In the recent Third Circuit decision of In re Lower Bucks Hospital, No. 13-1311 (3d Cir. July 3, 2014), the Third Circuit upheld the ruling of the Bankruptcy Court for the Eastern District of Pennsylvania that non-consensual releases were not part of the debtor’s plan of reorganization due to failure to adequately disclose the same to the Court. In the bankruptcy case, bondholders objected to the release in favor of The Bank of New York Mellon Trust Company, N.A., in its capacity as indenture trustee, on the basis that adequate notification was not provided.
Only a single paragraph in the disclosure statement referenced the third-party release, with no use of distinguishing font, and the debtor’s plan was even less direct.
The third-party release was deemed by the Court to be an injunction that must be described in “specific and conspicuous language” in both the plan and disclosure statement pursuant to Fed. R. Bankr. P. 3016(c). This would allow a hypothetical investor to be able to make an informed judgment about the plan. See 11 U.S.C. § 1125(a)(1). The Third Circuit agreed with the Bankruptcy Court that the pleadings failed on both “presentation and placement.” Accordingly, a finding of inadequate disclosure and the resulting denial of the third-party release was warranted.