Nondebtor Release Prohibition Act of 2021 (“NRPA”): Not the Best Solution to the Abuse of Non-Consensual Third-Party Release
ABSTRACT
Since 1978, bankruptcy courts have been tasked with trying to adjudicate intractable issues in the insolvency of businesses and individuals. The fundamental goal of Chapter 11 reorganization is to give debtors a financial “fresh start” unhampered by the pressure and discouragement of preexisting debt. This goal is largely achieved through the rearrangement of the debtor’s capital structure, and to come up with a plan of repayment that conclusively releases the debtor from all outstanding claims of liabilities against it. Over the years of development, this mechanism has expanded to release the debtor’s third-party affiliates, including shareholders, officers, and insurance carriers, from their liabilities arising out of the debtor’s reorganization. Due to its effectiveness in facilitating business revival, this so-called “third-party release” mechanism has become one of the most leveraged reorganizational tools in Chapter 11 cases. Bankruptcy courts normally allow third-party releases that obtain full creditors’ approval. On the other hand, non-consensual third-party releases, which are not agreed upon by all creditors, are subject to the bankruptcy courts’ higher standard of scrutiny. However, recent controversies concerning the abuse of non-consensual third-party release brought sound criticisms that question some jurisdictions’ relatively permissive attitude toward such releases.
In 2021, the Nondebtor Release Prohibition Act of 2021 (NRPA) was proposed in Congress. The Act would impose a blanket prohibition to the use of non-consensual third-party release in virtually all bankruptcy cases, except for asbestos-related debtors subject to 11 U.S.C. § 524(g). This would also signal an end to the ongoing development among federal circuit courts in deciding the appropriate scope of application of one of the most prevalent bankruptcy law mechanisms. This note argues why NRPA’s abrupt prohibition against the use of non-consensual third-party release could seriously hamper the bankruptcy courts’ capability in facilitating a successful business reorganization, which run contrary to the fundamental goals of the United States bankruptcy law regime. This Note will also propose an alternative route that Congress should take in resolving issues concerning the abuse of non-consensual third-party releases.