The restructuring industry held its proverbial breath following the Supreme Court’s decision in Harrington v. Purdue Pharma L.P., which invalidated the nonconsensual third-party release in the debtors’ plan. While various courts continue to interpret the Purdue Pharma decision, New Jersey Bankruptcy Courts (the “Bankruptcy Court”) appear unified in allowing consensual third-party releases and finding that opt-out provisions constitute a consensual release, as most recently affirmed in the BowFlex case.[1]
Major companies and their boards, with the advice of counsel and advisors, must analyze and decide which venue (if multiple proper options exist) is most likely in a chapter 11 bankruptcy case to benefit the company, preserve value, and is in the best interest of all stakeholders. In high stakes bankruptcy cases, companies, boards, DIP lenders, and other constituents cannot afford to guess what to expect – there needs to be a reasonable amount of certainty. Chief Bankruptcy Judge Michael Kaplan recently stated that the New Jersey bench is known for “being efficient and effective, and known for offering practitioners much-needed consistency that can help ensure the litigations [and cases] move smoothly.”[2] Bankruptcy courts in New Jersey are demonstrating this both pre- and post-Purdue Pharma, as they have routinely confirmed plans with opt-out provisions.
On March 4, 2024, BowFlex Inc., and affiliated debtor BowFlex of New Jersey LLC (collectively, the “Debtors”) filed for chapter 11 protection in the Bankruptcy Court, with the aim of conducting a sale process for substantially all of the Debtors’ assets. In re BowFlex Inc., Case No. 24-12364 (ABA) (Bankr. D.N.J.). Following the sale of the Debtors’ assets, the Debtors filed their plan of liquidation, which provided for the creation of a liquidation trust that would distribute the Debtors’ remaining assets to the general unsecured creditors. The U.S. Trustee opposed the plan arguing that the opt-out nondebtor releases are nonconsensual and in violation of the Purdue Pharma decision. Judge Altenburg, presiding over the confirmation hearing, overruled the U.S. Trustee’s objection and confirmed the plan. The Bankruptcy Court emphasized that the Purdue Pharma decision did not explain what constitutes “consent” or a “consensual” third-party release, and the Supreme Court simply stated that “merely voting” in favor of a plan was insufficient to establish consent. The Bankruptcy Court reasoned that the opt-out mechanism can be an appropriate tool to establish a consensual release of nondebtors, as long as the releasing parties receive notice consistent with due process and the opt-out process and consequences thereto were “clear and conspicuous” in the notice.[3] The Bankruptcy Court also overruled the U.S. Trustee’s objection to the exculpation and gatekeeping provisions in the plan as they are both routinely granted in New Jersey chapter 11 cases. Additionally, as to the exculpation provision, the Bankruptcy Court found that it was proposed in good faith, properly limited liability for the exculpated parties, and was a necessary part of the plan settlement.
Prior to the Supreme Court’s Purdue Pharma decision, New Jersey Bankruptcy Courts routinely held that the opt-out provision constitutes a consensual third-party release.[4] On the day the Supreme Court issued the Purdue Pharma decision, the Bankruptcy Court was in the midst of a highly contentious confirmation hearing in In re Rite Aid Corp., Case No. 23-18993 (MBK) (Bankr. D.N.J.). The Bankruptcy Court confirmed the plan which contained gatekeeping provisions and third-party releases, of which, the debtors voluntarily changed the opt-out release of non-debtors to an opt-in release. Given the switch to an opt-in release, the Bankruptcy Court found that there was no basis to deviate from its ruling to confirm the plan, despite the Purdue Pharma decision. Following the Purdue Pharma decision, the Bankruptcy Court in In re Invitae Corp., Case No. 24-11362 (MBK) (Bankr. D.N.J.) confirmed the debtors’ plan and rejected the U.S. Trustee’s objection to the opt-out release for non-debtors. In making its ruling, the Bankruptcy Court incorporated “relevant rulings” on these issues from the BlockFi and Bed Bath & Beyond cases. The Bankruptcy Court also approved the opt-out procedures in In re Sam Ash Music Corp., Case No. 24-14727(SLM) (Bankr. D.N.J.) finding that the procedures for opting out of the third-party release, as set forth in the ballots and the non-voting notice were good, sufficient, and adequate to bind the applicable parties to the third-party release.
The recent post-Purdue Pharma rulings demonstrate that bankruptcy courts in New Jersey do not believe that Purdue Pharma impacts the use of opt-out and gatekeeping provisions. Given the recent rulings, we anticipate that New Jersey will remain a critical venue for debtors and boards of directors who seek predictability on major issues, such as, the right to receive the benefit of third-party releases.
Matthew Clemente, Maegan Quejada, and Michael Sabino of Sidley Austin LLP and Joseph J. DiPasquale, Mark E. Hall, and Michael R. Herz of Fox Rothschild LLP represented the Debtors in BowFlex as co-counsel.
[1] As discussed below, the New Jersey Bankruptcy Court also recently and post-Purdue Pharma approved opt-out provisions in the Invitae and Sam Ash bankruptcies.
[2] ALM Law.com, NJ Bankruptcy Chief Judge Discusses Court Process, Stability and the Importance of Having NJ Cases Filed In NJ (August 21, 2024).
[3] No parties, including the U.S. Trustee, objected to the noticing of the plan or whether the opt-out notice contained clear and conspicuous information to notice parties of their rights.
[4] See In re Cyxtera, Case No. 23-14853 (JKS) (Bankr. D.N.J. Nov. 17, 2023); In re BlockFi; Case No. 22-19361 (MBK) (Bankr. D.N.J. October 4, 2023; In re Bed Bath & Beyond, Case No. 23-13359 (VFP) (Bankr. D.N.J. September 14, 2023); In re Congoleum Corporation, Case No. 20-18488 (MBK) (Bankr. D.N.J. Jan. 25, 2021); In re Modell’s Sporting Goods, Inc., Case No. 20-14179 (VFP) (Bankr. D.N.J. Nov. 12, 2020); In re SLT Holdco, Inc., Case No 20-18368 (MBK) (Bankr. D.N.J. Oct. 21, 2020); In re Aceto Corporation, Case No. 19-13448 (VFP) (Bankr D.N.J. Sept. 18, 2019); In re Saint Michael’s Medical Center, Inc., Case No. 15-24999 (VFP) (Bankr D.N.J. Jan. 12, 2017).