Emory Bankruptcy Developments Journal


Bankruptcy courts have often used 'third-party releases' in the chapter 11 context to release certain non-debtors from liabilities. As chapter 9 municipal bankruptcies have become more numerous, debtors have sought third-party relief there as well. The author categorizes these chapter 9 cases into two categories. The first involves cases where the State provides funds to the reorganization effort in exchange for some creditors giving up claims against the State. The second consists of cases where a city attempts to relieve its police officers of liability for civil rights violations by including injunctions against the civil rights plaintiffs in the city's plan of reorganization. The author argues that the second category of cases have ignored fundamental limitations on third-party relief and allow debtors to exploit a test that was not intended for chapter 9 bankruptcy. This leads the author to propose replacing the 'necessity' standard with one suited for municipal bankruptcies.