Opting Into Opting Out: Due Process and Opt-Out Releases

• Published in: American Bankruptcy Institute journal Vol. 43; no. 8; pp. 26 - 63
• Main Authors: Huebner, Marshall S, Somers, Kate
• Format: Journal Article
• Language: English
• Published: Alexandria American Bankruptcy Institute 01.08.2024
• Subjects: Bankruptcy; Bankruptcy laws; Bankruptcy reorganization; Class action lawsuits; Consent; Due process of law; Elections; Federal courts; Judges & magistrates; Third party; Torts; United States > US; Delaware
• ISSN: 1931-7522

[...]that the U.S. Supreme Court has issued its ruling barring nonconsensual releases, there will - absent legislative change - be an even greater focus on (and need for) other types of releases with respect to third parties, including both opt-out and opt-in releases. Factors in Support of Opt-Out Releases in Appropriate Circumstances Bankruptcy courts have focused on the following entirely sensible factors in deciding whether opt-out releases are appropriate on the facts before them: 1. adequate or meaningful recoveries for creditors;4 2. volume of opt-out elections actually received;5 3. adequate consideration provided in exchange for release; 4. clear and prominent notice of the release and the opportunity to opt out;6 5. highly publicized nature of the case and the third-party releases, including in cases "of great notoriety" where creditors "knew about the existence of the bankruptcy case [and] knew they would have to act";7 6. active creditor participation;8 7. whether creditors had adequate representation, including by official committees;9 and 8. the unique nature of mass tort bankruptcies and/ or integrated settlements that confer broad benefit to all stakeholders. Many courts have found opt-out releases to be appropriate in the mass tort context.10 Even the U.S. Trustee's Office has started coming around of late.11 Where these factors are satisfied, it defies reason to assume that creditor silence should be deemed a rejection, rather than an acceptance, of a negotiated settlement. [...]as the Mallinckrodt court explained, the notion of deemed consent by failure to act "is utilized throughout the judicial system. In Mallinckrodt, Hon. John T. Dorsey of the U.S. Bankruptcy Court for the District of Delaware distinguished cases that did not "involve mass tort bankruptcies like this one.