Stein Mart, Inc.

ORDERED.

Dated: March 29, 2021

eo NEN fs) My

Ted Eye

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

MIDDLE DISTRICT OF FLORIDA

JACKSONVILLE DIVISION

IN RE:

Chapter 11

STEIN MART, INC., Case No. 3:20-bk-2387-JAF

STEIN MART BUYING CORP., Case No. 3:20-bk-2388-JAF

STEIN MART HOLDING CORP., Case No. 3:20-bk-2389-JAF

(Jointly Administered)

Debtors.

eee

FINDING OF FACTS AND CONCLUSIONS OF LAW

This case came before the Court for a confirmation hearing and final approval of Disclosure

Statement of Debtors’ Combined Plan of Liquidation (the “Proposed Plan”), submitted by Debtors

STEIN MART, INC. (“Stein Mart”), STEIN MART BUYING CORP., and STEIN MART

HOLDING CORP. (collectively, “Debtors”). (Doc. 848). An objection to confirmation was filed

by NANCY J. GARGULA, the United States Trustee for Region 21 (the “U.S. Trustee”), as well

as by the UNITED STATES SECURITIES AND EXCHANGE COMMISSION (the “SEC”).

(Docs. 934 & 936). A confirmation hearing was held on March 11, 2021. (Doc. 965). Based on

the argument and evidence presented, the Court makes the following Findings of Fact and

Conclusions of Law pursuant to Bankruptcy Rules 9014(c) and 7052.

FINDINGS OF FACT

On August 12, 2020, Debtors filed respective petitions under Chapter 11 of the Bankruptcy

Code. The Court entered an order directing the joint administration of Debtors’ cases. (Doc. 94).

The U.S. Trustee appointed the Official Committee of Unsecured Creditors (the “Creditor’s

Committee”) to represent the interests of the unsecured creditors, treated under Class 6 of the

Proposed Plan. (Doc. 137). Debtors continued to operate their business and manage their

properties as debtors in possession. (Doc. 4). In January 2021, Debtors filed their Proposed Plan

together with their Disclosure Statement. (Doc. 848) (the Proposed Plan); (Doc. 849) (the

Disclosure Statement). In their motion to conditionally approve the Disclosure Statement, Debtors

attached their Notice of Non-Voting Status and Opt-Out Form (the “Opt-Out Form”). (Doc. 850-

1). The Disclosure Statement was conditionally approved, and a confirmation hearing was set for

March 11, 2021. (Doc. 853).

Debtors are Florida corporations with headquarters in Jacksonville, Florida. Debtor Stein

Mart owns all the stock of the other two debtors, and the three entities operate as a single business.

Stein Mart is a publicly traded company that was formerly listed on the NASDAQ Exchange but

is now traded over the counter. Debtors operated a nationwide discount department store chain

with roughly 281 retail stores and 8,000 to 9,000 employees (equivalent to approximately 5,000 40-

hour employees). From 2016, Stein Mart’s sales generally declined because of the growth of e-

commerce and other factors.

Prior to the COVID pandemic, in January 2020, Debtors entered into a merger agreement

with Kingswood Capital Management, LLC (“Kingswood”) and an entity managed by Jay Stein,

the then chairman of Stein Mart. Under the merger agreement, Stein Mart’s equity shareholders

(the “Shareholders”) would have received $0.90 in cash for each share of common stock owned.

However, the Shareholders were never given an opportunity to vote on the merger agreement. In

April 2020, the merger agreement was terminated prior to closing because the pandemic caused

Debtors to be unable to satisfy the minimum liquidity closing conditions contained in the

agreement. Debtors subsequently continued discussing a sale of the company to Kingswood, but

an agreement was never reached. Debtors’ further efforts to find a different buyer or additional

sources of financing also proved unsuccessful. Debtors then determined a Chapter 11 liquidation

was the best strategy going forward.

Chiefly, the Proposed Plan proposes to liquidate Debtors’ assets and distribute those funds

to creditors in accordance with the same priority scheme as a Chapter 7 liquidation. After the

liquidation is complete, Debtors will be dissolved. (Doc. 848 at 31). Ninety-one percent (91%)

of unsecured creditors voted in favor of the Plan, which represents roughly ninety-six percent

(96%) of the total unsecured claims by dollar amount. (Doc. 949-1). Shareholders were not

entitled to vote on the Proposed Plan. Under the Proposed Plan, the unsecured creditors would

receive payment equal to roughly eight percent (8%) of their total claims. Additionally, the

Proposed Plan contains a choice-of-law provision establishing Florida law as governing law to the

extent federal law does not provide a specifically applicable rule of law. (Doc. 848 at 18).

The Creditor’s Committee filed a statement in support of the Proposed Plan (the

“Committee Statement”). (Doc. 951). The Committee Statement provides that the Proposed Plan

“represents the best possible outcome for unsecured creditors and the most viable path to maximize

creditor recoveries” in these cases. (Doc. 951 at 1). The Creditor’s Committee investigated

whether there was any potential liability on the part of the Debtors or Debtors’ directors and

officers. The Creditor’s Committee found no evidence supporting any meritorious claims, and the

Court is not aware of anything indicating any meritorious claims against Debtors’

directors/officers. As a result of its investigation and negotiation with Debtors, the Creditor’s

Committee asked Debtors to forgo purchasing a directors and officers liability tail policy (the

“D&O Tail Policy”), which would have cost $2.8 million. The D&O Tail Policy would cover

directors’ and officers’ liability after the company is dissolved (i.e., after Debtors stop paying the

premium on the existing D&O policy). Forgoing the D&O Tail Policy would save Debtors $2.8

million and allow the money to flow to unsecured creditors. The evidence indicates that, without

the $2.8 million, unsecured creditors would receive nothing. In light of forgoing the D&O Tail

Policy, various liability releases were included in the Proposed Plan. These releases are the subject

of the U.S. Trustee’s and the SEC’s objections to confirmation.

Relevant are the releases contained in Articles VIII.C., VIII.D., VIII.E., and VIII.F of the

Proposed Plan. (Doc. 848 at 43-49). Article VIII.C. (the “Debtors’ Release”) contains a release

granted by Debtors in favor of numerous parties concerning a broad scope of existing and future-

arising claims related to (among other things) the prepetition management and operation of

Debtors, Debtors’ efforts to obtain a merger agreement, Debtors’ efforts to obtain a sale agreement,

the wind-down of Debtors, issuance of securities and/or bonds by Debtors, acts/omissions of the

Debtors’ directors/officers and their ownership/operation of the companies, the filing and conduct

of this Chapter 11 case, settlement of claims of secured creditors, the preparation and negotiation

of the Proposed Plan, et cetera. Such released claims include derivative claims. Further, the types

of claims expressly excepted include only “claims related to any act or omission that is determined

in a Final Order to have constituted actual fraud.” (Doc. 848 at 48).

Article VIII.D. (the “Third-Party Release”) contains a largely identical release granted by

the “Releasing Parties” in favor of the Debtors, the Creditor’s Committee, the plan administrator,

and numerous others concerning the same broad scope of claims covered in the Debtors’ Release.

(Doc. 848 at 47). As its only exemption, the Third-Party Release contains the same actual-fraud

exemption as the Debtors’ Release. The “Releasing Parties” (or third-party releasors) granting the

Third-Party Release include, among others, “all holders of claims or interests that vote to reject

the Plan or are deemed to reject the Plan and who do not affirmatively opt out of the releases

provided by the Plan by checking the box on the [Opt-Out Form] indicating that they opt not to

grant the releases provided in the Plan.” (Doc. 848 at 15). In other words, the Third-Party Release

grants a release by any Shareholder or unsecured creditor (among others) who fails to affirmatively

opt out of the release by using the Opt-Out Form. At least fourteen (14) of the general unsecured

creditors opted out of the Third-Party Release. (Doc. 949-2). It is unclear whether any

Shareholders opted out of the release.

The Opt-Out Form is a five-page document with a conspicuous bold checkbox label, “OPT

OUT of the Consensual Third-Party Release Provision.” (Doc. 850-1 at 30). The form provided

for return of the form by first-class mail and by online submission. (Doc. 850-1 at 33). Overnight

courier and overnight mail were also listed as potential options. (Doc. 850-1 at 29). The form

included an addressed first-class return envelope. The instructions included on the form were clear

enough for a reasonable investor to comprehend. The form also included a domestic telephone

number, an international telephone number, and an email address for parties in interest to contact

with questions.

Article VIII.E. (the “Exculpation Clause”) waives all liability of the Debtors, the Creditor’s

Committee, the plan administrator, and others for post-petition conduct occurring during the

bankruptcy case. The Exculpation Clause provides as follows:

45. “Exculpated Party” means collectively, and in each case solely in its capacity

as such: (a) the Debtors; (b) the Committee and each of its members; (c) the Agents

and Lenders [i.e., secured creditors]; (d) the Plan Administrator; and (e) with

respect to each of the above and the foregoing Entities in clauses (a) though (d),

such Entity and its current and former Affiliates, and such Entities’ and their current

and former Affiliates’ current and former directors, managers, officers, equity

holders (regardless of whether such interests are held directly or indirectly),

predecessors, participants, successors, and assigns, subsidiaries, and each of their

respective current and former equity holders, officers, directors, managers,

principals, members, employees, agents, advisory board members, financial

advisors, partners, attorneys, accountants, investment bankers, consultants,

representatives, Professionals and other professionals, each in their capacity as

such.

. . .

E. Exculpation. Notwithstanding anything herein to the contrary, the Exculpated

Parties shall neither have nor incur, and each Exculpated Party is released and

exculpated from, any liability to any Holder of a Cause of Action, Claim, or Interest

for any postpetition act or omission in connection with, relating to, or arising out

of, the Chapter 11 Cases, the formulation, preparation, dissemination, negotiation,

filing, or consummation of the Disclosure Statement, the Plan, or any contract,

instrument, release or other agreement or document created or entered into in

connection with the Disclosure Statement or the Plan, the filing of the Chapter 11

Cases, the pursuit of Confirmation, the pursuit of Consummation, the

administration and implementation of the Plan, including the distribution of

property under the Plan (whether or not such issuance or distribution occurs

following the Effective Date), negotiations regarding or concerning any of the

foregoing, or the administration of the Plan or property to be distributed hereunder,

except for actions determined by a Final Order to have constituted actual

fraud, but in all respects such Entities shall be entitled to reasonably rely upon the

advice of counsel with respect to their duties and responsibilities pursuant to the

Plan. The Exculpated Parties have, and upon completion of the Plan shall be

deemed to have, participated in good faith and in compliance with the applicable

laws with regard to the solicitation of votes and distribution of consideration

pursuant to the Plan and, therefore, are not, and on account of such distributions

shall not be, liable at any time for the violation of any applicable Law, rule, or

regulation governing the solicitation of acceptances or rejections of the Plan or such

distributions made pursuant to the Plan.

(Doc. 848 at 10, 48) (emphasis added).

Finally, Article VIII.F. (the “Injunction”) permanently enjoins any holder of a released

claim from enforcing the claim, collecting on the claim, encumbering property of released entities,

asserting any right of setoff or recoupment in relation to the claim, et cetera. These releases are

exceptionally broad in scope, both as to the scope of claims involved and the scope of parties on

both sides of the releases.

CONCLUSIONS OF LAW

“Section 1129 of the Bankruptcy Code provides that a court shall confirm a Chapter 11

plan if it complies with each of the requirements set forth therein.” In re Monticello Realty

Investments, LLC, 526 B.R. 902, 912 (Bankr. M.D. Fla. 2015). “The Debtor has the burden of

proving by a preponderance of the evidence each of the elements of § 1129.” Id.

The U.S. Trustee and the SEC argue the Proposed Plan should not be confirmed because:

1) the Third-Party Release is nonconsensual as to the Shareholders; 2) being that it is

nonconsensual, the Third-Party Release does not meet the Dow Corning factor test adopted by the

Eleventh Circuit; 3) the Debtor’s release is unsupported by consideration and is overly broad; 4)

the Exculpation Clause is nonconsensual, fails to meet the Dow Corning factor test, and goes

beyond the safe-harbor provision found in § 1125(e); 5) the Third-Party Release is also a first-

party release which the Court has no authority to approve because the release effectively grants a

de facto discharge of debts that would be excepted from discharge under § 523 and § 1141(d)(3);

and 6) Shareholders have not received any consideration in exchange for granting the release and

the release is, therefore, unenforceable against the Shareholders.1

These issues are addressed, in turn.

I. Whether the Third-Party Release is consensual under Florida law.

“With increasing frequency, bankruptcy courts [ ] have been asked to confirm plans that

contain permanent injunctions or releases that benefit parties that are not debtors.” 6 Norton

Bankr. L. & Prac. 3d § 114:5 (Jan. 2021). “These cases may be divided for ease of understanding

into four different categories.” Id. Applicable here, “[t]he fourth type is the most general in which

1 The United States Trustee also objected to confirmation on the basis that Debtors did not provide proof

they are paying liquidation value to unsecured creditors. The Court will overrule that objection.

directors, professionals and others involved in the reorganization seek a release.” Id. “These often

occur but are rarely reported.” Id.

“Courts generally apply contract principles in deciding whether a creditor [or equity

holder] consents to a third-party release.” In re SunEdison, Inc., 576 B.R. 453, 458 (Bankr.

S.D.N.Y. 2017) (bracketing added). “Consent may be express or manifested by conduct.” Id.

(emphasis added). “Courts generally agree that an affirmative vote to accept a plan that contains

a third-party release constitutes an express consent to the release.” Id. “Consent through silence

or inaction [ ] raises a more difficult question.” Id. Where consent is in question, applicable state

contract law provides the most appropriate standard to determine consent, rather than theoretical

“general” contract law that may or may not apply to the specific release at issue.

Under Florida law, applicable here by way of the choice-of-law provision, a “release is an

outright cancellation or discharge of the entire obligation as to one or all of the [releasees].” Rosen

v. Florida Ins. Guar. Ass’n, 802 So. 2d 291, 295 (Fla. 2001). A release “involves the fundamental

tenets of contract law: offer and acceptance.” Basner v. Bergdoll, 284 So. 3d 1122, 1124 (Fla. 1st

DCA 2019). “An acceptance sufficient to create an enforceable agreement ‘must be (1) absolute

and unconditional; (2) identical with the terms of the offer; and (3) in the mode, at the place, and

within the time expressly or impliedly stated within the offer.’” Id. “This ensures that there is a

‘meeting of the minds’ [or so-called ‘mutuality of acceptance’] between the parties on all essential

terms.” Id. (bracketing added). In sum, so long as there is “offer and acceptance” under Florida

law, the Third-Party Release is “consensual” for the purposes of confirming Debtors’ Proposed

Plan.

Here, the releases contained in the Proposed Plan are consensual because the Opt-Out Form

meets the elements of acceptance under Florida law. The decision to return or not return the Opt-

Out Form is an absolute and unconditional acceptance or rejection of the offered release. The non-

return of the form indicates acceptance of the terms offered, in the mode and manner prescribed in

the Third-Party Release. Neither the U.S. Trustee nor the SEC has presented Florida case law to

the contrary. Further, this mode and manner of acceptance essentially mimics the bankruptcy

court’s own negative-notice procedure. The Court is convinced the opt-out procedure employed

here produces a consensual agreement and meeting of the minds between the releasees and

releasors. However, this conclusion does not and shall not determine the enforceability of the

Third-Party Release against each specific releasor. Rather, the Court determines the Third-Party

Release is fundamentally consensual in nature. As a result, the Third-Party Release is not a basis

on which the Court will sustain the objections to confirmation.

II. Assuming the Third-Party Release was nonconsensual, whether the Third-Party

Release meets the Eleventh Circuit’s Dow Corning factor test for nonconsensual bar

orders / injunctions.

The Third-Party Release is a consensual release; however, for purposes of completeness,

the Court analyzes the Third-Party Release under the Dow Corning factors as prescribed by the

Eleventh Circuit for considering nonconsensual bar orders. SE Property Holdings, LLC v. In re

Seaside Eng’g & Surveying, Inc. (In re Seaside Eng’g & Surveying, Inc.), 780 F.3d 1070 (11th

Cir. 2015).

A. Enforceability of an approved consensual “release” versus a nonconsensual

“bar order” injunction.

The Eleventh Circuit used the terms “bar order” and “nonconsensual release”

interchangeably. Seaside, 780 F.3d at 1076 n.2. However, under Florida law, if the release is not

consensual, it is not a release at all. See 10 Fla. Jur 2d Compromise, Accord, and Release § 48

(Mar. 2021). Rather, a so-called nonconsensual release is, perhaps, more properly referred to as a

bar order or mandatory injunction. Sec. & Exch. Comm’n v. Quiros, 966 F.3d 1195, 1199 (11th

Cir. 2020). This bears important implications regarding future enforceability.

If the bankruptcy court approves a consensual release at confirmation, the bankruptcy court

may or may not determine the enforceability of the release as applied to specific parties and facts.

But mere approval at the time of confirmation, standing alone, is not and cannot constitute a final

determination that the release is enforceable as between all parties under all fact patterns. Here,

the number of Shareholders is too large and too diverse to determine the enforceability of the

Third-Party Release as against every releasor. The risk of unenforceability of the consensual

release is borne by the releasees and plan proponents.

In contrast, the enforceability of a nonconsensual “bar order” is evident from the fact that

it is a final order of the Court, entered pursuant to its statutory authority. See generally Quiros,

966 F.3d at 1199 (discussing bar orders in the bankruptcy and receivership contexts). Here, the

Court’s approval of the Third-Party Release is not to be construed as a bar order because the Third-

Party Release is a consensual release. Additionally, it fails to meet the Dow Corning factors.

B. The Dow Corning factor test.

The Eleventh Circuit ascribes to the majority view that § 105(a) of the Bankruptcy Code

permits nonconsensual bar orders (or injunctions) that bar claims of third-party non-debtors (e.g.,

the Shareholders) against other third-party non-debtors (e.g., Debtors’ directors/officers, the

Creditor’s Committee, et cetera). Seaside, 780 F.3d at 1078. Issuing a nonconsensual bar order is

a discretionary decision. Id. at 1079. However, “such bar orders ought not to be issued lightly

and should be reserved for those unusual cases in which such an order is necessary for the success

of the reorganization, and only in situations in which such an order is fair and equitable under all

the facts and circumstances.” Id. “The inquiry is fact intensive in the extreme.” Id.

The Eleventh Circuit adopted the seven-factor test from Dow Corning for considering

whether to enter a nonconsensual bar order. Id. (discussing In re Dow Corning Corp., 280 F.3d

648, 658 (6th Cir. 2002)). “[B]ankruptcy courts should have discretion to determine which of the

Dow Corning factors will be relevant in each case.” Id. “The factors should be considered a

nonexclusive list of considerations, and should be applied flexibly, always keeping in mind that

such bar orders should be used ‘cautiously and infrequently,’ and only where essential, fair, and

equitable.” Id. (internal citations omitted).

The seven factors are as follows:

(1) There is an identity of interests between the debtor and the third

party, usually an indemnity relationship, such that a suit against the

non-debtor is, in essence, a suit against the debtor or will deplete the

assets of the estate;

(2) The non-debtor has contributed substantial assets to the

reorganization;

(3) The injunction is essential to reorganization, namely, the

reorganization hinges on the debtor being free from indirect suits

against parties who would have indemnity or contribution claims

against the debtor;

(4) The impacted class, or classes, has overwhelmingly voted to

accept the plan;

(5) The plan provides a mechanism to pay for all, or substantially

all, of the class or classes affected by the injunction;

(6) The plan provides an opportunity for those claimants who choose

not to settle to recover in full and;

(7) The bankruptcy court made a record of specific factual findings

that support its conclusions.

Id. The bar order affirmed in Seaside was an exculpation clause that limited liability for post-

petition conduct connected to the bankruptcy case.

As to the first factor, Debtors have not presented evidence of contractual indemnification,

yet Florida law provides for indemnification for Debtors’ directors/officers (non-debtor releasees)

in limited circumstances. § 607.0852, Fla. Stat. (2020); § 607.0854(1), Fla. Stat. (2020). Thus,

the relationship between the Debtors and Debtors’ directors/officers is sufficient that this factor

weighs in favor of entering a bar order. This is the only factor favoring a bar order.

As to the second factor, the directors/officers have not contributed “substantial assets” to

any reorganization effort given that this is a liquidation case. This factor is generally inapplicable

in a liquidation case. Further, even assuming this factor applies in a liquidation case, while the

directors and officers have worked diligently in negotiating the Proposed Plan with the Creditor’s

Committee, those efforts do not constitute “substantial assets.” Thus, the second factor does not

support entry of a nonconsensual bar order.

As to the third factor, which is often a critical factor, this case does not involve a

reorganization. It remains an open question as to whether nonconsensual bar orders even have a

place in Chapter 11 liquidation cases. More to the point, the Debtors’ ability to successfully

liquidate their assets does not “hinge” on an injunction against the numerous claims enumerated

in the Third-Party Release. Such an injunction is not absolutely necessary. Arguably, the

injunctions may be critical to having the Class 6 unsecured creditors and Creditor’s Committee

voluntarily waive their own claims against the bankruptcy estate that would not otherwise be

discharged pursuant to § 1141(d)(3)—which is discussed further, below. In other words, the

parties have voluntarily negotiated releases between the unsecured creditors and the Debtors.

Being essential to such voluntary negotiations is not what this factor contemplates. This factor

contemplates involuntary injunctions rather than negotiated releases. Thus, the Court concludes

this factor weighs neither for nor against the entry of a nonconsensual bar order enjoining the

multitude of claims enumerated in the Third-Party Release.

As to the fourth factor, the impacted classes with voting rights have voted overwhelmingly

in favor of the plan. However, the impacted class without voting rights (i.e., the Class 9

Shareholders) have not. This factor does not weigh in favor of entry of a bar order; though, neither

does this factor weigh against entering such an order.

As to the fifth and sixth factors, these factors weigh directly against entering a

nonconsensual bar order. The Proposed Plan provides no opportunity for the Class 6 unsecured

creditors who opted out of the Third-Party Release to recover in full. The plan likewise fails to

pay anything to the Class 9 Shareholders impacted by this release.

It appears the conceptual underpinning of nonconsensual bar orders expects the debtor to

restructure and continue operations in some form. In the case of a liquidation, this conceptual

underpinning is generally absent. As a result of this and the factor analysis above, the Court

concludes it would be inappropriate to enter a nonconsensual bar order barring the broad class of

claims enumerated in the Third-Party Release. As Debtors indicated in their brief, “Seaside and

Munford are not directly applicable to the instant consensual third-party release because in this

case anyone can opt out of the release.” (Doc. 945 at 53).

III. Whether the Debtors’ Release is supported by consideration.

As to the Debtor’s Release found in Article.VIII.C. of the Proposed Plan, the releasees are

the “Released Parties” as that term is defined in the Proposed Plan, and the releasors are the

Debtors. (Doc. 848 at 14, 45). Traditionally, it is the releasor’s consent that matters, and the

Debtors have clearly consented. However, the Debtors’ Release is consensual on both sides. That

is, parties in interest can opt out of being a releasee of the Debtors’ Release simply by opting out

of being a releasor in the Third-Party Release. Further, Debtors received consideration for giving

this release in the form of receiving the releases via the Third-Party Release. The consideration is

a release for a release. Further, this bargain is a sound business judgment on the part of the Debtors.

IV. Whether the nonconsensual Exculpation Clause meets the Dow Corning factors.

The key difference between the Third-Party Release and the Exculpation Clause is that the

Opt-Out Form only applies to the Third-Party Release and not the Exculpation Clause. There is

no ability for a nonconsenting party to opt out of the Exculpation Clause. Thus, the Exculpation

Clause is nonconsensual, and the Dow Corning factor test applies. In re Seaside Eng’g &

Surveying, Inc., 780 F.3d 1070, 1076 (11th Cir. 2015) (applying Dow Corning factor test to an

exculpation clause that is more limited than the instant clause). The Exculpation Clause fails to

meet the Dow Corning factor test for the same reasons discussed above concerning the Third-Party

Release.

Further, the Exculpation Clause abdicates liability on essentially all types of claims except

actual fraud. This narrow exception to the Exculpation Clause goes a step too far to be entered as

a nonconsensual bar order. See, e.g., Seaside, 780 F.3d at 1076 (excepting fraud, gross negligence,

and willful misconduct); In re Winn-Dixie Stores, Inc., 356 B.R. 239, 261 (Bankr. M.D. Fla. 2006

(excepting fraud, gross negligence, and willful misconduct); In re Enron Corp., 326 B.R. 497, 501

(S.D.N.Y. 2005) (excepting gross negligence, willful misconduct, and fraud); Murphy v.

Weathers, 2008 WL 4426080, at *5 (M.D. Ga. Sept. 25, 2008) (excepting fraud, gross negligence,

willful misconduct, and breach of fiduciary duty). The Exculpation Clause is the sole basis upon

which the Court will sustain the objections to confirmation.

V. Whether the Court retains authority to approve the Third-Party Release and whether

the release impermissibly grants Debtors or non-debtor individuals a discharge they would

not otherwise be entitled to, pursuant to § 1141(d)(3) and § 523(a), respectively.

Section 523(a) generally enumerates various exceptions to discharge that apply to

“individual” debtors. 11 U.S.C. § 523(a) (2020). Section 1141(d)(3) provides that the

confirmation of a Chapter 11 plan “does not discharge a debtor if-- (A) the plan provides for the

liquidation of all or substantially all of the property of the estate; (B) the debtor does not engage

in business after consummation of the plan; and (C) the debtor would be denied a discharge under

section 727(a) of this title if the case were a case under chapter 7 of this title.” 11 U.S.C. §

1141(d)(3) (2020); see also In re TOUSA, Inc., 503 B.R. 499, 505 n.4 (Bankr. S.D. Fla. 2014)

(“TOUSA’s Chapter 11 plan is a liquidating plan and no discharge of debt results in a liquidation

under 11 U.S.C. § 1141(d)(3).”).

Here, Debtors are not entitled to a discharge pursuant to § 1141(d)(3) in light of the

Proposed Plan. Further, the Third-Party Release releases claims against non-debtor individuals

that would be excepted from discharge under § 523(a). However, nothing in § 1141(d)(3) or §

523(a) prevents Debtors or the non-debtor individuals from negotiating voluntary consensual

releases with creditors. This result is reasonable in light of the fact that the Creditor’s Committee

negotiated and received $2.8 million for unsecured creditors in exchange for voluntarily releasing

claims against the Debtors that would not be discharged under § 1141(d)(3). Nothing in Title 11

precludes this voluntary outcome under these circumstances. However, this leads into the U.S.

Trustee’s and SEC’s final argument concerning whether the Shareholders received consideration

in exchange for the releases granted by them in the Third-Party Release.

VI. Whether Shareholders received consideration in exchange for granting the

Third-Party Release.

The U.S. Trustee and SEC contend the Third-Party Release should not be approved because

the Shareholders have received nothing in exchange for the releases they voluntarily granted by

choosing not to opt-out of the Third-Party Release. It is correct that, under Florida law, an

enforceable release requires the releasor to receive some valuable or adequate consideration before

the release may be enforceable against that releasor. Lakes of Meadow Vill. Homes v. Arvida/JMB

Partners, L.P., 714 So. 2d 1120, 1123 (Fla. 3d DCA 1998) (holding that genuine issues of fact

existed as to whether ten dollars was adequate consideration in exchange for release); Hamilton v.

United Ins. Co. of Am., 428 So. 2d 346, 347 (Fla. 1st DCA 1983) (holding that sufficient

consideration supported the releases); Atl. Coast Line R. Co. v. Beazley, 45 So. 761, 785 (Fla.

1907) (discussing sufficiency of consideration for a release and stating, “While it is always

pleasant to ‘walk in the light’ of authority and to keep company with our judicial brothers in the

different courts whenever it is possible to do so, it is still more desirable to feel that in our

conclusions we are supported by the reason of the law, even if in so doing we should have to stand

alone.”).

Here, the Court is unaware of what consideration any particular Shareholder may or may

not have received although it is clear the unsecured creditors received valuable consideration (i.e.,

the $2.8 million) in exchange for the releases granted by them in the Third-Party Release.

Nevertheless, enforceability of the Third-Party Release as to any specific non-debtor releasor is

not an element for confirmation of the Proposed Plan and determining enforceability as to every

Shareholder is inappropriate. 11 U.S.C. § 1129 (2020). If the Third-Party Release turns out not

to be enforceable as to a specific releasor concerning a specific claim against a specific releasee,

the risk of such an occurrence falls on the releasee(s)—i.e., the Debtors, Debtors’ directors and

officers, the Creditor’s Committee, the plan administrator, and/or other proponents of the Proposed

Plan. The proponents of the plan, being sophisticated parties represented by counsel, certainly

took this risk into consideration. Taking on such risk is a sound business judgment under the

totality of the circumstances.

The objectors further contend the Injunction found in Article VIII.F. of the Proposed Plan

prevents Shareholders from even bringing suit. First, the U.S. Trustee and SEC have not presented

the barest hint of any meritorious Shareholder claims. Second, if a purported releasor magically

discovers a non-frivolous, meritorious claim after confirmation and brings suit against a purported

releasee, the plaintiff-releasor may plead failure of consideration in the complaint. A different

course is for the defendant-releasee to raise the release as an affirmative defense followed by the

plaintiff-releasor’s reply. Again, the Court makes no determination as to the enforceability of the

Third-Party Release against any specific non-debtor releasor; such matters could not and should

not be raised here and now.

Conclusion

The Third-Party Release is consensual under Florida law, and nothing in § 1141(d)(3) or

§ 523(a) prevents Debtors or other non-debtor individuals from negotiating voluntary consensual

releases with creditors. The Court will approve it. However, if it were nonconsensual, the Court

would not approve it because it does not meet the Dow Corning factor test for nonconsensual bar

orders/injunctions. The Debtors’ release is supported by consideration. The Court will approve

it. The Exculpation Clause is nonconsensual and does not meet the Dow Corning factor test. The

Court will not approve it. The Court will enter a separate order overruling the U.S. Securities and

Exchange Commission’s Objection to Confirmation, sustaining in part and overruling in part the

United States Trustee’s Objection to Confirmation, and denying confirmation of the Debtors’

Combined Plan of Liquidation.