Does the door close on large third-party versions in the event of bankruptcy?
One of the many powerful tools provided by Chapter 11 is the ability for a debtor to obtain forgiveness of debts through a plan of reorganization. In complex cases, however, debtors often view the release as insufficient to achieve all of its restructuring goals. Thus, third-party releases are often incorporated into the bankruptcy plan as a means of protecting non-debtor parties from litigation directly or even indirectly related to the debtor’s business. In recent years, the reach and use of these third-party releases appears to have been stretched arguably to breaking point, as demonstrated by the recent and landmark district court decision in the Ascena case. See Patterson v Mahwah Bergen Retail Group, Civil. No. 3:21cv167 (DJN) (ED Va. 13 January 2022).
The Ascena bankruptcy case featured facts typical of many complex Chapter 11 filings in recent years. Mahwah Bergen Retail Group, Inc. (f/k/a Ascena Retail Group, Inc.) (Ascena) and affiliated debtors commenced Chapter 11 in the United States Bankruptcy Court for the Eastern District of Virginia on July 23, 2020. The Virginia’s Eastern District had become a popular place to file large retail bankruptcy cases. Immediately after the sale of substantially all of its assets, the debtors filed an amended plan of reorganization.