankruptcy judge's findings as that given the findings of a district judge under Fed.R.Civ.P. 52(a)). The district court may not engage in independent fact finding. In re Indian Palms Assocs., Ltd., 61 F.3d 197, 210 n. 19 (3d Cir.1995) (citing 28 U.S.C. § 158(a)). In reviewing factual findings, the district court must give due regard to the bankruptcy judge's opportunity to observe the demeanor and credibility of witnesses. See Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 500, 104 S.Ct. 1949, 80 L.Ed.2d 502 (1984); In re Myers, 491 F.3d 120, 126 (3d Cir. 2007) ("The Bankruptcy Court is best positioned to assess the facts, particularly those related to credibility and purpose."); Fed. R. Bankr.P. 8013 ("[D]ue regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.").

The bankruptcy court's conclusions of law are reviewed under the less deferential de novo standard., In re Goody's Family Clothing, Inc., 610 F.3d 812, 816 (3d Cir. 2010) (internal citation omitted). Under the de novo standard, the district court makes a judgment independent of the bankruptcy court, without deference to that court's analysis and conclusions of law. Scimeca v. Umanoff, 169 B.R. 536, 541-42 (D.N.J.1993), aff'd, 30 F.3d 1488 (3d Cir.1994).

Discussion

The Bankruptcy Court had subject matter jurisdiction to approve the third party release as part of the plan of reorganization.

Before considering BNYM's challenge to the Bankruptcy Court's finding that the notice of the third party release was inadequate, we must determine that the Bankruptcy Court had subject matter jurisdiction to approve the third party release as part of the plan of reorganization.28 This inquiry requires us to determine whether, by virtue of the indemnification agreement between LBH and BNYM, the purported third party release between the Bondholders and BNYM, as the indenture trustee, is "related to" LBH's bankruptcy.29

We conclude that the Bankruptcy Court had "related to" jurisdiction over the third party release provision as part of LBH's plan of reorganization. This is because the filing of the class action against BNYM had an immediate effect on LBH's bankruptcy estate when it triggered BNYM's claim for defense costs against LBH.

A bankruptcy court has subject matter jurisdiction over "`all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11,' 28 U.S.C. § 157(b)(1) (collectively known as `core proceedings'), and ... `a proceeding that is not a core proceeding but that is otherwise related to a case under title 11,' 28 U.S.C. § 157(c)(1) (`non-core proceedings')." In re Mullarkey, 536 F.3d 215, 221 (3d Cir.2008).30

"Arising under" refers to those causes of action specifically created by the bankruptcy statute. "Arising in" cases involve the administration of the bankruptcy estate. See, e.g., In re Marcus Hook Dev. Park, Inc., 943 F.2d 261, 267 (3d Cir.1991). A "related to" case does not invoke a substantive right under the bankruptcy statute and exists outside of bankruptcy, but its outcome could conceivably have an effect on the bankruptcy estate. Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984), overruled on other grounds by Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 129, 116 S.Ct. 494, 133 L.Ed.2d 461 (1995).

The subject matter of the third party release — the claims asserted by the Bondholders in the class action — is not founded on any bankruptcy statute. Nor does it directly involve the administration of the bankruptcy estate. Thus, because the class action does not "arise under" or "arise in" bankruptcy, the Bankruptcy Court had subject matter jurisdiction only if the Bondholders' claims in the class action are "related to" LBH's bankruptcy.

The test for establishing "related to" jurisdiction was articulated in Pacor, Inc. v. Higgins, 743 F.2d at 994. In Pacor, the Third Circuit held that "[a]n action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action ... which in any way impacts upon the handling and administration of the bankrupt estate." Id. However, potential, rather than actual, impact upon the bankruptcy estate is insufficient. A party's inchoate claim of indemnity against a debtor is not, in and of itself, enough to establish the bankruptcy court's subject matter jurisdiction over an action brought against that party. Id. at 995;31 Steel Workers Pension Trust v. Citigroup, Inc., 295 B.R. 747, 750 (E.D.Pa. 2003).

Eighteen years later, in In re Federal-Mogul Global, Inc., 300 F.3d 368 (3d Cir. 2002), the Third Circuit rejected an absolute rule that whenever there is an indemnification agreement, "related to" jurisdiction is automatically established. It reiterated that "[t]he test articulated in Pacor ... inquires whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit." Id. at 382. Accordingly, the court found no "related to" subject matter jurisdiction to enjoin an action by a third party against a non-debtor because the non-debtor's indemnification claim against the debtor had "not yet accrued and would require another lawsuit before [it] could have an impact on [the debtor's] bankruptcy proceeding." Id.

More recently, in In re W.R. Grace & Co., 591 F.3d 164, 175 (3d Cir.2009), the Third Circuit once again reiterated the rule of "related to" jurisdiction in the context of an indemnification claim. In W.R. Grace, the court held that a bankruptcy court lacked jurisdiction to enjoin state court actions by one non-debtor against another non-debtor, who held only a potential common law indemnification claim against the debtor. Id. at 173.32 The court factually compared W.R. Grace to Pacor, Federal-Mogul, and Combustion Engineering,33 stating that "our recently reaffirmed precedent dictates that a bankruptcy court lacks subject matter jurisdiction over a third-party action if the only way in which that third-party action could have an impact on the debtor's estate is through the intervention of yet another lawsuit." Id. at 173. Significantly, in distinguishing common law and contractual indemnification, the court clarified that it did "not mean to imply that contractual indemnity rights are in themselves sufficient to bring a dispute within the ambit of related-to jurisdiction." Id. at 174 n. 9. That determination must be "developed on a fact-specific, case-by-case basis." Id.

These cases make clear that mere potential impact upon the debtor's estate is insufficient to invoke "related to" jurisdiction. Contingent indemnification liability will not suffice. The necessity of future action to fix a debtor's liability after resolution of a pending lawsuit precludes the exercise of "related to" jurisdiction.

The existence of an indemnification agreement between a defendant in a proceeding outside the bankruptcy action and a non-party bankrupt debtor does not automatically supply the nexus necessary for the exercise of "related to" jurisdiction. Only when the right to indemnification is clearly established and has accrued upon the filing of a civil action is the proceeding deemed "related to" the bankruptcy case. But, where the right to indemnification is contingent on a factual finding in an action not involving the bankruptcy debtor and requires the commencement of another lawsuit to establish that right, there is no effect on the bankruptcy estate and thus no "related to" jurisdiction. In re Federal-Mogul Global, Inc., 300 F.3d at 382.

Here, the Bankruptcy Court, citing W.R. Grace, correctly concluded that it had "related to" jurisdiction because LBH's contractual duty of indemnification owed to BNYM supplied the necessary nexus between the claims in the class action and LBH's bankruptcy. In re Lower Bucks Hosp., 471 B.R. at 449. Examining the Loan and Security Agreement and the Trust Indenture, the Bankruptcy Court found that if Becker's class action were successful, LBH would be obligated to indemnify BNYM for its liability and defense expenses. Id.34 Thus, according to the Bankruptcy Court, BNYM had, as a result of the contractual indemnification, "a potentially significant claim in the bankruptcy and create[d] the requisite nexus between Becker's class action claims against BNYM and LBH's reorganization." Id.

Pacor and its progeny instruct us to ask two questions in determining whether there is "related to" jurisdiction. Steel Workers Pension Trust, 295 B.R. at 753. First, is LBH's indemnification liability triggered automatically upon the filing of the class action against BNYM? Second, is a later successful lawsuit against LBH, after the resolution of the class action, a prerequisite to a finding of indemnification owing from LBH to BNYM? If the answer to the first question is no, or the answer to the second is yes, "related to" jurisdiction does not exist. Id.

There are two agreements relevant to the indemnification issue. The Loan and Security Agreement governs the relationship between LBH and the Authority. The Trust Indenture defines the respective rights and obligations of the Authority and the Indenture Trustee, originally Continental Bank and later BNYM. Each agreement references the other.

Section 11.03 of the Trust Indenture limits the liability of the Indenture Trustee to the Bondholders. It provides, in relevant part, as follows:

Trust Indenture, § 11.03 at 62.35

Pursuant to section 11.4(b) of the Loan and Security Agreement, LBH agreed to indemnify the Authority against "any and all claims" arising out of the financing transaction.36 The scope of the indemnity is broad and requires LBH to assume and pay for the defense of any claim against the Authority. It excludes only claims for "malfeasance or nonfeasance in office, bad faith, gross negligence, wilful misconduct, fraud or deceit."37 The indemnification provision, in relevant part, reads as follows:

Loan and Security Agreement, § 11.4(b) at 52-53.38

Later, in section 11.4(e) of the Loan and Security Agreement, LBH agreed to indemnify the Trustee, now BNYM as successor to Continental Bank, against "any liabilities" arising out of its powers and duties.39 The provision addresses liabilities caused by the Trustee's "gross negligence, or wilful misconduct."40 Section 11.4(e) provides:

Loan and Security Agreement, § 11.4(e) at 54. Thus, section 11.4(e) describes the nature of the liabilities for which LBH must indemnify BNYM, and by reference to section 11.4(b), defines the scope of the indemnity obligation as the same as LBH owes the Authority.

Section 11.4(b) imposes an indemnity obligation regardless of whether the claims ultimately result in a finding of liability. It covers "any and all claims, losses, damages or liabilities." Section 11.4(e), on the other hand, fixes indemnification only once "liabilit[y]" has been established. It does not cover claims that do not result in liability. Thus, when read without reference to section 11.4(b), section 11.4(e) does not automatically impose a duty of indemnification because LBH's indemnification obligation would not arise until BNYM's liability is definitively determined in Becker's class action. In other words, Becker would have to prevail in the class action before BNYM could rightfully demand indemnification from LBH. This is the inchoate type of claim precluded by Pacor. Pacor, 743 F.2d at 995. But, by reference to section 11.4(b), section 11.4(e) does indeed impose an obligation upon LBH to assume the defense and the expense of defending against claims, even though BNYM's liability has not yet been established. Section 11.4(e) defines the parameters of the obligation by using the phrase "to the same extent and in the same manner as is described in subsection 11.4(b)." Requiring LBH to indemnify BNYM to the same extent and in the same manner as it must indemnify the Authority under section 11.4(b) means LBH must assume and pay for the defense of any claim other than for gross negligence or willful misconduct.41 Consequently, LBH's indemnification obligation, at least in part, was triggered upon the filing of the class action against BNYM; and, it is not contingent upon a finding of liability. Therefore, the Bankruptcy Court had "related to" subject matter jurisdiction to rule on the third party release provision.

The Bankruptcy Court did not err in concluding that the notice provided to the Bondholders was inadequate.

Having determined that the Bankruptcy Court had "related to" jurisdiction, we must decide whether it clearly erred in determining that the Bondholders were not provided adequate information concerning the third party release before they voted on the plan of reorganization.

Section 1125 of the Bankruptcy Code mandates that before creditors may be solicited to vote on a plan of reorganization, the plan proponent must file a copy of the plan, or a summary of the plan, and a written disclosure statement to holders of claims and interests. 11 U.S.C. § 1125(b). The disclosure statement must first be approved by the bankruptcy court "as containing adequate information." Id. "[A]dequate information" is defined as:

11 U.S.C. § 1125(a)(1). What constitutes "adequate information" is determined on a case-by-case basis, with the ultimate determination within the discretion of the bankruptcy court. In re Texas Extrusion Corp., 844 F.2d 1142, 1156-57 (5th Cir.1988); see also In re Aspen Limousine Serv. Inc., 193 B.R. 325, 334 (D.Colo.1996) (holding that in reviewing the adequacy of a disclosure statement on appeal, the reviewing court considers whether the bankruptcy court has abused the broad discretion it has to consider the adequacy of the statement); In re El Comandante Mgmt. Co., 359 B.R. 410, 414 (Bankr.D.P.R.2006) ("Beyond the statutory guidelines described in Section 1125(a)(1), the decision to approve or reject a disclosure statement is within the discretion of the bankruptcy court.") (internal quotations and citations omitted).42 "Factual findings of the bankruptcy judge on `core matters' such as the adequacy of disclosure under Section 1125(a) should be set aside on appeal by the district court only if those findings represent an abuse of discretion." Kirk v. Texaco, Inc., 82 B.R. 678, 681 (S.D.N.Y. 1988) (citing In re Snyder, 56 B.R. 1007, 1009 (N.D.Ind.1986)).

The bankruptcy court abuses its discretion when it makes factual findings that are "clearly erroneous." See Fed. R. Bankr.P. 8013. Thus, only if the finding was clearly erroneous will the Bankruptcy Court's finding that the disclosure statement did not provide "adequate information" within the meaning of Section 1125(a)(1) be set aside.43

Here, in reviewing the adequacy of the disclosure statement, the Bankruptcy Court meticulously analyzed the purpose of the third party release, the factors that the Bondholders needed to evaluate whether the global settlement was in their best interest, and the content of the disclosures. In re Lower Bucks Hosp., 471 B.R. at 459. Based on its analysis, the Bankruptcy Court concluded that the Bondholders could not have made an "informed judgment about the plan" of reorganization because they had not been adequately informed. Id. n. 61 (citing 11 U.S.C. § 1125(a)(1)).

First, the Bankruptcy Court determined that the disclosure did not comply with Fed. R. Bankr.P. 3016(c), which requires a disclosure statement to "describe in specific and conspicuous language (bold, italic, or underlined text) all acts to be enjoined and identify the entities that would be subject to the injunction." In re Lower Bucks Hosp., 471 B.R. at 459-60 (citing Fed. R. Bankr.P. 3016(c)). It determined "there was nothing conspicuous regarding the disclosure of the Third Party Release in any of the documents sent to the Bondholders." Id. at 460. The Bankruptcy Court specifically found that the existence and significance of the third party release was obscured because it was embedded, without any emphasis, in the boilerplate release of claims against LBH. Id. It also noted that only the heading, "Release-Bond Documents," was in bold typeface, which by itself did not indicate "something out of the ordinary, i.e. anything other than the release of the Bondholders' rights against [LBH] under the Indenture." Id.

BNYM misapprehends Rule 3016(c) when it argues that the phrase "bold, italic, or underlined text" is merely a parenthetical example of "conspicuous language" in the rule, and not a requirement. BNYM argues "[i]f the Supreme Court had intended the interpretation of the text of Rule 3016 that Bankruptcy Court suggested in this case, it would have explicitly stated so — it would not have placed these words in parentheses."44 Assuming BNYM is correct, it does not affect the Bankruptcy Court's conclusion. Whether Rule 3016(c) actually requires bold, italicized or underlined text is not dispositive. The Bankruptcy Court considered other factors, including the placement of the third party release provision. As characterized by the Bankruptcy Court, the disclosure statement "squandered the opportunity to mention the Third Party Release in several places where it was germane." In re Lower Bucks Hosp., 471 B.R. at 461.

Although it questioned BNYM's assumption that non-disclosure-statements may even be considered when determining the adequacy of a later disclosure statement, the Bankruptcy Court still considered, along with the disclosure statement, the number of notices sent to the Bondholders. Id. It concluded:

Id. at 460. As the Bankruptcy Court further found, "the repetition of the same mistake made in the [Disclosure Statement] does not cure the Rule 3016(c) defect.... If anything, the general similarity of the serial notices would make it less likely that the recipients would parse carefully any of the later documents." Id. at 461. It also determined that many of the notices contained an ambiguous term which did not differentiate indemnity claims against LBH from the Bondholders' claims against BNYM. Id. Finally, the Court noted that it is not the Bondholders' responsibility to "hunt" for a third party release provision. Id.

At oral argument, BNYM's counsel encouraged us "to go back to the whole record" and consider the nine separate notices sent to the Bondholders.45 A review of those notices does not reveal that BNYM disclosed what claims the Bondholders had and were giving up against BNYM.

The first notice, dated January 15, 2010, provided the Bondholders with notice of LBH's default of its obligations and LBH's bankruptcy filing.46 The second notice, dated June 16, 2010, reported that LBH commenced a proceeding against BNYM, and provided a summary of LBH's seven-count complaint.47 There is no description of the claims from which a bondholder could discern that BNYM was accused of failing to perfect the Bondholders' security interest and the effect that failure would have on the Bondholders' creditor status. The next two notices, dated July 2, 2010 and August 5, 2010, merely reiterated that there was an adversary proceeding.48 They added no more information. The fifth notice, dated January 1, 2011, provided a procedural history of the adversary proceeding in general terms, without explaining the basis for LBH's claim that BNYM did not have a perfected security interest and what that meant to the Bondholders.49 In the next notice, dated March 23, 2011, there was brief mention that there were ongoing settlement negotiations.50 Later, in the notice, there was an invitation "to participate in a discussion with respect to this account" in a scheduled conference call.51 However, there was nothing to indicate that among the topics to be discussed were the settlement proposals and the adversary proceeding.

In the seventh notice, dated May 13, 2011, BNYM reported that there was a proposed settlement between LBH and BNYM.52 It referenced that LBH, as a result of settlement discussions, proposed a plan for "treatment of the bonds in a chapter 11 plan."53 It advised that the Bondholders would "have the opportunity to vote on the proposal."54 Nothing in that notice disclosed that there was a potential claim against BNYM for failing to perfect the Bondholders' security interest and, more importantly, that BNYM was getting a release.

The eighth notice, dated August 16, 2011, was a seven-page, single-spaced document, with the settlement stipulation attached as an exhibit.55 It summarized the settlement terms between LBH and BNYM. As to the release of BNYM, it stated that the settlement would include a release of "any and all claims against the Debtors, the Debtors' estates, and the Trustee by any and all parties, including without limitation all Bondholders...."56 Again, as in prior notices, there is nothing to alert the Bondholders that there was a potential claim against BNYM for failure to perfect the security interest that jeopardized the Bondholders' investment.

Significantly, in the last notice, dated October 14, 2011, BNYM reported that Becker had filed a motion to reconsider the settlement approval order, and that BNYM was intending to contest it.57 The notice did not explain the grounds for the motion or BNYM's rationale for opposing it. As the Bankruptcy Court noted, BNYM sent this notice at the outset of the plan voting period. In re Lower Bucks Hosp., 471 B.R. at 440 n. 27. It questioned why BNYM did not disclose this material information prior to the Bondholders' vote on a plan of reorganization which included a third party release that would have released all claims against BNYM.

In summary, none of the nine notices predating the disclosure statement described the Bondholders' potential claims against BNYM or explained what claims by the Bondholders against BNYM would be released.58 Contrary to BNYM's argument, there was insufficient information from which the Bondholders could have concluded that they had a potential claim against BNYM.

As the Bankruptcy Court observed:

In re Lower Bucks Hosp., 471 B.R. at 461.

Significantly, the Bankruptcy Court found that the disclosure statement did not provide the Bondholders with information about the merits or value of the potential claims against BNYM in the class action that they would be relinquishing. Id. at 459. Consequently, the Bondholders could not evaluate whether the benefits of the proposed plan outweighed what they would give up by agreeing to the third party release.

Becker contends that "conspicuously absent" from the disclosure statement was information bearing on "(3) whether there was potential conflict in the Bond Trustee negotiating for its own release" and "(5) what consideration the Bond Trustee was giving for the Third Party Release."59 What is clear is that BNYM agreed to release its contractual right of indemnification against LBH in return for the third party release because of "the impending discharge of its indemnification rights" against LBH. In re Lower Bucks Hosp., 471 B.R. at 451. What claims the Bondholders were releasing against BNYM is not clearly described in the disclosure notice or the separate nine notices. It is also unclear what exactly the Bondholders would receive in exchange for releasing their claims against BNYM. Bondholders had certain rights under the indenture agreement. The disclosures did not clearly detail what they were and why the release of BNYM was necessary.

In summary, the Bankruptcy Court engaged in a careful and thorough analysis of the factors bearing on the adequacy of disclosures provided to the Bondholders. It did not abuse its discretion when it found that the disclosure statement did not adequately communicate the specifics of the settlement, but rather, obscured the existence and significance of the third party release provision. We agree with the Bankruptcy Court that the information provided was not adequate to enable a reasonable creditor to make an informed judgment about the plan, particularly the release of BNYM. Accordingly, the Bankruptcy Court's finding that the disclosure statement did not contain "adequate information" as required by Section 1125(a) is not clearly erroneous.

The Bankruptcy Court correctly concluded that the Bondholders did not consent to the third party release through the settlement motion process.

BNYM contends, without elaboration and citation to authority, that the Bondholders consented to the third party release when they did not object to it in the settlement motion process. However, as the Bankruptcy Court and Becker correctly point out, the settlement stipulation "was not a stand-alone agreement that was complete and enforceable upon court approval." In re Lower Bucks Hosp., 471 B.R. at 457; Br. of the Appellee at 12. It was not self-executing. It was provisional. The settlement was conditioned upon confirmation of the plan of reorganization and on the effective date of the plan. The Bankruptcy Court's September 14, 2011 order also provided that the Bondholders' claims would be released "upon the Plan Effective Date."60 In fact, during the December 2, 2011 confirmation hearing, the Bankruptcy Court clarified that the settlement was not "so final" as to preclude its review during confirmation.61 Further, during the March 2, 2012 hearing, BNYM's counsel "effectively" conceded that the final treatment of the Bondholders could be accomplished only through the plan confirmation process. In re Lower Bucks Hosp., 471 B.R. at 457 n. 54. Therefore, until all requirements, including adequate disclosure, were satisfied and the plan was confirmed, the settlement stipulation, including the third party release, did not become effective.

Prior to confirmation of the plan, the Bankruptcy Court severed the third party release provision. At the same time, it ruled that nothing in its September 14, 2011 order constituted a waiver, release, discharge, or impairment of any claims that the Bondholders may have against BNYM. Id. at 441. Later, after a hearing on March 2, 2012, it provisionally struck the third party release from the plan. Finally, in its May 24, 2012 Order, it struck the release from the reorganization plan. Thus, the provisional settlement stipulation never survived as part of the plan.

Adopting BNYM's argument that the Bondholders' failure to object to the settlement stipulation constituted acceptance would render the notice requirements superfluous. The purpose of giving Section 1125 notice is to assure that those acting have sufficient information to make an informed judgment about the plan. Here, if the Bondholders had not been given adequate notice of the ramifications of the release as a component of the plan, they could not have knowingly agreed to its terms.

The Bankruptcy Court did not err in concluding that the third party release was an impressible non-consensual release.

BNYM contends that even if the impermissible release was not consensual, it should still be approved because it was an essential component of a global settlement that was fair and equitable to the Bondholders, and necessary to the success of the LBH's reorganization.62

In In re Continental Airlines, 203 F.3d 203 (3d Cir.2000), the Third Circuit addressed the issue of the validity of releases of third party claims against non-debtors. It reviewed the decisions of several other circuits, some of which allowed them in limited circumstances and others which disallowed them. Recognizing that an injunction or release is "extraordinary protection" for non-debtor parties, the court declined to establish a "blanket rule" permitting or proscribing non-debtor releases. Id. at 217.63 Instead, without deciding the issue, it prognosticated that "there are circumstances under which [it] might validate a non-consensual release that is both necessary and given in exchange for fair consideration." Id. at 214 n. 11.

At the same time, it identified the "hallmarks of permissible non-consensual releases — fairness, necessity to the reorganization, and specific factual findings to support these conclusions." Id. at 214. It also considered whether reasonable consideration had been given in exchange for the release. Id. at 215.

To determine whether or not a release is necessary to the reorganization, the plan's proponent must demonstrate that there is a relationship between the debtors' successful reorganization and the non-consensual parties' release, and that "`the releasees have provided a critical financial contribution to the debtors' plan that is necessary to make the plan feasible in exchange for receiving a release of liability.'" In re Nickels Midway Pier, LLC, No. 03-49462, 2010 WL 2034542, at *13 (Bankr.D.N.J. May 21, 2010) (quoting In re Genesis Health Ventures, Inc., 266 B.R. 591, 608 (Bankr.D.Del.2001)). To determine whether the release is fair, BNYM must demonstrate that the "non-consenting creditors [the Bondholders] were given reasonable consideration in exchange for the release." Id.

In In re South Canaan Cellular Invs., Inc., 427 B.R. 44, 72 (Bankr.E.D.Pa.2010), the bankruptcy court evaluated whether a non-consensual release satisfied the Continental "hallmarks." It considered whether: (1) the third party to be protected by the release had made an important contribution to the reorganization; (2) the requested release was "essential" to the confirmation of the plan; (3) a large majority of the creditors in the case had approved the plan; (4) there was a close connection between the case against the third party and the case against the debtor; and (5) the plan provided for payment of substantially all of the claims affected by the release. Id.

In this case, BNYM urged the Bankruptcy Court to approve the non-consensual release, arguing that all five factors had been satisfied. The Bankruptcy Court determined that "[w]hile the record conceivably could support favorable findings to BNYM on the first, second, fourth, and perhaps, fifth factors, I am unable to make the requisite finding on the third factor." In re Lower Bucks Hosp., 471 B.R. at 462. Because the pre-solicitation disclosure was inadequate, the Bankruptcy Court lacked "sufficient confidence that a large percentage of the Bondholders (in both number and amount of claims) who voted to accept the Plan understood that they would be releasing their claims against BNYM." Id. Indeed, if notice was inadequate, any purported approval by the creditors was consequently uninformed and unknowing. Similarly, inadequate notice could also explain why the Bondholders holding half the value of the bonds did not vote on the plan.

First, we analyze the consideration provided by BNYM in exchange for the release. In doing so, we are guided by the Bankruptcy Court's careful analysis of BNYM's actions and role during the settlement negotiations. LBH commenced an adversary proceeding against BNYM, contending that it had failed to file the financing statements essential to preserving the Bondholders' status as secured creditors. Throughout the proceedings, BNYM appeared to argue that due to its willingness to participate in the settlement negotiations on behalf of the Bondholders, it had an unconditional right to condition its decision to settle with LBH on the inclusion of the third party release provision. In re Lower Bucks Hosp., 471 B.R. at 452. Specifically, BNYM contended that there could be no settlement without its participation and agreement. Calling it "the most provocative contention," the Bankruptcy Court flatly rejected this argument, pointing out that despite its critical role in the settlement negotiations, BNYM never had a "legal right to put [its own interest] ahead of the interests of the Bondholders." Id. at 452-53.

BNYM further contends that it made substantial contributions to the Debtor's reorganization by giving up its right to indemnification against LBH. As discussed, unless and until Becker prevails in the class action, the only claim BNYM gave up was for defense costs. However, and as the Bankruptcy Court pointed out, it is not clear that this claim would get administrative-expense priority. Id. at 454. Neither the Loan Agreement nor the Trust Indenture contain any provisions that would grant BNYM an unconditional charging lien for defense costs. Id. Undoubtedly, the claim, if allowed, would dilute the recoveries of other general creditors. However, it is not clear that it is large enough to merit approval of a non-consensual release.

BNYM also argues that the third party release was "absolutely necessary" to LBH's reorganization because its indemnification claim would have precluded LBH's successful emergence from bankruptcy.64 Specifically, according to BNYM, LBH could not move forward until the claims were resolved, delaying Chapter 7 liquidation.65 The Bankruptcy Court noted that BNYM was in a position to place obstacles in the way of the reorganization. In re Lower Bucks Hosp., 471 B.R. at 456. Accordingly, its support "in its capacity as indemnitee, was important, perhaps even essential, to the success of the reorganization." Id. (emphasis removed). Indeed, the Court opined that in exchange for BNYM's support, some Bondholders could have acceded to the third party release. Alternatively, some Bondholders could have rejected the global settlement and "roll[ed] the dice on the option of litigation against BNYM." Id. However, the Bondholders never got an opportunity to make an assessment of the alternatives available to them because the disclosures they received were inadequate.

With respect to what consideration the Bondholders received in exchange for the third party release, there is no evidence from which one could conclude whether any was given; or, if it was given, whether it was adequate. Pursuant to the settlement agreement, the Bondholders were to receive $8.15 million from LBH in exchange for a release of any claims against LBH. There is no indication that BNYM itself gave any consideration or compensation to the Bondholders. Therefore, it appears that BNYM included the settlement provision to shield itself from liability in connection with its obligation to the Bondholders in the adversary proceeding and for its prepetition conduct without having given any consideration.

In summary, the Bankruptcy Court did not err in concluding that the Continental hallmarks of permissible non-consensual releases were not present in this case.

Conclusion

The Bankruptcy Court, which had "related to" jurisdiction to rule on the third party release, did not abuse its discretion in holding that the third party release provision was inadequately disclosed. Therefore, we shall affirm the Bankruptcy Court.

ORDER

AND NOW, this 2nd day of January, 2013, upon consideration of the briefs of the parties, and after review of the record and oral argument, it is ORDERED that the Orders of the Bankruptcy Court dated May 10, 2012, and May 24, 2012, are AFFIRMED.