In the last few years, bankruptcy scholars and professionals have criticized mass tort debtors’ use of chapter 11 bankruptcy as a litigation forum. One such criticism concerns mass tort debtors’ use of third-party releases: provisions in chapter 11 reorganization plans that enjoin creditors’ claims against non-debtor third parties. If a bankruptcy court approves such releases, creditors lose claims against the released third parties, which often include the debtor’s directors, insurers, or employees.
Third-party releases have troubled many. Critics and courts have said that third-party releases violate (1) the Bankruptcy Code, (2) bankruptcy policy, (3) the constitutional right to due process, and (4) the separation of powers. All four of these issues hold water, but the separation of powers especially warrants addressing because of its prophylactic nature—implemented correctly, the separation of powers mitigates the other three concerns. The separation of powers problem is that bankruptcy courts exceed their Article I authority by approving releases that alter only non-debtors’ legal rights, a job typically reserved for Article III courts.
The Supreme Court guided bankruptcy courts on the separation of powers in the seminal case Stern v. Marshall. Yet bankruptcy courts still lack a uniform separation of powers approach for third-party releases. This Comment proposes a framework to help bankruptcy courts gauge the constitutionality of third-party releases. Bankruptcy courts should analyze each proposed release individually using the “public rights exception” from Stern, presuming the releases unconstitutional until the debtor proves otherwise. Doing so will protect constitutional sanctity, serve bankruptcy policy, and mitigate due process risks.
Third-Party Bankruptcy Releases and the Separation of Powers: A Stern Look,
Emory Bankr. Dev. J.
Available at: https://scholarlycommons.law.emory.edu/ebdj/vol40/iss1/4