Retail Group, Inc.

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA

Richmond Division

JOEL PATTERSON, et ai.,

Appellants,

v. Civil No. 3:21¢v167 (DJN)

MAHWAH BERGEN RETAIL GROUP, INC.

Appellee.

MEMORANDUM OPINION

This case arises out of the bankruptcy cases commenced by Mahwah Bergen Retail

Group, Inc. (f/k/a Ascena Retail Group, Inc.) (“Mahwah” or “Ascena”) and sixty-three of its

affiliates (collectively, the “Debtors”). The United States Bankruptcy Court for the Eastern

District of Virginia (“Bankruptcy Court”) confirmed the reorganization plan (“the Plan”) set

forth by the parties in interest, and Joel Patterson and Michaella Corporation (“Securities

Litigation Lead Plaintiffs”) filed notices of appeal to this Court. Likewise, the United States

Trustee (“Trustee”) filed a notice of appeal of the confirmation to this Court.' The appeals were

consolidated into this action.” In these appeals, Appellants challenge third-party (non-debtor)

releases, as well as an exculpation provision, contained in the Plan.

This appeal implicates the most fundamental right guaranteed by the due process clause

in our judicial system: the right to be heard before the loss of one’s rights. “For more than a

century the central meaning of procedural due process has been clear: ‘Parties whose rights are

The United States Securities and Exchange Commission (SEC) supported the Trustee’s

appeal as an amicus.

The other appeals consolidated into this action are Case No. 3:21cv166 and Case No.

3:21¢ev205.

to be affected are entitled to be heard; and in order that they may enjoy that right they must first

be notified.’” Fuentes v. Shevin, 407 U.S. 67, 80 (1972) (quoting Baldwin v. Hale, 68 U.S. 223,

233 (1863)). “And, the Supreme Court has explained that the particular constitutional protection

afforded by access to the courts is ‘the right conservative of all other rights, and lies at the

foundation of orderly government.’” Cromer v. Krafi Foods N. Am., Inc., 390 F.3d 812, 817 (4th

Cir. 2004) (quoting Chambers v. Baltimore & O. R. Co., 207 U.S. 142, 148 (1907)).

Furthermore, “[t]his right . . . has little reality or worth unless one is informed that the matter is

pending and can choose for himself whether to appear or default, acquiesce or contest.”

Schroeder v. City of New York, 371 U.S. 208, 212 (1962) (quoting Mullane v. Cent. Hanover

Bank & Tr. Co., 339 U.S. 306, 314 (1950)). Relatedly, “parties who choose to resolve litigation

through settlement may not dispose of the claims of a third party, and a fortiori may not impose

duties or obligations on a third party, without that party’s agreement.” Loc. No. 93, Int’l Ass'n of

Firefighters AFL-CIO C.L.C. v. City of Cleveland, 478 U.S. 501, 529 (1986). This is so, because

the general rule provides “that a person cannot be deprived of his legal rights in a proceeding to

which he is not a party.” Martin v. Wilks, 490 U.S. 755, 759 (1989); see also id. at 762 (“A

judgment or decree among parties to a lawsuit resolves issues as among them, but it does not

conclude the rights of strangers to those proceedings.”’).

These fundamental principles resonate with force in this appeal from the Bankruptcy

Court, as third-party releases strike at the heart of these foundational rights. The United States

Trustee — a statutory watchdog over bankruptcy proceedings — and the Securities Litigation

Lead Plaintiffs, as designated by a United States District Judge in a putative class action alleging

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securities fraud, challenge the approval by the Bankruptcy Court’ of exceedingly broad third-

party (non-debtor) releases, as well as an exculpation provision, contained in the Plan submitted

by Debtors.

Third-party releases, such as those at issue here, carry much controversy, for they are a

“device that lends itself to abuse.” In re Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d

Cir. 2005). Indeed, several Courts of Appeals (the Fifth, Ninth and Tenth Circuits) prohibit the

use of third-party releases. See, e.g., Inre Pac. Lumber Co., 584 F.3d 229, 251-53 (Sth Cir.

2009); In re Lowenschuss, 67 F.3d 1394, 1401-02 (9th Cir. 1995); In re W. Real Estate Fund,

Inc., 922 F.2d 592, 600-02 (10th Cir. 1990). And a District Judge in the Southern District of

New York recently concluded in a thoughtful opinion that no statutory basis exists for their use.

Inre Purdue Pharma, L.P.,2021 WL 5979108 (S.D.N.Y. Dec. 16, 2021).

The Fourth Circuit has made clear that the use of third-party releases is disfavored,

saying that such releases should be “granted cautiously and infrequently.” Bekrmann v. Nat'l

Heritage Found., 663 F.3d 704, 712 (4th Cir. 2011). Other circuits that permit their use likewise

reserve their utilization for the rare or exceptional case. See, e.g., Inre Millennium Lab Holdings

If, LLC, 945 F.3d 126, 139 (3d Cir. 2019) (directing that “courts considering such releases do so

with caution... . [and] with the utmost care and to thoroughly explain the justification for any

such inclusion”); In re Seaside Eng’g & Surveying, Inc., 780 F.3d 1070, 1078 (11th Cir. 2015)

(permitting releases and bar orders but cautioning that they “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

3 The Honorable Kevin R. Huennekens, United States Bankruptcy Judge for the Eastern

District of Virginia (Richmond Division).

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the facts and circumstances”); In re Metromedia Fiber Network, Inc., 416 F.3d at 141-43

(holding that involuntary releases should only be approved if they form an important part in a

reorganization plan, and that they are proper “only in rare cases”); In re Dow Corning Corp., 280

F.3d 648, 657-58 (6th Cir. 2002) (“Because such an injunction is a dramatic measure to be used

cautiously, we follow those circuits that have held that enjoining a non-consenting creditor’s

claim is only appropriate in ‘unusual circumstances.””).

Despite these admonitions, the Bankruptcy Court for the Richmond Division of this

district regularly approves third-party releases, as acknowledged by Debtors’ counsel during oral

argument. (Tr. of Dec. 20, 2021 Argument (“Arg. Tr.”) at 6:8-14 (ECF No. 75).) This recurrent

practice contributes to major companies like Mahwah (a New Jersey company) using the

permissive venue provisions of the Bankruptcy Code to file for bankruptcy here.* Indeed,

according to the Trustee, the Richmond Division (just the division, not the entire Eastern District

of Virginia) joins the District of Delaware, the Southern District of New York, and the Houston

Division of the Southern District of Texas as the venue choice for 91% of the “mega” bankruptcy

cases. (Reply Br. of Appellant John P. Fitzgerald, ITI, Acting United States Trustee for Region 4

(“Trustee Reply Br.”) at 22-23 (ECF No. 45).) The ubiquity of third-party releases in the

Richmond Division demands even greater scrutiny of the propriety of such releases. And, their

prevalence also undermines assertions that they are integral to the success of this particular

4 To be clear, venue properly exists in the Richmond Division, as Debtors latched onto the

existing bankruptcy of one of their affiliates, Dress Barn, which is incorporated in Virginia, as

the basis for venue. 28 U.S.C. § 1408. Consequently, the question is not whether venue was

proper here, but instead why Debtors chose this venue over the many other venue options that it

had available to it. During oral argument, counsel for Debtors had no explanation for his client’s

choice of Richmond to file for bankruptcy. (Arg. Tr. at 78:20-22.)

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reorganization plan. As District Judge Colleen McMahon astutely observed: “When every case

is unique, none is unique.” Jn re Purdue Pharma, L.P., 2021 WL 5979108, at *3.

The Third-Party Releases at issue in this case represent the worst of this all-too-common

practice, as they have no bounds. The sheer breadth of the releases can only be described as

shocking. They release the claims of af /east hundreds of thousands of potential plaintiffs not

involved in the bankruptcy, shielding an incalculable number of individuals associated with

Debtors in some form, from every conceivable claim — both federal and state claims — for an

unspecified time period stretching back to time immemorial. In doing so, the releases close the

courthouse doors to an immeasurable number of potential plaintiffs, while protecting corporate

insiders who had no role in the reorganization of the company. Yet, the Bankruptcy Court —

acting with its limited Article I powers — extinguished these claims with little or no analysis. In

doing so, the Bankruptcy Court exceeded the constitutional limits of its authority as delineated

by the Supreme Court in Stern v. Marshall, 564 U.S. 462 (2011), ignored the mandates of the

Fourth Circuit in Behrmann, and offended the most fundamental precepts of due process.

Likewise, the Bankruptcy Court erred by approving an overly broad Exculpation

Provision that exceeds the bounds of similar provisions approved in other cases. However,

unlike the Third-Party Releases that must be voided and severed from the reorganization plan,

redrafting can salvage the Exculpation Provision on remand.

Accordingly, this case will be remanded to the Bankruptcy Court for further proceedings

consistent with this opinion.

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I. FACTUAL BACKGROUND®

Ascena provided specialty retail apparel for women and girls, operating approximately

2,800 stores in the United States, Canada and Puerto Rico, which served more than 12.5 million

customers and employed nearly 40,000 employees. Debtors held a portfolio of recognizable

brands, including Ann Taylor, LOFT, Lane Bryant, Catherines, Justice, Lou & Grey and

Cacique.

Beginning in March 2020, Debtors had to temporarily close all of their retail stores due to

the COVID-19 pandemic, and in so doing, furloughed nearly all of their store-level workforce as

well as a substantial portion of their corporate workforce. At the time, Debtors had

approximately $1.6 billion in secured debt and $700 to $800 million in unsecured debt.

(USTAPP 1592, 1599.) Before filing for bankruptcy, Debtors negotiated with many of their

secured lenders to arrive at a restructuring support agreement, which formed the basis of the

original chapter 11 plan. (USTAPP 1591.) Then, on July 23, 2020, Debtors commenced the

Bankruptcy Cases that ultimately were consolidated into Case No. 20bk33113 in the Bankruptcy

Court. However, rather than reorganize, Debtors ultimately largely liquidated the businesses,

selling substantially all of the assets for a total sale price of $651.8 million. (USTAPP 2259-61,

2262-64, 2265-67, 2320.) Thereafter, they filed an amended chapter 11 plan. (Amended Joint

Chapter 11 Plan of Reorganization of Mahwah Bergan Retail Group, Inc. and Its Debtor

Affiliates (the “Plan”) (USTAPP 2410-2529).)

5 Unless otherwise cited, the Court takes these facts from the Bankruptcy Court’s Opinion

(“Bankr. Confirm. Op.”) explaining its reasoning for confirming the Plan, found at pages

USTAPP 2837-2876 of the Trustee’s Appendix ((““USTAPP”) (ECF Nos. 35-1 through 35-3)).

In citing pages contained in the Trustee’s Appendix, the Court will cite to the page numbers

following “UST” in the Trustee’s Appendix.

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A. The Plan

The Plan provided that some secured lenders would be paid in full, general unsecured

creditors would receive pro rata payments from a trust funded by $7.25 million in cash and the

remaining class of secured claims would receive the remainder of Debtors’ cash. (USTAPP

2621-36.) The shareholders would receive nothing and the Plan would extinguish their equity

interest. (USTAPP 2634.)

On February 25, 2021, the Bankruptcy Court conducted an evidentiary hearing to

consider the Debtors’ Plan in addition to the unresolved objections filed by the SEC and the

Trustee, as well as those raised by Joel Patterson and Michaella Corporation, the lead plaintiffs

in a securities fraud action against Ascena and two of its former executives pending in the United

States District Court for the District of New Jersey (the “Securities Litigation”). The Bankruptcy

Court overruled the objections and confirmed the Plan and, on February 25, 2021, entered the

Confirmation Order confirming the Plan. Then, on March 9, 2021, the Bankruptcy Court entered

its Memorandum Opinion to supplement its findings of facts and conclusions of law in the

Confirmation Order.

Before confirming the Plan, the Bankruptcy Court had to first approve a Disclosure

Statement that would supply creditors and interest holders with information about the proposed

plan as a part of the solicitation process. Accordingly, on September 10, 2020, the Bankruptcy

Court held a hearing regarding the Disclosure Statement. In response to objections by the SEC,

the Bankruptcy Court required Debtors to amend the Disclosure Statement to include language

recommended by the SEC, so that the notice would more clearly convey information to non-

voting equity holders about the provisions of the Plan, including the inclusion of Third-Party

Releases, the right of each non-voting equity holder to opt out of the Third-Party Releases and

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the process for doing so. Additionally, in response to objections by the Securities Litigation

Lead Plaintiffs, the Bankruptcy Court adopted additional steps to effectuate notice of the

Disclosure Statement. However, the Bankruptcy Court overruled the Trustee’s objections, which

closely resembled the issues that he raises in this appeal.

The sale of Debtors’ brands for $651 million allowed their brands to continue under new

ownership and brought proceeds into Debtors’ estate for the benefit of creditors. Debtors’ term

lenders and the Creditors’ Committee endorsed the Plan. The Plan provided for certain payment

structures to Debtors’ creditors. The unsecured creditors also received a waiver of any

avoidance actions that Debtors’ estate could bring against them. The holders of equity interest in

Ascena were not projected to receive any distribution and, therefore, were deemed to reject the

Plan. The Plan also included broad releases that form the basis of this appeal.

B. The Releases Contained in the Plan

As part of the Plan, the major stakeholders negotiated and included extremely broad and

convoluted releases and an exculpation provision. Specifically, the Plan provides for the

following Debtors’ Releases:

[E]ach Released Party is conclusively, absolutely, unconditionally, irrevocably,

and forever released and discharged by each and all of the Debtors, the

Reorganized Debtors, and their Estates . . . from any and all Causes of Action,

including any derivative claims, asserted or assertable on behalf of any of the

Debtors . . . based on or relating to, or in any manner arising from, in whole or in

part, the Debtors (including the management, ownership, or operation thereof),

the purchase, sale, or rescission of any Security of the Debtors or the Reorganized

Debtors, the subject matter of, or the transactions or events giving rise to, any

Claim or Interest that is treated in the Plan, ... or any other related agreement, or

upon any other act, omission, transaction, agreement, event, or other occurrence

(in each case, related to any of the foregoing) taking place on or before the

Effective Date.

(USTAPP 2460-61.) The Plan further provides for the following Release by holders of Claims

or Interests (“Third-Party Releases”):

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Effective as of the Effective Date, each Releasing Party in each case except for

Claims arising under, or preserved by, the Plan, Each Releasing Party (other than

the Debtors and the Reorganized Debtors), in each case on behalf of itself and its

respective successors, assigns, and representatives, and any and all other Entities

who may purport to assert any claim, Cause of Action, directly or derivatively,

by, through, for, or because of the foregoing entities, is deemed to have released

and discharged each Debtor, Reorganized Debtor, and each other Released Party

from any and all Causes of Action, whether known or unknown, including any

derivative claims, asserted or assertable on behalf of any of the Debtors . . . based

on or relating to, or in any manner arising from, in whole or in part, the Debtors

(including the management, ownership or operation thereof), the purchase, sale,

or rescission of any Security of the Debtors or the Reorganized Debtors, the

subject matter of, or the transactions or events giving rise to, any Claim or Interest

that is treated in the Plan, the business or contractual arrangements between any

Debtor and any Released Party, the Debtors’ in- or out-of-court restructuring

efforts, intercompany transactions, the ABL Credit Agreement, the Term Loan

Credit Agreement, the Chapter 11 Cases, the Restructuring Support Agreement

and related prepetition transactions, the Backstop Commitment Letter, the

Disclosure Statement, the New Corporate Governance Documents, the Exit

Facilities, the Plan (including, for the avoidance of doubt, providing any legal

opinion requested by any Entity regarding any transaction, contract, instrument,

document, or other agreement contemplated by the Plan or the reliance by any

Released Party on the Plan or the Confirmation Order in lieu of such legal

opinion), the filing of the Chapter 11 Cases, the pursuit of Confirmation, the

pursuit of Consummation, the administration and implementation of the Plan,

including the issuance or distribution of Securities pursuant to the Plan, or the

distribution of property under the Plan or any other related agreement, or upon

any other act, omission, transaction, agreement, event, or other occurrence (in

each case, related to any of the foregoing) taking place on or before the Effective

Date.

(USTAPP 2461.)

The Plan defines “Releasing Party” broadly to include:

[C]ollectively, and in each case in its capacity as such: (a) each of the Debtors;

(b) the Reorganized Debtors; (c) each of the Consenting Stakeholders; (d) the

ABL Agent; (e) the ABL Lenders; (f) Term Loan Agent; (g) the Term Loan

Lenders; (h) each of the lenders and administrative agents under the Exit

Facilities; (i) the Backstop Parties; (j) the DIP ABL Agent; (k) the DIP ABL

Lenders; (1) the DIP Term Agent; (m) the DIP Lenders; (n) all holders of Impaired

Claims who voted to accept the Plan; (0) all holders of Impaired Claims who

abstained from voting on the Plan or voted to reject the Plan but did not timely opt

out of or object to the applicable release; (p) all holders of Unimpaired Claims

who did not timely opt out of or object to the applicable release; (q) all holders of

Interests; (r) the Plan Administrator; (s) each current and former Affiliate of each

Entity in foregoing clause (a) through the following clause (t); (t) each Related

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Party of each Entity in the foregoing clause (a) through clause (t); and (u) the

Creditors’ Committee; provided that, in each case, an Entity shall not be a

Releasing Party if it: (x) elects to opt of the releases contained in the Plan, or (y)

timely objects to the releases contained in the Plan and such objection is not

resolved before Confirmation; provided further that any such Entity shall not

receive the Avoidance Action waiver.

(USTAPP 2427.) Thus, Releasing Parties includes all holders of claims and interests who do not

timely opt out of or object to the Third-Party Releases.

Likewise, the Plan defines “Released Party” broadly, to include:

[C]ollectively, each of the following in their capacity as such: (a) each of the

Debtors; (b) the Reorganized Debtors; (c) each of the Consenting Stakeholders;

(d) the ABL Agent; (e) the ABL Lenders; (f) the Term Loan Agent; (g) the Term

Loan Lenders; (h) each of the lenders and administrative agents under the Exit

Facilities; (i) the Backstop Parties; (j) the DIP ABL Agent; (k) the DIP ABL

Lenders; (I) the DIP Term Agent; (m) the DIP Term Lenders; (n) the Plan

Administrator; (0) each current and former Affiliate of Each Entity in the

foregoing clause (a) through this clause (p); (p) each Related Party of each Entity

in the foregoing clause (a) through this clause (p); and (q) the Creditors’

Committee; provided that any holder of a Claim or Interest that opts out of the

releases shall not be a “Released Party.”

(USTAPP 2427.)

In turn, the Plan then defines the term “Related Party” to include:

[W]ith respect to any person or Entity, each of, and in each case in its capacity as

such, current and former directors, managers, officers, investment committee

members, special or other committee members, equity holders (regardless of

whether such interests are held directly or indirectly), affiliated investment funds

or investment vehicles, managed accounts or funds, predecessors, participants,

successors, assigns, subsidiaries, Affiliates, partners, limited partners, general

partners, principals, members, management companies, fund advisors or

managers, employees, agents, trustees, advisory board members, financial

advisors, attorneys (including any other attorneys or professionals retained by any

current or former director or manager in his or her capacity as director or manager

of an Entity), accountants, investment bankers, consultants, representatives, and

other professionals and advisors of such person or Entity, and any such Person’s

or Entity’s respective heirs, executors, estates, and nominees.

(USTAPP 2426.)

Finally, the Plan provides for the following Exculpation Provision:

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[N]o Exculpated Party shall have or incur, and each Exculpated Party is hereby

released and exculpated from any Cause of Action or any claim arising from the

Petition Date through the Effective Date related to any act or omission in

connection with, relating to or arising out of, the Chapter 11 Cases, the

formulation, preparation, dissemination, negotiation, filing, or termination of the

Restructuring Support Agreement and related prepetition transactions, the

Disclosure Statement, the Plan, the Exit Facilities, the Backstop Commitment

Letter, the DIP Financing Order, Cash Collateral Order, or any Restructuring

Document, contract, instrument, release or other agreement or document

(including providing any legal opinion requested by any Entity regarding any

transaction, contract, instrument, document, or other agreement contemplated by

the Plan or the reliance by any Exculpated Party on the Plan or the Confirmation

Order in lieu of such legal opinion) 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 issuance of Securities pursuant to the

Plan, or the distribution of property under the Plan or any other related agreement,

except for claims related to any act or omissions that is determined in a Final

Order to have constituted actual fraud, willful misconduct, or gross negligence,

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 consummation 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, 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.

(USTAPP 2461-62.)

The Plan defines “Exculpated Parties,” in turn, to include:

(a) each of the Debtors; (b) each of the Reorganized Debtors; (c) each of the

Consenting Stakeholders; the Creditors’ Committee and its members; (e) the

Term Loan Agent; (f) each current and former Affiliate of each Entity in clause

(a) through the following clause (g); and (g) each Related Party of each Entity in

clause (a) through this clause (g).

(USTAPP 2422.)

C. The Notice

Any reasonable review of the Third-Party Releases leads to a conclusion that the releases

cover any type of claim that existed or could have been brought against anyone associated with

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Debtors as of the effective date of the plan. Yet, the Bankruptcy Court (and now Debtors as

well) only focused on one claim against Ascena and two of its former corporate officers: a

putative class action alleging securities fraud brought against Ascena, former CEO David Jaffe

and former CFO Robert Giammatteo. By doing so, the Bankruptcy Court ignored all of the other

potential claims (both federal and state claims) released against others covered by the releases, as

well as neglected to address any other potential claims against Jaffe and Giammatteo. This

tunnel vision proves fatal to any notions of proper notice (as well as consent) in this case.

With its focus on the securities fraud litigation, the Bankruptcy Court approved a

disclosure statement for dissemination to creditors and shareholders after a hearing. (USTAPP

0942, 0980-82.) The Bankruptcy Court required a Notice of Non-Voting Status to be sent to

both current and former shareholders of Ascena during the Putative Class Period. The Notice of

Non-Voting Status informed the recipients that they could opt out of the Third-Party Releases by

returning an enclosed form no later than November 15, 2020. The Notice of Non-Voting Status

stated in bold and underlined text that, under Debtors’ Plan, “you will be deemed to have

released whatever claims you may have against many other people and entities (including

company officers and directors) unless you return the enclosed ‘Release Opt-Out Form’.”

The recipient could return a hardcopy form in the pre-addressed, pre-paid envelope or

electronically through an online portal, which would effectuate the opt-out.

The Bankruptcy Court did not order that any notice or opt-out forms be sent to all of the

Releasing Parties, including the current and former employees, consultants, accountants or

attorneys of Debtors, their affiliates, lenders, creditors or interest holders. Nor did it even

examine other possible causes of action released. Prime Clerk — essentially a middleman in this

process — bore responsibility for notifying the equity holders. Prime Clerk sent the notice and

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opt-out forms by first-class mail to all current and former registered holders identified by

Ascena’s transfer agent, American Stock Transfer & Trust Company, LLC (“AST”). As to the

beneficial holders, Prime Clerk served the notice and opt-out forms on the list of Nominees with

instructions to forward the materials to their beneficial holder clients as of the voting record date

and their beneficial holder clients who had purchased or otherwise acquired the equity interest

during the Putative Class Period. Additionally, the Bankruptcy Court ordered publication of a

general notice of the confirmation hearing in USA Today and The New York Times. (USTAPP

0985-86.) This notice ran for one day and included the day and time of the hearing, the deadline

by which to object to the Plan and that the Plan contained a third-party release. (USTAPP 1559.)

Throughout this process, Debtors sent notice of the Third-Party Releases and the opt-out

procedure to roughly 300,000 parties believed to be potential members of the putative class

action case pending in the New Jersey district court. The record lacks any information about

how many of the parties actually received the notice or any mention of efforts to determine the

success of the attempts at notice regarding the securities fraud litigation. As of November 18,

2020, Debtors had received approximately 596 Release Opt-Out Forms — approximately 0.2%

of those targeted by the notice.

D. The Securities Litigation

Although not directly related to the procedural or factual history of the bankruptcy

proceeding, the Third-Party Releases essentially thwart a lawsuit filed in a separate federal court.

In June 2019, the Securities Litigation Lead Plaintiffs filed a federal securities putative class

action in the United States District Court for the District of New Jersey.© On November 21,

2019, the Securities Litigation Lead Plaintiffs filed a Consolidated Amended Complaint against

6 Newman vy. Ascena Retail Group, Inc., et al., 2:19¢v13529 (D.N.J.).

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Debtors and the Individual Defendants, which included Debtors’ former CEO (Jaffe) and CFO

(Giammatteo). The proposed class included all persons, other than the defendants, who

purchased or otherwise acquired Debtors’ common stock between December 1, 2015 and May

17, 2017. The Amended Complaint asserts claims under the Securities Exchange Act of 1934

and generally alleges that the defendants engaged in a deceptive scheme and made false and

misleading statements and omissions that artificially inflated the price of the common stock

during the class period.

The Securities Litigation Lead Plaintiffs objected to the Third-Party Releases, but the

Bankruptcy Court overruled their objections. Moreover, they attempted to opt out of the Third-

Party Releases on behalf of the putative class, but the Bankruptcy Court denied that request. The

Securities Litigation Lead Plaintiffs now appeal those decisions, as the Third-Party Releases in

this case has halted the New Jersey case before reaching the class certification stage.

IL. PROCEDURAL HISTORY

On March 12, 2021, the Securities Litigation Lead Plaintiffs filed two notices of appeal

of the Confirmation Order to this Court.’ In their appeals, the Securities Litigation Lead

Plaintiffs argue that the Bankruptcy Court erred in approving the Third-Party Releases to the

extent that the Third-Party Releases relate to the claims asserted in the Securities Litigation.

(Opening Br. of Appellants Joel Patterson and Michaella Corp. (“Appellants’ Br.”) at 7 (ECF

No. 30).) The Securities Litigation Lead Plaintiffs further argue that the Bankruptcy Court erred

in finding that they lack standing to object to the Third-Party Releases and that they could not

opt out on behalf of the class that they seek to represent. (Appellants’ Br. at 7-8.)

The Securities Litigation Lead Plaintiff's other notice of appeal initiated Case No.

3:21¢v166, which the Court then consolidated into this action.

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On March 26, 2021, the Trustee filed a notice of appeal of the Confirmation Order to this

Court.’ The Court consolidated the Trustee’s appeal with the other pending appeals into this

case and set a briefing schedule. (ECF Nos. 11, 15.) In his appeal, the Trustee argues that the

Bankruptcy Court erred by approving the Third-Party Releases and Exculpation Provision

contained in the Plan and approved by the Confirmation Order. (Br. of Appellee [sic] John P.

Fitzgerald, III, Acting United States Trustee For Region 4 (“Trustee Br.”) at 2 (ECF No. 35).)

The Trustee further argues that the Bankruptcy Court erred in the manner in which it conducted

the confirmation approval process. (Trustee Br. at 47-50.)

After filing the appeal, the Trustee filed a motion to stay in the Bankruptcy Court, asking

the Bankruptcy Court to stay the application of the Plan’s exculpation and release provisions

pending the adjudication of this appeal. On May 13, 2021, the Bankruptcy Court conducted a

hearing on the stay motion below. Then, on May 28, 2021, the Bankruptcy Court denied the

Trustee’s stay motion and entered a Memorandum Opinion (“Bankr. Stay. Op.” (USTAPP 2877-

2904)) setting forth its findings of facts and conclusions of law.

On June 2, 2021, the Trustee filed a Motion to Stay in this Court (ECF No. 18), in which

the Securities Litigation Lead Plaintiffs joined. (ECF No. 28.) Debtors opposed the stay. (ECF

No. 27.) On June 28, 2021, the Court denied the Motion to Stay, finding that the Trustee had

failed to meet the high burden required for a party seeking a stay. (ECF Nos. 33-34.)

On September 10, 2021, Debtors filed their Response Brief for Appellee Mahwah Bergen

Retail Group, Inc. ((“Appellee Br.”) (ECF No. 43).) On October 11, 2021, the Securities

Litigation Lead Plaintiffs and the Trustee each filed a reply brief, respectively. ((‘“Trustee Reply

8 The Trustee’s notice of appeal initiated Case No. 3:21¢v205, which the Court then

consolidated into this action.

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Br.”) (ECF No. 45); (Reply Br. of Appellants Joel Patterson and Michaela Corp.) (““Appellants’

Reply Br.) (ECF No. 46).) On December 20, 2021, the Court held oral argument on this appeal,

rendering it ripe for review. For the reasons stated below, the Court finds that the Bankruptcy

Court erred in its approval of the Third-Party Releases and the Exculpation Provision.

I. STANDARD OF REVIEW

“When reviewing a decision of the bankruptcy court [rendered in a core proceeding], a

district court functions as an appellate court and applies the standards of review in federal courts

of appeal.” Paramount Home Ent. Inc. v. Cir. City Stores, Inc., 445 B.R. 521, 526-27 (E.D. Va.

2010) (citing Jn re Webb, 954 F.2d 1102, 1103-04 (Sth Cir. 1992)). Specifically, “[t]he district

court reviews the bankruptcy court’s legal conclusions de novo and its factual findings for clear

error.” Mar-Bow Value Partners, LLC v. McKinsey Recovery & Transformation Serv. US, LLC,

578 B.R. 325, 328 (E.D. Va. 2017) (citing In re Harford Sands Inc., 327 F.3d 637, 639 (4th Cir.

2004)). Clear error exists when the district court “‘is left with the definite and firm conviction

that a mistake has been committed.’” Jd. (quoting Anderson v. Bessemer City, 470 U.S. 564, 573

(1985)). In cases involving questions of law and fact, the Court reviews findings of fact under

the clearly erroneous standard and reviews de novo the legal conclusions derived from those

facts. Gilbane Bldg. Co. v. Fed. Rsv. Bank of Richmond, Charlotte Branch, 80 F.3d 895, 905

(4th Cir. 1996).

Conversely, if the proceeding before the Bankruptcy Court constitutes a non-core

proceeding and the parties did not consent to the Bankruptcy Court’s jurisdiction, “the district

court... undertake[s] de novo analysis of both the factual findings to which [the appellant]

objected and the law.” Jn re Apex Express Corp., 190 F.3d 624, 630 (4th Cir. 1999). Indeed, 28

U.S.C. § 157(c)(1) directs:

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A bankruptcy judge may hear a proceeding that is not a core proceeding but that

is otherwise related to a case under title 11. In such proceeding, the bankruptcy

judge shall submit proposed findings of fact and conclusions of law to the district

court, and any final order or judgment shall be entered by the district judge after

considering the bankruptcy judge’s proposed findings and conclusions and after

reviewing de novo those matters to which any party has timely and specifically

objected.

Relatedly, Bankruptcy Rule 8018.1 provides that:

If, on appeal, a district court determines that the bankruptcy court did not have the

power under Article III of the Constitution to enter the judgment, order, or decree

appealed from, the district court may treat it as proposed findings of fact and

conclusions of law.

Fed. R. Bankr. P. 8018.1. The district court then reviews such proposed findings of fact and

conclusions of law de novo. Fed, R. Bankr. P. 9033(d).

IV. ANALYSIS

This appeal requires the Court to first determine whether the Bankruptcy Court exceeded

its authority under the Constitution when it released the claims included in the Third-Party

Releases, This analysis will encompass whether the Releasing Parties consented to the

jurisdiction of the Bankruptcy Court. Next, the Court must determine whether the Bankruptcy

Court erred in approving the Third-Party Releases under applicable Fourth Circuit standards.

This, again, will require an analysis of whether the parties consented to the Third-Party Releases.

Then, the Court will address Appellee’s argument that the Court must dismiss this appeal on

equitable mootness grounds. Finally, the Court will examine the challenge to the Exculpation

Provision. However, before addressing the merits of the appeal, the Court will address whether

Appellants have standing to press this appeal.

Page 17 of 87

A. Standing to Appeal

1. The United States Trustee’s Standing to Appeal

During oral argument, Debtors’ counsel conceded that Debtors have no challenge to the

standing of the Trustee to appeal. (Arg. Tr. at 20:10-11.) Debtors make this concession for good

reason. The Bankruptcy Code gives the United States Trustee standing, providing that the

Trustee “may raise and may appear and be heard on any issue in any case or proceeding under

this title but may not file a plan pursuant to section 1121(c) of this title.” 11 U.S.C. § 307. The

Trustee serves the role of “protecting the public interest and ensuring that bankruptcy cases are

conducted according to law.” In re Clark, 927 F.2d 793, 795 (4th Cir. 1991) (quotations

omitted). Given their role, the Fourth Circuit has recognized that a trustee could never satisfy the

“person aggrieved standard,” discussed below, but still has standing to appeal adverse

bankruptcy decisions in its role as a “public watchdog” over bankruptcy proceedings. See id. at

796 (“[S]tanding to appeal under the Bankruptcy Act as a ‘party aggrieved’ may arise from a

party’s official duty to enforce the bankruptcy law in the public interest.”). The Fourth Circuit

noted that, “had Congress intended to prohibit U.S. trustees from appealing adverse bankruptcy

court rulings, it would have done so explicitly.” Jd. Accordingly, the Trustee has standing to

appeal to this Court. And, his appeal of the Third-Party Releases encompasses the appeal

advanced by the Securities Litigation Lead Plaintiffs. This leaves the Court with no reservations

that it can consider the merits of the appeal regardless of whether the Securities Litigation Lead

Plaintiffs have standing.

2. The Securities Litigation Lead Plaintiffs’ Lack of Standing to Appeal

The Debtors do, however, challenge the Securities Litigation Lead Plaintiffs’ standing to

prosecute this appeal. (Appellee Br. at 48.) Specifically, Debtors argue that by objecting to the

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Third-Party Releases, the Securities Litigation Lead Plaintiffs opted out of the release and,

therefore, it has no impact on them. The Court agrees and finds that the Securities Litigation

Lead Plaintiffs lack standing to prosecute this appeal.

“The test for standing to appeal a bankruptcy court’s order to the district court is well-

established: the appellant must be a person aggrieved by the bankruptcy order.” Mar-Bow

Value Partners, LLC v. McKinsey Recovery & Transformation Serv. US LLC, 469 F. Supp. 3d

505, 523 (E.D. Va. 2020) (internal quotations omitted). To satisfy the person aggrieved

standard, “the appellant must show that the order diminishes its property, increases its burdens,

or impairs its rights.” /d. (internal quotations omitted).

Here, the Securities Litigation Lead Plaintiffs argue that they were placed in a “death

trap” by being forced to choose between either not opting out, and thereby waiving significant

rights, or opting out (as they ultimately chose) and risking a challenge to their standing.

Although the Court is sympathetic to the conundrum in which they were placed, tough strategic

decisions do not confer standing. Moreover, this tough strategic decision resulted in the Third-

Party Releases having no binding effect on them as individuals. They may still pursue any and

all claims that the Third-Party Releases purport to release. Thus, they cannot complain of any

diminution of property, increase in burden or impairment of rights in their individual capacity.

Although they claim that the Third-Party Releases inhibit their ability to enlarge their recovery in

the Securities Action (Appellants’ Reply at 18), they actually seek to enlarge the recovery of the

putative class — i.e., more class members obtaining a recovery, leading to a greater overall class

recovery — not necessarily their own personal recovery. As such, the Securities Litigation Lead

Plaintiffs must pin their hopes of establishing standing on harm suffered in their capacity as

putative representatives of the class.

Page 19 of 87

However, the Securities Litigation Lead Plaintiffs’ capacity as putative representatives of

a class in the District of New Jersey does not confer standing to appeal in this Court. The

Securities Litigation Lead Plaintiffs claim that they have standing “because they are fiduciaries

for the Class, have rights closely aligned with those of Class members, and are the court-

appointed advocate for Class members’ rights.” (Appellants’ Reply at 19.) However, this

argument puts too much weight on their role as putative class representatives. As lead plaintiffs

in a putative class action, the Securities Litigation Lead Plaintiffs have no special status;

consequently, they must establish individualized harm. See Campbell-Ewald Co. v. Gomez, 577

U.S. 153, 165 (2016) (“While a class lacks independent status until certified, . . . a would-be

class representative with a live claim of her own must be accorded a fair opportunity to show that

certification is warranted.”). As the Fourth Circuit has noted, “[nJot every effort to represent a

class will succeed; the representative is an agent only if the class is certified.” Gentry v. Siegel,

668 F.3d 83, 90 (4th Cir. 2012). Accordingly, the Securities Litigation Lead Plaintiffs’ argument

that their representative capacity confers standing on them relies on the speculation that they will

eventually represent a certified class. But, “[s]peculation and conjecture do not give rise to

bankruptcy appellate standing.” Mar-Bow, 469 F. Supp. 3d at 532.

Two appellate decisions support this conclusion. In Gentry, the Fourth Circuit concluded

that the named plaintiffs in putative classes lacked standing to challenge the notice procedures

employed by the bankruptcy court. 668 F.3d at 95. The plaintiffs had received the actual notice,

such that they could not challenge the notice on behalf of themselves, and the Fourth Circuit

concluded that they did “not have standing to assert the due process rights of others who are not

parties.” /d. Similarly, here, the Securities Plaintiffs cannot challenge on their own behalf the

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Third-Party Releases that no longer (due to the opt out) release their own individual claims, and

they lack standing to challenge the Third-Party Releases on behalf of others who are not parties.

Likewise, the Second Circuit encountered a nearly identical circumstance to the facts

here in Jn re Dynegy, Inc., 770 F.3d 1064 (2d Cir. 2014). There, a named plaintiff in a putative

securities class action sought to challenge the third-party releases in a confirmation plan that

would release non-debtor officers. /d. at 1067. The Second Circuit agreed with the district court

that the named plaintiff lacked standing to personally challenge the plan, because he had opted

out of the release. Jd. Likewise, the Second Circuit found that he lacked standing to opt out of

or object to the releases on behalf of the putative class, because the class had not been certified in

either the trial court or the bankruptcy court. /d. at 1068-70. The same facts exist here, and the

Court reaches the same conclusion.

Accordingly, the Court finds that the Securities Litigation Lead Plaintiffs lack standing to

prosecute this appeal.? Again, however, the Court stresses that the Trustee has standing to raise

the same challenges to the Third-Party Releases as the Securities Litigation Lead Plaintiffs have

raised.

B. The Constitutional Implications of the Third-Party Releases

In assessing whether the Bankruptcy Court erred in approving the Third-Party Releases,

the Court will begin with a discussion of the jurisdiction of bankruptcy courts generally and

whether they have the constitutional power to approve such releases. The Court will then

9 The Securities Litigation Lead Plaintiffs have raised additional issues in this appeal.

Specifically, they claim that the Bankruptcy Court erred in finding that they lacked the authority

to opt out on behalf of the putative class and in declining to certify the class for the limited

purpose of opting out on behalf of the class. (Appellants’ Br. at 82-85.) However, the Court’s

ultimate conclusion that the Third-Party Releases are unenforceable renders moot the question of

whether the Bankruptcy Court should have provided some mechanism to opt out of the class

from the Third-Party Releases.

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examine whether the Releasing Parties consented to adjudication of their claims by an Article I

court. The Court answers both questions in the negative.

1. The Limitations of the Jurisdiction of the Bankruptcy Courts

Federal district courts exercise “original and exclusive jurisdiction of all cases” under the

Bankruptcy Code. 28 U.S.C. § 1334(a). District courts may refer all bankruptcy matters to

bankruptcy judges, which this District has done as a matter of course since 1984. 28 U.S.C.

§ 157(a); see In the Matter of: The Administration of the Bankruptcy Courts and Reference of

Bankruptcy Cases and Proceedings to the Bankruptcy Judges of this District (E.D. Va. Aug. 15,

1984) (Standing Order referring all bankruptcy matters to Bankruptcy Court). District courts

retain the authority to withdraw, in whole or in part, any case or proceeding that they had

referred. See Houck v. Substitute Tr. Servs., Inc., 791 F.3d 473, 481 (4th Cir. 2015) (citing 28

U.S.C. § 157(d)). “In short, while the district courts were given jurisdiction over bankruptcy

cases, Congress also delegated to the bankruptcy courts, ‘as judicial officers of the district

courts,” ... adjudicatory authority, subject to the district courts’ supervision as particularized in §

157 and the limits imposed by the Constitution.” /d. (quoting Wellness Int’l Network, Ltd. v.

Sharif, 575 U.S. 665, 679 (2015)). This case implicates those limits imposed by Article III of the

Constitution.

Article III provides that “[t]he judicial Power of the United States, shall be vested in one

supreme Court, and in such inferior Courts as the Congress may from time to time ordain and

establish.” Congress has established 94 District Courts and 13 Courts of Appeals, “composed of

judges who enjoy the protections of Article III: life tenure and pay that cannot be diminished.”

Wellness Int’l, 575 U.S. at 668. The Supreme Court has long recognized that “Congress may not

withdraw from” the Article III courts “any matter which, from its nature, is the subject of a suit

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at the common law, or in equity, or admiralty.” Stern, 564 U.S. at 484. This limitation finds its

basis in the protections of life tenure and against salary diminution that Article III provides,

which “help to ensure the integrity and independence of the Judiciary.” Wellness Int'l, 575 U.S.

at 668. In authorizing the appointment of bankruptcy judges (who do not enjoy the Article III

protections), Congress has attempted to align the responsibilities of bankruptcy judges with the

boundaries set by the Constitution. However, as discussed below, the Supreme Court has found

that Congress violated Article III in authorizing bankruptcy judges to decide certain claims for

which litigants enjoy an entitlement to an Article IIT adjudication.

2. Northern Pipeline and Congress’ Reaction

In Northern Pipeline Const. Co. v. Marathon Pipe Line Co., the Supreme Court

considered the constitutionality of the Bankruptcy Reform Act enacted by Congress in 1978, and

specifically whether the bankruptcy court had the judicial authority to adjudicate a state-law

contract claim filed by the debtor against a third party. 458 U.S. 50, 54 (1982). The Bankruptcy

Reform Act gave the newly created bankruptcy courts power “much broader than that exercised

under the former” system and enabled bankruptcy courts to decide “all civil proceedings arising

under title 11 or arising in or related to cases under title 11.” /d. at 55. Thus, Congress vested

the bankruptcy judges with most of the “powers of a court of equity, law, and admiralty” without

affording them the protections of Article III. Jd. Because the Bankruptcy Reform Act vested

“the essential attributes of the judicial power” in a non-Article II adjunct, the Supreme Court

held that “[s]uch a grant of jurisdiction cannot be sustained as an exercise of Congress’ power to

create adjuncts to Art. III courts.” /d. at 87. Thus, it found the “broad grant of jurisdiction to the

bankruptcy courts” unconstitutional and concluded that the bankruptcy court lacked jurisdiction

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to adjudicate the state-law contract claim against an entity not otherwise part of the bankruptcy

proceedings. /d. at 69-72, 87.

Following the decision in Northern Pipeline, Congress passed the Bankruptcy

Amendments and Federal Judgeship Act of 1984 (the “1984 Act”), revising the statutes

governing bankruptcy judges and their jurisdiction. Pub. L. No. 98-353, 98 Stat. 333. Under the

1984 Act, “{t]he manner in which a bankruptcy judge may act . .. depends on the type of

proceeding involved.” Stern, 564 U.S. at 473. “Congress has divided bankruptcy proceedings

into three categories: (1) those that arise under title 11, (2) those that arise in a title 11 case, and

(3) those that are related to a case under title 11.” Chesapeake Tr. v. Chesapeake Bay Enters.,

2014 WL 202028, at *2 (E.D. Va. Jan. 17, 2014) (citing Stern, 564 U.S. at 473). The first

two categories constitute “core proceedings” such that a bankruptcy judge has the statutory

authority to “hear and enter final judgments.” Stern, 564 U.S. at 474. With respect to the third

category, non-core proceedings, a bankruptcy judge may hear a “proceeding that is not a core

proceeding but that is otherwise related to a case under title 11,” but, unless the parties consent,

the bankruptcy judge cannot enter final judgments and instead must submit “proposed findings

of fact and conclusions of law to the district court.” 28 U.S.C. § 157(c)(1).

Section 157 sets forth a non-exhaustive list of examples of core proceedings. The list

includes, for example, “the allowance or disallowance of claims against the estate,” and

“counterclaims by the estate against persons filing claims against the estate.” 28 U.S.C.

§ 157(b)(2)(B)-(C). A party may appeal the final judgment of a bankruptcy court to the district

court, which reviews it under traditional appellate standards. 28 U.S.C. § 158(a); Fed. R. Bankr.

Proc. 8013. However, when a bankruptcy judge determines that a “proceeding . . . is not a core

proceeding but . . . is otherwise related to a case under title 11,” the bankruptcy judge may only

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“submit proposed findings of fact and conclusions of law to the district court,” which then

reviews de novo any matter to which a party objects. 28 U.S.C. § 157(c)(1).

3. Stern v. Marshall

The Supreme Court took up the constitutionality of the 1984 Act in Stern v. Marshall.

564 U.S. at 471. There, the Court faced the issue of whether the bankruptcy court had

jurisdiction to enter a final judgment on a counterclaim brought by the debtor against an

individual who had filed a proof of claim in the bankruptcy action. /d. The Court noted that the

debtor’s counterclaim plainly constituted a “core” proceeding under the statute, thus giving the

bankruptcy judge the statutory authority to enter a final judgment on the claim. /d. at 475.

However, the Court concluded that Article III of the Constitution did not permit the bankruptcy

court to enter final judgment on the counterclaim. /d. at 482. The counterclaim “[was] a state

law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling

on the creditor’s proof of claim in bankruptcy.” Jd. at 487. The Supreme Court reaffirmed that

“Congress may not bypass Article III simply because a proceeding may have some bearing on a

bankruptcy case... Jd. at 499. Instead, “the question is whether the action at issue stems

from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Jd.

The Court found that the bankruptcy court had gone beyond constitutional limits when it

“exercised the ‘judicial Power of the United States’ in purporting to resolve and enter final

judgment on a state common law claim.” Stern, 564 U.S. at 487. Accordingly, the bankruptcy

court lacked the constitutional authority to adjudicate the claim. /d. at 503.

In sum, the Supreme Court mandates that bankruptcy courts only have the constitutional

authority to adjudicate core claims, even if Congress has granted them the statutory authority to

resolve other claims. Naturally, this constitutional limitation applies to a bankruptcy court’s

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authority to grant releases. See In re Millennium Lab Holdings H, LLC, 945 F.3d at 137 (holding

that an approval of releases by a bankruptcy court is only “permissible if it involves a matter

integral to the restructuring of the debtor-creditor relationship”); Jn re Purdue Pharma, L.P.,

2021 WL 5979108, at *40 (“Nothing in Stern or any other case suggests that a party otherwise

entitled to have a matter adjudicated by an Article III court forfeits that constitutional right if the

matter is disposed of as part of a plan of reorganization in bankruptcy. Were it otherwise, then

parties could manufacture a bankruptcy court’s Stern authority simply by inserting the resolution

of some otherwise non-core matter into a plan.”).

Here, by granting the Third-Party Releases, the Bankruptcy Court took jurisdiction over

and extinguished the liability of an extraordinarily vast range of claims held by an immeasurable

number of individuals against a broad range of potential defendants. However, before doing so,

the Bankruptcy Court took no steps to determine if it had the power to extinguish the liability on

any particular claim. Indeed, the only extinguished claims that the Bankruptcy Court considered

were the securities fraud claims against the Individual Defendants (Jaffe and Giammatteo), and it

ignored all of the other potential claims that it terminated by approving the releases. In so doing,

the Bankruptcy Court failed to take the proper steps to ensure that it had the authority to grant the

releases.

4. Classification of Core v. Non-Core

A bankruptcy court has the responsibility to properly classify the claims before it based

on the content of the claims and adjudicate them according to those classifications. “It is the

bankruptcy court’s responsibility to determine whether each claim before it is core or non-core.”

Exec. Benefits Ins. Agency v. Arkison, 573 U.S. 25, 33 (2014). “A cause of action is

constitutionally core when it ‘stems from the bankruptcy itself or would necessarily be resolved

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in the claims allowance process.’” Allied Title Lending, LLC v. Taylor, 420 F. Supp. 3d 436, 448

(E.D. Va. 2019) (quoting Stern, 564 U.S. at 499). A bankruptcy estate’s claim against a creditor

“would necessarily be resolved in the claims allowance process when it shares common

questions of fact and law with the creditor’s claims and when it seeks to directly reduce or

recoup the amount claimed.” /d. (internal quotations omitted). A claim can become core when it

“become[s] integral to the restructuring of the debtor-creditor relationship.” Stern, 564 U.S. at

497. Conversely, claims by the bankruptcy estate that seek to “augment the estate” but do not

“directly modify the amount claimed” do not qualify as a core claim “to be resolved in ruling on

the proof of claim.” Allied Title Lending, LLC, 420 F. Supp. 3d at 448.

When confronted with a so-called Stern claim — “a claim designated for final

adjudication in the bankruptcy court as a statutory matter, but prohibited from proceeding in that

way as a constitutional matter,” — the bankruptcy court should proceed with the claim as it

would for non-core claims. Exec. Benefits Ins. Agency, 573 U.S. at 35-36, That requires the

bankruptcy court to “determine whether the claim may be adjudicated as a non-core claim —

specifically, whether it is ‘not a core proceeding’ but is ‘otherwise related to a case under title

11.°” Id. at 36. If it satisfies the “otherwise related to a case under title 11” as required by 28

U.S.C. § 157(c)(1), then the bankruptcy court “should hear the proceeding and submit proposed

findings of fact and conclusions of law to the district court for de novo review and entry of

judgment.” /d. at 36. Of course, if the claim has no relation to a case under title 11, then the

bankruptcy court lacks any authority to act on it.

Stern teaches that courts should focus on the content of the proceeding rather than the

category of the proceeding when determining whether a bankruptcy court has acted within its

constitutional authority. The Stern Court explained that counterclaims that do not “stem[] from

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the bankruptcy itself or would [not] necessarily be resolved in the claims allowance process”

must be decided by Article III courts. Stern, 564 U.S. at 497. The Court never declared that all

counterclaims by a debtor fall outside of a bankruptcy court’s jurisdiction. Instead, the Court

looked to the content of the debtor’s counterclaim and compared the factual and legal

determinations necessary to resolve the counterclaim to those necessary to resolve the original

claim. Jd. at 498-99. It did so to assess whether the counterclaim would necessarily be resolved

in the claims-allowance process. /d. In doing so, the Court focused on the basis for the

counterclaim to determine whether it stemmed from the bankruptcy itself. Jd. Given Stern’s

focus on the content of the claim over its categorization, courts cannot bypass the constitutional

limitations simply by categorizing a widely varying swath of claims as “core” and then assuming

jurisdiction over them.

a. The Bankruptcy Court Failed to Identify Whether it had

Jurisdiction Over the Claims That it Released.

Here, the Bankruptcy Court engaged in none of the content-based analysis demanded by

Stern. The Bankruptcy Court did not parse the content of the claims that it purported to release

to determine if each claim constituted a core claim, a non-core claim or a claim unrelated to the

bankruptcy case. The sheer breadth of the Third-Party Releases renders this a herculean

undertaking and underscores the constitutional questionability of the Bankruptcy Court’s actions.

However, the enormity of the task does not absolve the Bankruptcy Court of its responsibility to

properly identify the content of the claims before it and ensure that it has jurisdiction to rule on

each of them. In fact, because of the constitutional implications of extinguishing these claims,

this undertaking carries even greater import. As an appellate court, this Court will not speculate

as to the claims released and then parse each purportedly released claim to determine whether the

Bankruptcy Court had the power to extinguish that claim — that was the responsibility of the

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Bankruptcy Court. Jn re Continental Airlines, 203 F.3d 203, 214 (3d Cir. 2000) (“The hallmarks

of permissible non-consensual releases — fairness, necessity to the reorganization, and specific

factual findings to support these conclusions — are all absent here.”). The sheer breadth of the

releases and the lack of findings with respect to each released claim renders appellate review

virtually impossible and speaks to the impropriety of the approval of the Third-Party Releases.

b. The Bankruptcy Court Lacks Jurisdiction Over Many

Released Claims.

Although the Court cannot determine precisely which Released Claims the Bankruptcy

Court could have adjudicated, it takes only a cursory review of the Third-Party Releases and the

Releasing Parties to find released claims that the Bankruptcy Court lacked the authority to

adjudicate. The universe of released claims includes claims between non-debtors which may

have no connection to the property of Mahwah’s bankruptcy estate or the administration of the

Bankruptcy Proceeding. For example, the Third-Party Release would bar securities claims, such

as those brought by the Securities Plaintiffs, against former directors and officers of Mahwah,

even if the claims arose before Mahwah filed for bankruptcy and those directors and officers had

no involvement in the Bankruptcy Proceeding. And it bears noting that “federal courts disfavor

indemnity for federal securities law violations, calling into question the enforceability of these

obligations.” Jn re Continental Airlines, 203 F.3d at 216 (citing cases). Thus, the only type of

released claim that the Bankruptcy Court actually considered finds antipathy in the case law.

The Trustee points out numerous other potential claims that the Bankruptcy Court

released. (Trustee Br. at 33.) These include hostile work environment claims by a former

Mahwah employee against another Mahwah employee; negligence by a Mahwah employee

against a consultant hired by Mahwah to counsel employees on retirement plans; slander by a

former employee of Mahwah’s term lenders against a current employee of the lender for remarks

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that the former employee mishandled the lender’s deal with Mahwah; a breach of contract action

by an accountant of one of Mahwah’s loan agents against the agent for failure to pay for the

work that the account performed on the agent’s transaction with Mahwah; and malpractice by an

affiliate of Mahwah against its law firm for the firm’s simultaneous representation of both the

affiliate and Mahwah when their interests diverged. (Trustee Br. at 33.) None of these claims

appear even related — much less integral — to the restructuring of the debtor-creditor

relationship, such that the Bankruptcy Court could adjudicate them without running afoul of the

Constitution. And, given the breadth of the releases, the above examples likely represent only a

fraction of the purportedly released claims that lack an integral connection to the bankruptcy

process, such that the Bankruptcy Court lacked the power to release them.

5. The Implication of Stern’s Constitutional Analysis on the Released

Claims

Debtors’ argument that the Third-Party Releases do not implicate Stern’s constitutional

limitations fails. Essentially, Debtors ask the Court not to parse the released claims in any way

and, instead, find that the Bankruptcy Court had constitutional authority based on the inclusion

of the Releases in the Plan. (Appellee Br. at 57-59.) This argument would require the Court to

conclude that only the Plan Confirmation Order constitutes a judgment and that jurisdiction over

confirmation proceedings cures any jurisdictional defects within those proceedings. The Court

concludes neither.

a. The Bankruptcy Court Must Have Jurisdiction Over a Claim

to Release it.

First, the releases here implicate the constitutional limits on the Bankruptcy Court’s

ability to adjudicate claims, even if they do not constitute a judgment following a hearing on the

merits of the claim. Once the Plan became final, the provisions therein, including the Third-

Party Releases, became res judicata for subsequent parties trying to bring the claims. Travelers

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Indem. Co. v. Bailey, 557 U.S. 137, 152 (2009); In re Purdue Pharma, L.P., 2021 WL 5979108,

at *41 (“Nor is there any doubt that the entry of an order releasing a claim has former

adjudication effects, which is a key attribute of a final judgment. The Supreme Court has twice

held that non-consensual third-party releases confirmed by final order are entitled to res judicata

claim preclusion barring any subsequent action bringing a released claim .. . .”). Likewise,

when the Bankruptcy Court declared the releases consensual settlements of the claims, they

became final judgments on the merits for purposes of further litigation. See Larken, Inc. v.

Wray, 189 F.3d 729, 732 (8th Cir. 1999) (stating that a voluntary dismissal with prejudice

“constitutes a final judgment on the merits”); Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050

(5th Cir. 1987) (holding that order confirming plan that released creditor’s claims against

guarantor was a final judgment on the merits of those claims); see also In re Digital Impact, Inc.,

223 B.R. 1, 12, 13 n.6 (Bankr. N.D. Okla. 1998) (“A release, or permanent injunction, contained

in a confirmed plan . . . has the effect of a judgment — a judgment against the claimant and in

favor of the non-debtor, accomplished without due process.”).

At bottom, the Bankruptcy Court extinguished the Released Claims, which amounts to

adjudication of the claim for Stern purposes. In re Purdue Pharma, L.P.,2021 WL 5979108, at

*41 (“There really can be no dispute that the release of a claim ‘finally determines’ that claim. It

does so by extinguishing the claim, so that it cannot be adjudicated on the merits. A

nonconsensual third-party release is essentially a final judgment against the claimant, in favor of

the non-debtor, entered ‘without any hearing on the merits.””). To claim that the Bankruptcy

Court can fully extinguish these claims based solely on their inclusion in the Plan — without any

hearing on them or any findings about them —amounts to arguing that courts need not have the

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authority to extinguish claims so long as they provide no procedural safeguards in extinguishing

the claims. Obviously, this cannot be.

Likewise, the argument that the Bankruptcy Court possesses the power to extinguish

these claims based only on its jurisdiction over confirmation proceedings misses the mark. True,

bankruptcy courts have jurisdiction over Chapter 11 proceedings under 28 U.S.C. § 157(a), and

plan confirmation proceedings constitute core proceedings that the bankruptcy court may

adjudicate on a final basis. 28 U.S.C. § 157(b)(2)(L). Further, 11 U.S.C. § 105(a) permits the

bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to

carry out the provisions of this title.” But, this grant of authority has limits.

Although § 105 permits a bankruptcy court to issue orders necessary or appropriate to

carry out the provisions of the Bankruptcy Code, that section does not provide an independent

source of federal subject matter jurisdiction. Jn re Combustion Engineering, Inc., 391 F.3d 190,

224-25 (3d Cir. 2004) (“But as the statute makes clear, § 105 does not provide an independent

source of federal subject matter jurisdiction.”). Thus, independent statutory basis must exist for

the bankruptcy court to exercise jurisdiction over the claims. See In re Johns-Manville Corp.,

801 F.2d 60, 63 (2d Cir. 1986) (“Section 105(a) does not, however, broaden the bankruptcy

court’s jurisdiction, which must be established separately .. . .”).

Without an independent source of jurisdiction, a bankruptcy court must rely on its own

jurisdiction, which comes in the form of in rem jurisdiction over the debtor’s property and the

disposition of that property. See Cent. Virginia Cmty. Coll. v. Katz, 546 U.S. 356, 362 (2006)

(“Bankruptcy jurisdiction, at its core, is in rem.”). It is certainly true “that bankruptcy courts, as

courts of equity, have broad authority to modify creditor-debtor relationships.” United States v.

Energy Res. Co., Inc., 495 U.S. 545, 549 (1990). Yet, third-party claims belong to third parties,

Page 32 of 87

not the debtor’s estate. “As a general rule, a bankruptcy court has no power to say what happens

to property that belongs to a third party, even if that third party is a creditor or otherwise is a

party in interest.” Jn re Aegean Marine Petroleum Network, Inc., 599 B.R. 717, 723 (Bankr.

S.D.N.Y. 2019) (citing Callaway v. Benton, 336 U.S. 132, 136-41 (1949)).

Similarly, although a bankruptcy court’s in rem jurisdiction gives it authority over claims

against the estate, it has no in rem jurisdiction over third-party claims not against the estate or

property of the estate. See Jn re Johns-Manville Corp., 600 F.3d at 153-54 (holding that a

bankruptcy court did not have in rem jurisdiction over a third party’s direct claims against a non-

debtor insurer). Additionally, bankruptcy courts have subject matter jurisdiction over “civil

proceedings” that are “related to” a bankruptcy case. 28 U.S.C. §§ 157, 1334. However, the

Third-Party Releases here purport to release claims that may not yet constitute any pending civil

proceeding.

Additionally, many of the claims lack any relation to the bankruptcy case, even affording

“related to” jurisdiction the most liberal reading. Debtors’ argument that bankruptcy courts must

be able to confirm plans even if those plans affect other cases has it backwards. (Appellee’s Br.

at 59.) The Plan confirmation does not merely have a “tangential effect” on the Securities

Litigation and other claims. Rather, the Plan has the ultimate effect — extinguishment — on the

claims despite having — at most — a tangential effect on the bankruptcy estate. Therefore, the

bankruptcy court has no independent authority on which to rely.

Indeed, as discussed above, Stern and its progeny stand for the proposition that Congress

cannot enlarge the subject matter jurisdiction of the bankruptcy courts beyond permissible

constitutional limits. Thus, Congress could not eviscerate the limits of Article III jurisdiction by

enacting § 105. Article III simply does not allow third-party non-debtors to bootstrap any and all

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of their disputes into a bankruptcy case to obtain relief. See In re Midway Gold US, Inc., 575

B.R. 475, 519 (Bankr. D. Colo. 2017) (“If proceedings over which the Court has no independent

jurisdiction could be metamorphisized into proceedings within the Court’s jurisdiction by simply

by including their release in a proposed plan, this [Bankruptcy] Court could acquire infinite

jurisdiction.”’) (citations omitted). Moreover, the Court does not view releasing a claim held by a

third-party non-debtor against another third-party non-debtor as an “appropriate” order to carry

out the Bankruptcy Code. And certainly, given many of the released claims’ complete

attenuation to the bankruptcy estate and proceeding, these releases cannot be considered

“necessary.” Any finding by the Bankruptcy Court otherwise constitutes a clear error.

b. The Parties did not Consent to Article I Adjudication of Non-

Core Claims.

The Debtors further argue that the Third-Party Releases do not implicate the

jurisdictional constraints of Stern, because the parties consented to the Releases. (Appellee Br.

at 55-56.) This argument ignores the standard that the Supreme Court has set for consenting to

bankruptcy court jurisdiction. Likewise, the Bankruptcy Court ignored the standard that must be

met to find that a party has consented to its jurisdiction. As discussed below, the record contains

no evidence that could meet the Supreme Court’s standard for consent to non-Article III

jurisdiction.

i. The Supreme Court’s Standard for Consent

Following Stern, the Supreme Court took up the issue of whether a party could consent to

having the bankruptcy court decide a Stern claim in Wellness International Network, Ltd. v.

Sharif, 575 U.S. 665 (2015). The Court first answered the question of whether a litigant could

waive the right to an Article III court, concluding that “allowing bankruptcy litigants to waive

the right to Article III adjudication of Stern claims does not usurp the constitutional prerogatives

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of Article III courts.” Jd. at 679. In reaching this decision, the Court relied on the fact that

“Stern — like its predecessor, Northern Pipeline — turned on the fact that the litigant did not

truly consent to resolution of the claim against it in a non-Article III forum.” /d. at 681

(quotations omitted).

However, the Court next determined what constituted valid consent to adjudication by a

bankruptcy court. The Court rejected the argument that “such consent must be express.” Jd. at

683. Instead, it held that “[t]he implied consent standard articulated in Roel? supplies the

appropriate rule for adjudications by bankruptcy courts under § 157.” Jd. at 684. Therefore, “the

key inquiry is whether the litigant or counsel was made aware of the need for consent and the

right to refuse it, and still voluntarily appeared to try the case before the non-Article III

adjudicator.” /d. at 685 (cleaned up). An understanding of the standard in Wellness necessitates

a brief review of Roell vy. Withrow, 538 U.S. 580 (2003).

In Roel, the Supreme Court held that consent to proceedings before a magistrate judge

under 28 U.S.C. § 636(c) need not be express and instead can be inferred from a party’s conduct

during litigation. 538 U.S. at 582. In Roeil, the plaintiff agreed orally and in writing to having

the magistrate judge preside over the entire case. Jd. at 582-83. The district judge then referred

the case to the magistrate judge for final disposition, but with the caveat that the defendants

would have the opportunity to consent and the referral order would be vacated if they did not

consent. /d. at 583. The clerk then sent the referral order to the defendants with instructions to

submit a separate pleading indicating whether they consented or not. /d. One defendant

consented to magistrate judge jurisdiction, but two others did not take a position at all. /@ The

magistrate judge then proceeded to preside over a jury trial all the way to a verdict and judgment.

fd. On at least three different instances, the parties did nothing when the magistrate judge stated

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that the parties had consented to her jurisdiction. /d. at 584,n.1. Following the judgment, the

defendants submitted their consent in writing, but the district court and the Fifth Circuit Court of

Appeals nevertheless vacated the judgment, ruling that consent had to be express under § 636(c).

Id. at 585.

The Supreme Court disagreed that consent to magistrate judge jurisdiction had to be

expressly written. Jd. at 586. Instead, it found that the parties had “clearly implied their consent

by their decision to appear before the Magistrate Judge, without expressing any reservation, after

being notified of their right to refuse and after being told that she intended to exercise case-

dispositive authority.” /d. The Court noted that allowing the conduct of the parties to determine

consent “checks the risk of gamesmanship by depriving parties of the luxury of waiting for the

outcome before denying the magistrate judge’s authority.” Jd. at 590. Accordingly, it concluded

that “the better rule is to accept implied consent where, as here, the litigant or counsel was made

aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the

case before the Magistrate Judge.” Jd.

In Wellness, the Supreme Court found that applying the same standard in the bankruptcy

context possessed the same pragmatic virtues that motivated its adoption in the magistrate judge

concept. 575 U.S. at 684-85. However, the Court made clear that this standard has teeth: “[i]t

bears emphasizing, however, that a litigant’s consent — whether express or implied — must still

be knowing and voluntary.” /d. at 685 (citing Roel/, 538 U.S. at 587, n.5 (“notification of the

right to refuse” adjudication by a non-Article III court “is a prerequisite to any inference of

consent”)).

Page 36 of 87 .

ii. The Bankruptcy Court Incorrect Application of the Standard for

Consent

Applying this standard here, it becomes clear that the Bankruptcy Court erred as a matter

of law in finding that failure to return the opt-out form could constitute consent to Article I

adjudication. The Bankruptcy Court relied on the fact that the Releasing Parties received notice

and an opportunity to opt out of the Third-Party Releases as the basis for consent. (Bankr.

Confirm. Op. at 31-33.) But, the Bankruptcy Court made this determination in the context of

whether the Releasing Parties consented to the Third-Party Releases, not the threshold question

of whether they consented to having the Bankruptcy Court adjudicate the released claims.'° This

will not suffice to support a finding of consent to Article I adjudication for all of the Releasing

Parties.

Wellness and Roeil make clear that courts can discern the implication of consent to a non-

Article III court based on a party’s actions. However, they do not permit a finding of consent

based on inaction. In finding consent to Article I adjudication, Roel! relied on the litigation

conduct of the parties and the fact that they appeared before the magistrate judge to try their case

after notification of the referral. Indeed, the Court even cited the definition of an appearance as

an “overt act by which a party submits himself to the court’s jurisdiction.” Roell, 538 U.S. at

586, n.3. This reliance on the overt act of appearing in the non-Article III court demonstrates the

importance of actions over inactions. Likewise, Wel/ness cited to Roell for the proposition that

“actions rather than words” can support a finding of consent and that “the key inquiry is whether

the litigant or counsel was made aware of the need for consent and the right to refuse it, and still

10 As the Bankruptcy Court made no attempt to discern whether the Releasing Parties

consented to it adjudicating their non-core claims, the Court must assume that it would have

relied on the same manner of consent that it relied on in finding that the Releasing Parties

consented to the Third-Party Releases,

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voluntarily appeared to try the case before the non-Article III adjudicator.” Wellness Int’l, 575

U.S. at 684-85 (cleaned up). Importantly, any consent “must still be knowing and voluntary.”

Id. at 685.

Here, the Court cannot discern any actions undertaken by the Releasing Parties to support

a finding that they knowingly and voluntarily consented to Article I adjudication of the claims

that they released. Despite the enormous breadth of Releasing Parties deemed to have released

claims, the Bankruptcy Court undertook no analysis to determine which Releasing Parties (if

any) had consented to bankruptcy jurisdiction and which had not. Instead, as previously noted,

the Bankruptcy Court took a myopic approach to the Releasing Parties, focusing only on the

putative securities fraud class action members, ignoring all other Releasing Parties. And,

because the Bankruptcy Court failed to parse the core claims from non-core claims in the Third-

Party Releases, the Bankruptcy Court took no steps to determine which Releasing Parties needed

to consent to Article I adjudication of their claims before the Bankruptcy Court could act on

them. Rather, the Bankruptcy Court merely relied on the fact that a document was mailed out

with the goal of reaching thousands of individuals. Then, without regard to whether those

individuals received the document, and without regard as to whether those individuals took any

overt actions in response to the document, the Bankruptcy Court determined that they had

surrendered their constitutional right to an Article III court.

Again, the Bankruptcy Court ignored a wide swath of those releasing claims and, even

for those targeted with the notice, the notice contained no information about agreeing to Article ]

adjudication. Indeed, counsel for Debtors conceded during oral argument that the distributed

releases made no mention of agreeing to adjudication of their claims by an Article I court. (Arg.

Tr. at 41:10-11.) In any event, the record is silent as to how many of the targeted shareholders

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actually received the notice. Yet, hoping (without proving) that someone received a deficient

document — without any further action from that person — does not meet the standard for

knowing and voluntary consent to adjudication of a non-core claim by a bankruptcy court, as set

forth by the Supreme Court in Wellness.

Additionally, the Supreme Court in both Wellness and Roei! indicated that the implied

consent standard that it set forth had its basis in the elimination of gamesmanship. See, e.g.,

Wellness Int’l, 575 U.S. at 685 (noting that “checking gamesmanship” motivated the adoption of

the consent standard). Yet, allowing inaction to imply consent encourages the very

gamesmanship that the Supreme Court intended to check. That is, non-debtors could tuck

releases unrelated to a bankruptcy proceeding into bankruptcy plans, then secrete an opt-out

opportunity into a convoluted legal document, send the document to non-parties previously

unaware of the bankruptcy proceeding and use their non-response to extinguish all of their

claims. This type of gamesmanship, aimed at extinguishing claims of unwitting individuals and

providing a golden parachute to the parties drafting the plan, cannot be tolerated.

In words that apply equally well here, Judge McMahon wrote the following in In re

Purdue Pharma, L.P.:

The third-party claims at issue neither stem from [the debtor’s] bankruptcy nor

can they be resolved in the claims allowance process. Yet those claims are being

finally disposed of pursuant to the Plan; they are being released and extinguished,

without the claimants’ consent and without any payment, and the claimants are

being enjoined from prosecuting them. Debtors and their affiliated non-debtor

parties cannot manufacture constitutional authority to resolve a non-core claim by

the artifice of including a release of that claim in a plan of reorganization.

2021 WL 5979108, at *41. The Bankruptcy Court here exceeded its constitutional authority

without any inquiry or factfinding. Accordingly, the Bankruptcy Court erred in adjudicating the

Stern claims without the knowing and voluntary consent of the Releasing Parties.

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6. Consequence of a Stern Violation

Having determined that the Bankruptcy Court violated Stern by exceeding its authority,

the Court must vacate the Confirmation Order and treat it as a Report and Recommendation with

proposed findings of fact and conclusions of law, which the Court reviews de novo. Purdue

Pharma, L.P., 2021 WL 5979108, at *42; 28 U.S.C. § 157(c)(1); Bankruptcy Rule 8018.1. Here,

unfortunately, the Bankruptcy Court’s opinion lacks any meaningful factfinding, so the Court

will need to set forth its own factual findings based on the record from the confirmation hearing.

Bankruptcy Rule 9033(d).

Before turning to the factual findings in this case, the Court pauses for an observation

about the procedure for the handling of third-party releases by bankruptcy courts going forward.

Due to the substantial constitutional issues at play with the use of this perilous tool, it seems

preferrable for a bankruptcy court to submit any third-party releases to the district court for

approval via a Report and Recommendation in the rare and exceptional case that warrants the use

of third-party releases. The Report and Recommendation should identify with specificity the

claims and individuals released and provide detailed proposed findings of fact and conclusions of

law to ensure that the released claims are truly integral to the reorganization. See In re Seaside

Engineering & Surveying, Inc., 780 F.3d at 1079 (noting that this “inquiry is fact intensive in the

extreme”); In re Dow Corning Corp., 280 F.3d at 657-58 (criticizing conclusory statements and

mandating specific evidentiary findings with separate analysis for each individual release). This

practice would necessarily avoid any Stern issues.

Moreover, it would serve as an extra safeguard to ensure that third-party releases are

reserved for the truly appropriate case, mindful that the use of third-party releases should be

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utilized “cautiously and infrequently.” Behrmann, 663 F.3d at 712. As one bankruptcy court has

observed:

[t]hird-party releases are not a merit badge that somebody gets in return for

making a positive contribution to a restructuring. They are not a participation

trophy, and they are not a gold star for doing a good job. Doing positive things in

a restructuring case — even important positive things — is not enough.

Nonconsensual releases are not supposed to be granted unless barring a particular

claim is important in order to accomplish a particular feature of the restructuring.

In re Aegean Marine Petroleum Network, Inc., 599 B.R. at 726-27.

Cc. Factual Findings Under Bankruptcy Rule 9032

The Court will now set forth its findings of facts in accordance with Rule 9033(d). The

findings are based on the evidence submitted during the confirmation hearing.') For the hearing,

Debtors tendered declarations from Carrie W. Teffner (President and Executive Chair of

Debtors), Gary W. Begeman (a disinterested director of the Board of Directors for Debtors),

Alex Orchowski (Director of Global Corporate Acts at Prime Clerk LLC), and William Kosturos

(Managing Director of Alvarez & Marsal North America, LLC, who served as Debtors’ financial

advisor). Teffner and Begeman also testified during the confirmation hearing on February 25,

2021.

The Court finds the following facts as relevant to the issues presented in this appeal:

1. On June 7, 2019, Securities Litigation Lead Plaintiffs filed a complaint as a

putative class action in the District of New Jersey alleging securities fraud against Ascena

Retail Group, Inc., David Jaffe and Robert Giammatteo in Newman v. Ascena Retail

Group, Inc., et al, Case No. 2:19¢v13529 (D.N.J.). On August 23, 2019, United States

District Judge Kevin McNulty appointed Securities Litigation Lead Plaintiffs and their

counsel as lead plaintiff and lead counsel, respectively. (Dkt. No. 26, Newman v. Ascena

Retail Group, Inc., et al, Case No. 2:19cv13529 (D.N.J.) (“D.N.J. Dkt.”).) On February

7, 2020, the defendants in that case filed a motion to dismiss that remains pending.

(D.N.J. Dkt. No. 47). On July 27, 2020, the defendants in that case filed a pleading

entitled “Suggestion of Bankruptcy” (D.N.J. Dkt. No. 58) that resulted in a stay of all

Notably, the evidence was uncontroverted; therefore, there is no need to assess the

credibility of the witnesses.

Page 41 of 87

proceedings in that case being entered the next day, July 28, 2020 (D.N.J. Dkt. No. 59).

The case remains stayed as of the date of this Opinion.

2. David Jaffe previously served as the Chief Executive Officer of Debtors, while Robert

Giammatteo previously served as Debtors’ Chief Financial Officer. Both Jaffe and

Giammatteo left their employment with Debtors several months before Debtors filed for

bankruptcy. (USTAPP 0929, 1030.)

3. On July 23, 2020, Debtors filed a voluntary petition for relief under Chapter 11 of the

Bankruptcy Code. (USTAPP 0001-18.)

4, With the Bankruptcy Court’s approval, Debtors consummated three transactions

involving the sale of their businesses. On September 24, 2020, the Bankruptcy Court

approved the sale of Debtors’ Catherines enterprise. On November 12, 2020, the

Bankruptcy Court approved the sale of Debtors’ Justice enterprise. On December 8,

2020, the Bankruptcy Court approved the sale of Debtors’ remaining businesses,

including the sale of the Lane Bryant brand and the Premium business segment, which

included Ann Taylor, LOFT, and Lou & Grey, to buyer Premium Apparel LLC. The last

of these sales closed on December 23, 2020. These sales consisted of substantially all of

the Debtors’ assets. (Decl. of Carrie W. Teffner in Supp. of Confirmation of the

Amended Joint Chapter 11 Plan (“Teffner Decl.”) ¢ 5 (USTAPP 2318-2335).) The sale

of the Debtors’ Premium and Lane Bryant business resulted in Debtors receiving

approximately $472 million in net cash proceeds. (Decl. of William Kosturos in Supp. of

Confirmation of the Amended Joint Chapter 11 Plan (“Kosturos Decl.”) 4 5 (Dkt. No.

1761, Inre Retail Group, Inc., Case No. 20bk33113 (“Bankr. Dkt.”)).)

5. Asa result of the sale of its assets, all that was left for the reorganization after

December 23, 2020, was the distribution of Debtors’ remaining estate cash. (Teffner

Decl. 95.) By February 22, 2021, the Debtors had sold substantially all of their assets and

all that remained was to distribute cash proceeds in accordance with the terms of the Plan.

(Teffner Decl. 430.)

6. The Reorganization Plan reflects a global resolution with the Creditors’ Committee

and contemplates payment in full in cash of all allowed administrative and priority

claims, The Reorganization Plan had the support of 97% of the Term Lenders. (Teffner

Decl. 7 5.)

7. The Reorganization Plan resulted from the collaborative efforts between Debtors, their

advisors and legal counsel, and their stakeholders. The Amended Plan reflects the wind

down process and maximizes value to the Debtors’ stakeholders. (Teffner Decl. J 26.)

8. The Reorganization Plan contains third-party releases, an exculpation provision, and

an injunction provision. According to Ms. Teffner, these provisions were the product of

extensive good faith, arm’s-length negotiations and were material inducements for the

parties to enter into the comprehensive settlement embodied in the Plan. (Teffner Decl.

4 41.) The negotiations involved the Debtors and their lenders. (Tr. of Feb. 25, 2021

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Hr’g (“Confirm. Tr.”) at 22:24-25 (USTAPP 2673-2836).) None of the putative

members of the securities fraud class action participated in the negotiation. And, Ms.

Teffner acknowledged that none of the Releasing Parties had a seat at the table during the

negotiations. (Confirm. Tr. at 23:5-10.)

9. David Jaffe and Robert Giammatteo did not participate in the negotiations involving

the Third-Party Releases. Furthermore, the Third-Party Releases as they related to Jaffe

and Giammatteo were not material inducements for the comprehensive settlement for the

Reorganization Plan. (Confirm. Tr. at 23:11-24:2.). Moreover, neither Jaffe nor

Giammatteo participated at all (directly or indirectly) in the Debtors’ Chapter 11 process.

Indeed, they were no longer employed by Debtors at the time of the reorganization.

(Confirm. Tr. at 26:10-21.) Consequently, neither Jaffe nor Giammatteo played an

integral (or any) role in the formulation and negotiation of the Debtors’ plan. (Confirm.

Tr. at 34:9-16; 48:20-23.) The Court therefore finds that the releases for Jaffe and

Giammatteo were not integral to the reorganization.

10. The negotiations surrounding the Third-Party Releases were focused on all existing

and prior officers and directors (including Jaffe and Giammatteo) and were designed to

be broad. (Confirm. Tr. at 27:11-12; 32:23-25.) Ms. Teffner did not know whether the

Third-Party Releases covered former employees and consultants. (Confirm. Tr. at 41:3-

16.) Because the negotiations surrounding the Third-Party Releases were addressed to

only officers and directors, the Third-Party Releases exceeded the terms of the

negotiations.

11. At the time of the reorganization, Debtors had Director & Officer liability insurance

coverage of at least $50 million. (Confirm. Tr. at 29:1-31:4.) No evidence exists in the

record that any of the claims released by the Third-Party Releases would exceed the

D&O insurance coverage and thereby cause a financial depletion of the estate.

12. The Third-Party Releases were designed to limit time spent defending any type of

litigation, which would deplete assets and resources of the estate. (Confirm. Tr. 33:19-

24.) The failure to approve the Third-Party Releases included in the Reorganization Plan

could potentially increase the time and expense of the Debtors’ wind-down process to the

detriment of the Debtors’ stakeholders. According to Ms. Teffner, the guid pro quo for

the contributions, concessions and support offered by the Released Parties was the Third-

Party Releases. (Teffner Decl. | 45.)

13. Debtors created a Special Committee that consisted of Mr. Begeman and one other

disinterested director, (Decl. of Gary D. Begeman in Supp. of Confirmation of Amended

Joint Chapter 11 Plan (“Begeman Decl.”) § 1 (Bankr. Dkt. No. 1759).) The purpose of

the Special Committee was to conduct and oversee an investigation into historical

transactions and evaluate any proposed release of any claims or causes of actions by

Debtors in connection with a future transaction. The Special Committee retained

Kirkland & Ellis (Debtors’ counsel) to investigate potential causes of action that the

Debtors could bring against any of the Related Parties during a six-year lookback period.

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(Begeman Decl. {7 6-8.) The investigation found no material claims in favor of the

Debtors. (Begeman Decl. § 9.)

14. After an extensive investigation, the Debtors were unable to uncover any material

claims or causes of actions that could be brought against the Releasing Parties, and it is

unlikely that the Debtors would recover material amounts, if any, from the Releasing

Parties. (Teffner Decl. 42.) As such, the release by the Released Parties of claims

against the Releasing Parties (described as the “mutual release” in this appeal) has no

value and is fictional.

15. Mr. Begeman also reviewed the pending securities fraud class action filed in the

District of New Jersey against the Debtor and its former directors and officers (Jaffe and

Giammatteo) in Case No. 2:19cv12529. The Special Committee (Mr. Begeman and one

other disinterested director) determined that the claims in the class action lacked merit

and had no material value as related to the Debtors’ estates. (Begeman Decl. { 14.)

Notably, the Bankruptcy Court did not accept this as an expert opinion; instead, it only

received it as a report from the Special Committee. (Confirm. Tr. at 12:10-18.) This

Court gives no credit to Mr. Begeman’s assessment for this reason.

16. This Court explicitly rejects the Bankruptcy Court’s finding that the Third-Party

Releases were consensual. (Bankr. Confirm. Op. at 31.) Instead, the Court finds the

Third-Party Releases to be nonconsensual both as a matter of fact and as a matter of law.

In terms of factual grounds, the Bankruptcy Court’s opt-out notice was directed only to

the putative class members in the securities fraud case. The Bankruptcy Court made no

effort to provide notice and obtain consent from the numerous other Releasing Parties as

described in the Third-Party Releases.

17. As to the putative class members in the securities fraud case, the record fails to

establish that any consented to the release of their claims against Jaffe and Giammatteo.

Debtors used Prime Clerk to ensure to the best of their ability to get access to putative

members of the class action and to distribute the notices to the putative members.

(Confirm. Tr. 21:3-16.) Prime Clerk worked with third parties to attempt to identify

putative members of the class action and then to communicate the Notice to them. (Decl.

of Craig E. Johnson of Prime Clerk LLC in Supp. of the Debtors’ Objection to Securities

Lead Plaintiffs’ Motion for Entry of an Order Authorizing Lead Plaintiffs to Opt Out of

Third-Party Releases on Behalf of the Class (“Johnson Decl.”) J 7-9 (Bankr. Dkt. No.

947).) Prime Clerk sent the notice to approximately 300,000 individuals; however, the

record contains no information about the success of their efforts to reach this group.

(Bankr. Confirm. Op. at 13.) Indeed, Prime Clerk received only 596 opt-outs, which

corresponds to 0.2% of those targeted. (Confirm. Tr. at 52:22-24.) The Court therefore

finds that this effort was insufficient to establish notice of the opt-out provision in the

Notice. Further, the record lacks any information establishing as a matter of fact that any

of the targeted recipients of the Notice affirmatively consented to the release of their

claims as provided in the Third-Party Release.

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18. As to the shareholders who were putative class members in the securities fraud

action, those who were deemed to have opted out did not receive anything of value for

their releases. (Confirm. Tr. 18:13-22.)

19. There is no evidence in the record of any evaluation of any other potential claims

that the Releasing Parties could have brought against the Debtors other than the securities

fraud class action filed in the District of New Jersey, nor does the record contain any

effort to provide notice of the releases to any Releasing Party beyond the securities fraud

class action.

20. According to Ms. Teffner, the Exculpation Provision resulted from good faith, arm’s-

length negotiations and was designed to protect those who served and assisted with the

restructuring process, including those who did not necessarily owe a fiduciary duty to the

Debtors. (Teffner Decl. 47.)

Against this factual backdrop, the Court will now turn its attention to the propriety of the Third-

Party Releases.

D. The Application of Behrmann to the Third-Party Releases

In addition to the factual and constitutional defects in the approval of the Third-Party

Releases outlined above, Appellants argue that the Bankruptcy Court erred in approving the

Third-Party Releases under the applicable standards in the Fourth Circuit for approving

nonconsensual third-party releases as set forth in Behrmann. (Trustee Br. at 37; Appellants’ Br.

at 73.) Debtors respond that the Releasing Parties consented to the releases, rendering the

Behrmann factors inapplicable. (Appellee Br. at 41.) Additionally, Debtors contend that the

Third-Party Releases satisfy the Behrmann factors. (Appellee Br. at 75.)

Thus, beyond the Stern issues, this appeal boils down to two questions: (1) whether the

Bankruptcy Court erred by finding the releases consensual, and (2) whether the Bankruptcy

Court erred by failing to conduct the seven-factor Behrmann analysis. The Court finds that the

Bankruptcy Court erred on both fronts.

Page 45 of 87

1. Third-Party Releases and Behrmann Generally

As previously noted, some Courts of Appeal have held that bankruptcy courts lack the

power to grant nonconsensual third-party releases of the kind approved here. The Fifth, Ninth

and Tenth Circuits prohibit nonconsensual third-party releases. See, e.g., In re Pac. Lumber Co.,

584 F.3d at 251-53; In re Lowenschuss, 67 F.3d at 1401-02; Inre W. Real Estate Fund, Inc., 922

F.2d at 600-02. These Circuits generally base this prohibition on 11 U.S.C. § 524(e), which

states that “discharge of a debt of the debtor does not affect the liability of any other entity on, or

the property of any other entity for, such debt.” See, e.g., In re Pac. Lumber Co., 584 F.3d at 252

(“In a variety of contexts, this court has held that Section 524(e) only releases the debtor, not co-

liable third parties.”) (collecting cases); In re Am. Hardwoods, Inc., 885 F.2d 621, 626 (9th Cir.

1989) (“We therefore conclude that the specific provisions of section 524 displace the court’s

equitable powers under section 105 to order the permanent relief sought by American.”).

Other Circuits have held that bankruptcy courts have the power to impose involuntary

releases, but that such involuntary releases should be imposed in “only rare cases.” See, e.g., In

re Metromedia Fiber Network, Inc., 416 F.3d at 141-43 (holding that involuntary releases should

only be approved if they form an important part of a reorganization plan, and that they are proper

“only in rare cases”); In re Seaside Eng’g & Surveying, Inc., 780 F.3d at 1078 (permitting

releases and bar orders but cautioning that they “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”); Jn re Dow Corning Corp., 280 F.3d at 657-58 (“Because such an

injunction is a dramatic measure to be used cautiously, we follow those circuits that have held

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that enjoining a non-consenting creditor’s claim is only appropriate in ‘unusual

circumstances.””).

The Fourth Circuit has joined the circuits that allow non-debtor releases, but only

“cautiously and infrequently.” Behrmann, 663 F.3d at 712. In Behrmann, the Fourth Circuit

confirmed that it had previously “rejected the notion that 11 U.S.C. § 524(e) forecloses

bankruptcy courts from releasing and enjoining causes of action against nondebtors.” 663 F.3d

at 710 (citing In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989)). It noted that it had “declined

to retreat from this holding” in a subsequent opinion and then, again, rejected as “without merit”

the “blanket assertion that equitable relief in the form of non-debtor releases is never permissible

under the Bankruptcy Code.” /d. In rejecting this blanket assertion, the Fourth Circuit adopted

the Sixth Circuit’s test for approving non-debtor releases outlined in Jn re Dow Corning Corp.

The Fourth Circuit quoted in full from Jn re Dow Corning Corp.:

We hold that when the following seven factors are present, the bankruptcy court

may enjoin a non-consenting creditor's claims against a non-debtor:

(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.

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Behrmann, 663 F.3d at 711-12 (quoting Jn re Dow Corning Corp., 280 F.3d at 658).

Given the dramatic effect of third-party releases and that they are to be approved only in

unique circumstances, “the meaningful exercise of appellate review at a minimum requires that

the court make specific factual findings in support of its decision to grant equitable relief.” Jd. at

712. Ultimately, the Fourth Circuit remanded the case, because the bankruptcy court’s

conclusory statements regarding the factors “[were] meaningless in the absence of specific

factual findings explaining why this is so.” Jd. at 713. Underscoring the point that non-debtor

releases only have a place in unique circumstances, the Fourth Circuit found that the bankruptcy

court’s “conclusions could apply just as well to any number of reorganizing debtors.” Jd.

Therefore, it remanded the case “to set forth specific factual findings supporting its conclusions”

that the debtor’s circumstances entitled it to the non-debtor releases. /d.

Following remand, a different bankruptcy judge found the releases unenforceable and the

district court affirmed the bankruptcy court. Nat’l Heritage Found., Inc. v. Highbourne Found.,

760 F.3d 344, 347 (4th Cir. 2014). The Fourth Circuit affirmed, concluding that the debtor had

“failed to carry its burden of proving that the facts and circumstances of this case justify the

Release Provision.” /d. at 347.

2. The Interrelationship Between Stern and Behrmann

The exacting caution and detailed findings demanded of a bankruptcy court in granting a

non-debtor release in a unique circumstance stems from the constitutional limitations placed on

the bankruptcy court’s jurisdiction. As the Stern analysis demonstrates, the Constitution limits

bankruptcy courts — as non-Article III courts — to adjudicating only matters integral to a

bankruptcy proceeding. In essence, the Behrmann factors task a reviewing court with

determining how integral the releases are to a bankruptcy plan. Indeed, one factor asks the court

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to consider whether the release “is essential to the reorganization” such that the “reorganization

hinges on the debtor being free from indirect suits.” Behrmann, 663 F.3d at 711-12. Another

factor requires that the non-debtor “contributed substantial assets to the reorganization.” /d. at

711. Yet another examines the identity of interests between the debtor and the third party and

the extent to which the suit against the third party would deplete the assets of the estate. Jd.

Clearly, these factors ask the bankruptcy court to determine the extent of the entanglement

between the released claim and the bankruptcy case. Likewise, a bankruptcy court determining

whether it has “core” constitutional authority over a matter looks to the same relationship. See

Allied Title Lending, LLC, 420 F. Supp. 3d at 448 (“A cause of action is constitutionally core

when it ‘stems from the bankruptcy itself or would necessarily be resolved in the claims

allowance process.’”) (quoting Stern, 564 U.S. at 499).

The Third Circuit’s decision in Jn re Millennium Lab Holdings H, LLC illustrates this

connection between the Stern analysis and the Behrmann-type analysis, and stands in stark

contrast to what occurred here. There, the court examined a release in the debtor’s restructuring

agreement that released the debtor’s two primary shareholders from conduct that occurred before

the restructuring agreement. 945 F.3d at 131. Eventually, the bankruptcy court confirmed the

plan that included the releases, over a lender’s objection. /d. at 132. The bankruptcy court and

district court both overruled the lender’s objection that Stern prohibited the confirmation of a

plan releasing its claims, stating that Stern did not apply to plan confirmation proceedings. □□□ at

133. The lender appealed to the Third Circuit.

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On appeal, the Third Circuit affirmed the confirmation, but not because it determined that

Stern did not apply to plan confirmation proceedings.'? Rather, the Third Circuit conducted an

exhaustive discussion of Stern and the limitations that it places on the authority of bankruptcy

courts. Jd. at 133-37. It concluded its discussion as follows:

In sum, Stern teaches that the exercise of “core” statutory authority by a bankruptcy court

can implicate the limits imposed by Article III. Such an exercise of authority is

permissible if it involves a matter integral to the restructuring of the debtor-creditor

relationship. And, in determining whether that is the case, we can consider the content of

the “core” proceeding at issue.

Id. at 137.

Applying those principles, the Third Circuit concluded that the bankruptcy court

possessed constitutional authority to confirm the plan with the releases. Borrowing from its

Stern analysis, the court stated that “the question is whether,” in examining the release provisions

at issue, “the Bankruptcy Court was resolving a matter integral to the restructuring of the debtor-

creditor relationship.” Jd. at 137. Although it did not apply the facts to explicit factors like

courts in the Fourth Circuit must, the court’s reasoning closely resembles the Behrmann factors.

For example, the court relied on the contributions made by the released parties — $325 million

transfers of their equity to the lenders — and how the restructuring could not have occurred

without those contributions. Jd. at 137. The court noted how the releases resulted from

protracted arm’s-length negotiations in exchange for the contributions that allowed the debtor to

continue operating. In short, “[r]estructuring in this case was possible only because of the

release provision.” /d. Ultimately, because the “Bankruptcy Court’s conclusion that the release

provisions were integral to the restructuring was well-reasoned and well-supported by the

12 Indeed, in a footnote, the court acknowledged the appellees’ argument that a bankruptcy

court could always constitutionally confirm a plan. However, it stated that “[w]e have our

doubts about so broad a statement but we do not need to address it to decide this case.” Jd. at

137, n.10.

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record,” the bankruptcy court “was constitutionally authorized to confirm the plan in which those

provisions appeared.” Jd. at 140. But even then, the Third Circuit made clear that the situation

was an outlier. Jd. at 140 (“In short, our holding today is specific and limited. It is that, under

the particular facts of this case, the Bankruptcy Court’s conclusion that the release provisions

were integral to the restructuring was well-reasoned and well-supported by the record.”).

The Third Circuit’s reliance on the detailed factual findings below supporting the releases

underscore the importance of a bankruptcy court fully supporting its basis for approving a non-

debtor release. The detailed factual findings in Jn re Millennium Lab further highlight the lack of

factual findings in this case. Here, the Bankruptcy Court stated in conclusory fashion that the

Third-Party Releases were integral to the Plan, but it based this only on the fact that the Plan

stated as much. Thus, instead of making detailed factual findings as to whether unique

circumstances warranted the inclusion of non-debtor releases, the Bankruptcy Court abdicated

this crucial function to the negotiators of the Plan — the very negotiators who stood to benefit

from the Releases. However, the Bankruptcy Court cannot delegate to private citizens the

determination of whether a court has the constitutional power to approve the releases. Thus, the

Bankruptcy Court’s lack of explanation constitutes clear error, in addition to erring both factually

and as a matter of law in its determination that the parties’ consent obviated the need to conduct

the Behrmann analysis, as explained below.

3. Consent and the Behrmann Analysis

Debtors argue that Behrmann does not apply to consensual releases (Appellee Br. at 60),

whereas the Trustee argues that consent does not obviate the need to conduct the Behrmann

analysis. (Trustee Br. at 24.) Aside from adopting the Sixth Circuit’s approach for

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nonconsensual releases, the Fourth Circuit has not spoken directly on whether the Behrmann

analysis applies to consensual releases. Again, courts around the country have split on the issue.

Several courts have found that a party can consent to a third-party release and eliminate

the need for a Behrmann analysis. For example, the Seventh Circuit has noted approvingly that

“courts have found releases that are consensual and non-coercive to be in accord with the

strictures of the Bankruptcy Code.” Jn re Specialty Equip. Cos., Inc., 3 F.3d 1043, 1047 (7th Cir.

1993). Likewise, the United States Bankruptcy Court for the District of Maryland distinguished

consensual releases from those requiring a Behrmann analysis, because “[i]t is well recognized

that, where the application of the Dow Corning or other applicable factors leads to the conclusion

that the third party releases should not be approved, the court can nevertheless approve the

releases with the consent of the releasing parties.” Jn re Neogenix Oncology, Inc., 508 B.R. 345,

361 (Bankr. D. Md. 2014). The Second Circuit has also indicated that “[nJondebtor releases may

also be tolerated if the affected creditors consent.” Jn re Metromedia Fiber Network, Inc., 416

F.3d at 142. Similarly, the Northern District of Texas has noted that “[m]ost courts allow

consensual nondebtor releases to be included in a plan.” Jn re Wool Growers Cent. Storage Co.,

371 B.R. 768, 775 (Bankr. N.D. Tex. 2007).

a. Failing to Opt Out Does Not Rise to the Level of Consent

Required to Obviate Behrmann.

Even if consent can obviate the need for a Behrmann analysis, the level of consent

required to eliminate the need for a Behrmann-type analysis varies. Debtors contend that failing

to opt out of a release evidences consent to that release. (Appellee Br. at 41.) The Trustee

argues that the Bankruptcy Court erred in finding that this type of implied consent suffices.

(Trustee Br. at 24.) The Court agrees with the Trustee as a matter of law and as a matter of fact

(as previously determined).

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The Fourth Circuit does not appear to have spoken on the issue of whether implied

consent can give rise to a consensual non-debtor release. See In re Neogenix Oncology, Inc.,

2015 WL 5786345, at *5 (Bankr. D. Md. Oct. 1, 2015) (“The Fourth Circuit has not expressly

faced the issue presented here, whether a ‘consensual’ third party release must be express or

whether implied consent can be sufficient.”). Other courts have diverged on whether implied

consent can suffice for a release.

Some courts, like the District of New Jersey, look to the principles of contract law rather

than the bankruptcy court’s confirmation authority to conclude that the validity of the releases

requires affirmative consent. For example, in Jn re Congoleum Corp., the court determined that

a creditor must have “unambiguously manifested assent to the release of the nondebtor from

liability on its debt.” 362 B.R. 167, 194 (Bankr. D.N.J. 2007). Likewise, in Jn re Arrowmill

Development Corp., the court held that it was “not enough for a creditor to abstain from voting

for a plan, or even to simply vote ‘yes’ as to a plan.” 211 B.R. 497, 507 (Bankr. D.N.J. 1997).

Yet, other courts have found that a creditor must individually consent by voting in favor

of the plan. In In re Coram Healthcare Corp., the court stated that “to the extent creditors or

shareholders voted in favor of the Trustee’s Plan, which provides for the release of claims they

may have against the Noteholders, they are bound by that.” 315 B.R. 321, 336 (Bankr. D.Del.

2004). Likewise, in Jn re Washington Mutual, Inc., the court found the opt-out mechanism in the

plan insufficient to support the third-party releases with respect to the parties who did not return

a ballot. 442 B.R. 314, 355 (Bankr. D. Del. 2011).

However, other courts have determined that failure to return a ballot constitutes consent

to a third-party release when the creditor received notice of implications of releasing parties. For

example, in In re Indianapolis Downs, LLC, the court found that providing an opportunity to opt

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out along with detailed instructions for how to opt out warranted approval of the releases. 486

B.R. 286, 305-06 (Bankr. D. Del. 2013). However, the court allowed the “deemed” acceptance

by the unimpaired creditors, because “these creditors are being paid in full and have therefore

received consideration for the releases.” Jd. at 305. Likewise, in Jn re Sponsion, Inc., the court

found that parties who had accepted the plan and not opted-out would be bound by the release.

426 B.R. 114, 144 (Bankr. D. Del. 2010).

Still, other courts have allowed implied consent releases. In Jn re DBSD North America,

Inc., the court approved third-party releases when the releasing parties received adequate notice

of the release and they had an opportunity to opt out of the release. 419 B.R. 179, 218-19

(Bankr. $.D.N.Y. 2009); see also In re Calpine Corp., 2007 WL 4565223 (Bankr. 8.D.N.Y. Dec.

19, 2007) (“[parties] choosing not to opt out of the releases were given due and adequate notice

that they would be granting the releases by acting in such a manner”). Similarly, in Jn re

Conesco, Inc., the court found that impaired creditors who did not opt out had impliedly

consented to the releases. 301 B.R. 525, 527-28 (Bankr. N.D. Ill. 2003).

Debtors advance this last approach by comparing the opt-out provisions to contract law

and class action procedures. (Appellee Br. at 65.) However, both comparisons cut sharply

against their argument.

i. Contract Law Does Not Support Consent by Failure to Opt Out.

First, contrary to Debtors’ statement that “actual principles of contract law have long

provided that the manifestation of assent may be made wholly by failure to act” (Appellee Br. at

65), black letter contract law dictates otherwise. See Meekins v. Lakeview Loan Servicing, LLC,

2020 WL 1922765, at *4 (E.D. Va. Apr. 21, 2020) (“A party’s silence, however, is insufficient to

show its intention to be bound by the terms of a contract.”) (quotations omitted). Indeed, in one

of the cases cited by Debtors for its acceptance-by-silence proposition, the First Circuit stated,

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“it’s basic contract law that an offeror cannot unilaterally impose on another party the obligation

to respond and reject their offer.” Rivera-Colon v. AT&T Mobility Puerto Rico, Inc., 913 F.3d

200, 211 (1st Cir. 2019) (citing 1 Corbin on Contracts § 3.19 (2018) (“It should here be plainly

set forth that an offeror has no power to cause the silence of the offeree to operate as an

acceptance when the offeree does not intend it to do so.”); 2 Williston on Contracts § 6:50 (4th

ed. 1993) (“Merely sending an unsolicited offer does not impose upon the party receiving it any

duty to speak or deprive the party of its privilege of remaining silent without accepting.”’)).

Limited exceptions to this rule exist, such as previous dealings or when an offeror gives the

offeree reason to believe that silence or inaction will manifest assent, and the offeree remains

silent or inactive with the intent to accept the offer. Restatement (Second) of Contracts

§ 69(1)(b). However, neither Debtors nor the Bankruptcy Court identified any facts that would

support the application of an exception to the general rule of contracts that silence cannot

manifest assent. Nor does the record reveal any such facts. Indeed, the Court has already found

as a matter of fact that consent did not occur. Accordingly, any attempt to claim that contract

law supports a finding of consent to third-party releases based on inaction rings hollow.

ii. Class Action Law Does Not Support Finding Consent by Failing

to Opt Out.

Likewise, Debtors’ comparison to class actions falls short of providing support of their

contention that a failure to opt out constitutes consent to the releases. In fact, the comparison to

class action litigation highlights the impropriety of finding releases consensual based merely on a

failure to opt out. True, as noted by Debtors, courts (notably, Article IIT judges) may bind absent

class members to a judgment so long as they provide them notice of the action and the

opportunity to either opt out or participate. Phillips Petroleum Co. v. Shutts, 472 U.S. 797

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(1985). But to do so, courts must ensure that the class action complies with the unique

requirements of Rule 23 of the Federal Rules of Civil Procedure.

Importantly, Rule 23(a), in relevant part, allows an individual to sue on behalf of other

class members only if he will “fairly and adequately protect the interests of the class” and his

claims “are typical of the claims or defenses of the class.” Fed. R. Civ. P. 23(a)(3)-(4). Further,

the class must be specifically defined to identify the class members and the class claims. Fed. R.

Civ. P. 23(c)(1)(B). Moreover, the court must appoint class counsel that can best “represent the

interests of the class.” Fed. R. Civ. P. 23(g). Indeed, the court must appoint class counsel to

represent the class, as pro se litigants cannot represent absent class members. See Oxendine v.

Williams, 509 F.2d 1405, 1407 (4th Cir. 1975) (“Ability to protect the interests of the class

depends in part on the quality of counsel, and we consider the competence of a layman

representing himself to be clearly too limited to allow him to risk the rights of others.”) (internal

citations omitted). And, the presiding court bears responsibility for ensuring compliance with all

of the above requirements. Most, if not all, of these requirements become heavily litigated

throughout the life of a class action.

None of these protections exist in the context of a non-debtor release in a bankruptcy

action. First and foremost, no party litigates on behalf of the absent releasing party. No party

with a typical claim has a duty to ensure that he fairly and adequately represents the best interests

of the absent releasing party. Moreover, the absent releasing party does not enjoy counsel that

will represent his best interests in his stead. Indeed, the facts of this case highlight that

distinction. The Bankruptcy Court expressly rejected the ability of certain absent releasing

parties to have a party and counsel represent their best interests. Yet, the Bankruptcy Court still

sought to extinguish their claims.

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Similarly, and importantly, any class settlement that would bind absent class members

requires court approval. Fed. R. Civ. P. 23(e). After giving notice to all class members of the

proposed settlement, the court may only approve the settlement “after a hearing and only on

finding that it is fair, reasonable, and adequate” taking into account whether “(A) the class

representatives and class counsel have adequately represented the class; (B) the proposal was

negotiated at arm’s length; (C) the relief provided for the class is adequate; and (D) the proposal

treats class members equitably relative to each other.” Fed. R. Civ. P. 23(e)(2). “The inquiry

appropriate under Rule 23(e) . . . protects unnamed class members from unjust or unfair

settlements affecting their rights... .” Amchem Prod., Inc. v. Windsor, 521 U.S. 591, 623

(1997) (internal quotations omitted). And it is an Article III judge, acting with all of their

powers and protections as described in Stern, that approves the settlement.

Conversely, if mere failure to opt out obviates the need to conduct a Behrmann analysis,

then no court carries an obligation to ensure the fairness, reasonableness and adequacy of the

relief afforded the absent releasing parties. The Behrmann analysis at least provides some

oversight that resembles the scrutiny given by a court to class settlement under Rule 23, even if it

falls short of ensuring that the release of the claims is fair, reasonable and adequate. Again, the

facts of this case highlight the need for scrutiny of what Debtors call a “settlement” of the

released claims. No court would find this “settlement” fair, reasonable and adequate under Rule

23, as application of those factors demonstrate. No party or counsel represented the interests of

the class, much less represented them adequately. The settlement of the released claims did not

result from any negotiation with the Releasing Parties, much less one that occurred at arm’s

length. Instead, it appears that negotiations only occurred between the individuals and entities

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that would benefit from releases in an effort to shield themselves from any liability, not those

who would confer the benefit in exchange for some other benefit.

Along those lines, the settlement of the released claims provides no relief to the

Releasing Parties, much less adequate relief. The fact that the Releasing Parties also receive a

release provides nothing more than illusory consideration. The Court cannot envision a potential

claim that a former officer or director of Debtors could have against a former shareholder that

would give a mutual release any real value. Indeed, the Court has already found as a matter of

fact that the mutual release lacked any value and was purely fictional.

The protections provided to absent class members under Rule 23 highlight the lack of

protections provided to absent releasing parties in this context. Moreover, the comparison to

class actions also demonstrates the due process issues that result from releasing a claim based

only on the failure to opt out.

b. Releasing These Claims Raises Serious Due Process Concerns.

Third-party releases in bankruptcy actions based only on a failure to opt out also raise

serious due process concerns, because they lack the critical due process protections of Rule 23.

See Bell v. Brockett, 922 F.3d 502, 511 (4th Cir. 2019) (“Rule 23’s adequacy requirements

provide critical safeguards against the due process concerns inherent in all class actions.”). In

the seminal case on due process in class actions, the Supreme Court held that when “a fully

descriptive notice is sent [by] first-class mail to each class member, with an explanation of the

right to ‘opt out,’ [that procedure] satisfies due process” even if the absent class member would

be bound absent an affirmative opt in. Shutts, 472 U.S. at 812.

However, the Supreme Court’s basis for this holding underscores the lack of due process

present here. First, “[t]he notice must be the best practicable, reasonably calculated, under all

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circumstances, to apprise interested parties of the pendency of the action and afford them an

opportunity to present their objections.” /d. at 812 (quotations omitted). Second, the “notice

should describe the action and the plaintiffs’ rights in it.” Jd. Third, “an absent plaintiff [must]

be provided with an opportunity to remove himself from the class by executing and returning an

‘opt out’ or ‘request for exclusion’ form to the court.” /d. Fourth, “the Due Process Clause of

course requires that the named plaintiff at all times adequately represent the interests of the

absent class members.” /d.

In this case, the Third-Party Releases fail three of the four elements required to afford due

process. First, the Bankruptcy Court found the notice “sufficient.” (Bankr. Confirm. Op. at 31.)

But, “sufficient” falls short of the “best practicable, reasonably calculated” standard set forth by

the Supreme Court. Although the Court will not now fully undertake the analysis of whether the

notice constituted the “best practicable, reasonably calculated” notice “under the circumstances,”

it seems unlikely that the notice would meet that higher standard. Second, the notice did not

describe the released claims or the rights given up by the absent Releasing Parties. Nor did it

mention the only purported benefit (the illusory “mutual release”) to the Releasing Parties as

consideration for their release. Describing the bankruptcy action and generally stating that the

absent party would release all claims does not identify the specific claims subject to release. It

does not “describe the action and the plaintiffs’ rights in it.” The notice satisfies the third

element of providing the absent Releasing Parties the opportunity to opt out. Finally, as

discussed above, the absent class members had no one to adequately represent their interests.

Accordingly, allowing the release of claims based only on the failure to opt out does not comport

with due process.

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In conclusion, the Court finds that the Bankruptcy Court erred both factually and legally

in finding the Third-Party Releases to be consensual. Failure to opt out, without more, cannot

form the basis of consent to the release of a claim. Whether the Court labels these

“nonconsensual” or based on “implied consent” matters not, because in either case there is a lack

of sufficient affirmation of consent. See In re Neogenix Oncology, Inc., 2015 WL 5786345, at

*6 (“Behrmann provides sufficient guidance on whether a court should approve a release for

which there is insufficient affirmation of consent, whether the release is said to be

‘nonconsensual’ or based on ‘implied consent.’”). And, it bears emphasizing again that Debtors’

argument about consent focuses only on the pending securities fraud case in the District of New

Jersey, which constitutes only the tip of the release iceberg, as the Third-Party Releases cover far

more than a single case against two former officers. No argument about consent can be raised

about all of the other Releasing Parties that the Bankruptcy Court never even considered.

Accordingly, the mandates of Behrmann unquestionably apply, and the Bankruptcy Court

should have conducted the Behrmann analysis to determine if this case constitutes the rare case

warranting such third-party releases.

4. The Bankruptcy Court’s Error in Failing to Conduct a Behrmann

Analysis

Behrmann commands that a bankruptcy court may only grant nonconsensual non-debtor

releases “cautiously and infrequently.” Behrmann, 663 F.3d at 712. Because only cases with

unique circumstances warrant granting such releases, a bankruptcy court must make “specific

factual findings” demonstrating why the debtor’s circumstances entitle it to the benefit of the

releases. Id. at 712-13.

Here, the Bankruptcy Court failed to conduct any Behrmann analysis, precluding any

meaningful appellate review. Indeed, the Bankruptcy Court addressed the Behrmann factors in a

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single footnote — again, a single footnote — that merely said: “were the Behrmann factors

applicable to the Third-Party Releases, the Court would find the Behrmann factors were satisfied

for the reasons stated in the Debtors’ Memorandum of Law ....” (Bankr. Confirm. Op. at 38,

n.28). It should be obvious that a court may not satisfy its judicial responsibilities by simply

incorporating by reference a party’s brief. Cuthbertson v. Biggers Bros., 702 F.2d 454, 458 (4th

Cir. 1983) (“We have previously condemned the practice of adopting the prevailing party’s

proposed findings of facts and conclusions of law, and we repeat that admonition here.”). As the

Third Circuit reminded in Bright v. Westmoreland County, 380 F.3d 729 (3d Cir. 2004):

Judicial opinions are the core work-product of judges. They are much

more than findings of fact and conclusions of law; they constitute the logical and

analytical explanations of why a judge arrived at a specific decision. They are

tangible proof to the litigants that the judge actively wrestled with their claims

and arguments and made a scholarly decision based on his or her own reason and

logic. When a court adopts a party’s proposed opinion as its own, the court

vitiates the vital purposes served by judicial opinions.

Id. at 732. And such a cursory consideration of the Behrmann factors disregards the Fourth

Circuit’s command to limit the use of third-party releases to the exceptional case warranting

them.

Moreover, the vast Third-Party Releases broadly release a wide variety of claims, against

a wide variety of individuals, held by a wide variety of individuals. The variety of claims

released here necessarily means that the specific factual findings supporting the propriety of

releasing each type of claim will also vary. Accordingly, the Court cannot conduct meaningful

appellate review as a result of the Bankruptcy Court’s failure to address that which has been

released, setting forth the specific factual findings for each type of claim released. Meaningful

review requires detailed findings of fact by the Bankruptcy Court. That did not happen here.

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Indeed, the only identified claims released in this appeal are those against the Individual

Defendants (Jaffe and Giammatteo) as asserted in the putative class action filed in the District of

New Jersey. Yet, by way of example, they demonstrate the Third-Party Releases’ inability to

meet the Behrmann factors. A brief examination of the Behrmann factors as applied to these

claims follows.

a. Identity of Interests

Under the first factor, “a court must consider whether there is an identity of interests —

usually an indemnity obligation — between the debtor and the released parties,” such that the

“suit against the non-debtor may, in essence, be a suit against the debtor that risks depleting the

assets of the estate.” Nat'l Heritage Found., Inc., 760 F.3d at 348 (cleaned up). Debtors claim

that they had an indemnification obligation to the Individual Defendants. (Appellee Br. at 78-

79.) But, Debtors have essentially liquidated and, therefore, it remains uncertain whether

Debtors have a continuing indemnification obligation to the Individual Defendants. Moreover,

the Court agrees with the Third Circuit’s view in Jn re Continental Airlines:

We conclude that granting permanent injunctions to protect non-debtor parties on

the bases of theoretical identity of interest alone would turn bankruptcy principles

on their head. Nothing in the Bankruptcy Code can be construed to establish such

extraordinary protection for non-debtor parties.

203 F.3d at 217. Consequently, this factor does not weigh in favor of the releases.

b. Substantial Contribution

The second factor requires Debtors “to demonstrate that the Released Parties made a

substantial contribution of assets to its reorganization.” Nat’! Heritage Found., Inc., 760 F.3d at

348. The record does not support that the Individual Defendants made any financial contribution

to the reorganization or any other contribution. Indeed, the Court has already made a factual

finding that the Individual Defendants played no role in the reorganization (they had already left

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Debtors’ employment) and their releases were not integral to the reorganization. The fact that

they also provided releases to Debtors does not amount to a “substantial contribution of assets,”

especially given the illusory nature of the releases. Even if it could, the record does not support

that the releases provided by the Individual Defendants could amount to a contribution of

substantial assets. Accordingly, this factor weighs heavily against granting the release.

Cc. Essential to the Reorganization

To satisfy the third factor, “a debtor must demonstrate that the non-debtor release is

essential to its reorganization, such that the reorganization hinges on the debtor being free from

indirect suits against parties who would have indemnity or contribution claims against the

debtor.” /d. As an initial matter, Debtor largely liquidated, rather than reorganized. This alone

cuts against the essential nature of the releases. The third and final asset sale transaction closed

on December 23, 2020 — well before confirmation of the Plan. That the deals closed and the

assets changed hands well before any release was finalized or went into effect demonstrates that

the Plan does not hinge on the inclusion of the releases.

Moreover, the record does not reveal that the Plan would be doomed if the Individual

Defendants did not obtain a release. Indeed, as previously noted, the releases of the Individual

Defendants were not integral to the reorganization. And, the Court cannot discern any reason

why a lack of release for the Individual Defendants would prove fatal to the implementation of

the Plan. Accordingly, this factor also weighs heavily against granting the release.

d. Approval by the Affected Class

The fourth factor requires Debtor “to prove that the class or classes affected by the

Release Provision overwhelmingly voted in favor of the Plan.” /d. at 350. Here, the Class

Members, as a class receiving nothing under the Plan, were deemed to reject the Plan as a matter

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of law. 11 U.S.C. § 1126(g). Debtors claim that the small number of opt outs satisfy this prong.

However, for the reasons stated above, the Court gives little weight to the failure to opt out of the

Plan and will not view it as analogous to an affirmative vote in favor of the Plan. Therefore, this

factor also weighs heavily against the release.

e. Mechanism to Pay Substantially All of the Class Affected

Under the fifth factor, the court considers “whether the debtor’s reorganization plan

provides a mechanism to consider and pay all or substantially all of the class or classes affected

by the non-debtor release.” Jd. at 350. Here, the Plan does not create a separate fund to pay the

claims released or provide any other mechanism to consider or pay the securities claims. Indeed,

the Third-Party Releases are so broad that there has been no effort to even discern the full extent

of the claims. Because the Plan extinguishes these claims entirely without giving any value in

return, this weighs strongly against granting the Release. See id. at 351 (concluding that “the

absence of such a [channeling fund] can weigh against the validity of a non-debtor release,

especially when the result is that the impacted class’s claims are extinguished entirely”).

f. Opportunity to Recover

The final substantive factor “is whether the plan provides an opportunity for those who

chose not to settle to recover in full.” /d. at 351. Here, the Plan provides the class members an

opportunity to opt out of the Release and pursue the Securities claims. However, given the

deficient notice, the Court has already found that here, as a matter of fact, notice did not occur.

Accordingly, this factor also weighs against granting the Release.

In sum, the Behrmann factors clearly weigh against releasing the Individual Defendants

from liability in the Securities Claims. As with the Stern analysis, these claims have no

meaningful connection to the bankruptcy case. Indeed, the Court has already made a factual

finding that these releases were not integral to the Plan. Therefore, they do not implicate the

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unique circumstances that would warrant a bankruptcy court — or, at least one that grants non-

debtor releases only cautiously and infrequently — to release these claims as part of the

bankruptcy proceedings. Debtors’ claim that “virtually every confirmed plan in every complex

bankruptcy case [in the Eastern District of Virginia] includes consensual third-party release

provisions of this variety” (Appellees’ Br. at 8), harms, rather than helps, its argument. That the

Bankruptcy Court grants such non-debtor releases as a matter of course, rather than “cautiously

and infrequently” and only when warranted by unique circumstances, underscores the lack of

specific factual findings supporting the releases here.

For these reasons, the Bankruptcy Court clearly erred in finding that the releases satisfied

the Behrmann factors. Consequently, the Third-Party Releases must be voided and rendered

unenforceable. The Court will now turn to the impact on the Plan of the voiding of the Third-

Party Releases and whether the voided releases may be severed from the Plan.

E. Severability

The Court finds that it can sever the unenforceable releases from the Plan. Debtors argue

that the nonseverability provision renders the Third-Party Releases nonseverable from the Plan.

(Appellee Br. at 34-35.) The provision relied upon by Debtors follows in its entirety:

If, before Confirmation, any term or provision of the Plan is held by the

Bankruptcy Court to be invalid, void, or unenforceable, the Bankruptcy Court

shall have the power to alter and interpret such term or provision to make it valid

or enforceable to the maximum extent practicable, consistent with the original

purpose of the term or provision held to be invalid, void, or unenforceable, and

such term or provision shall then be applicable as altered or interpreted.

Notwithstanding any such holding, alteration, or interpretation, the remainder of

the terms and provisions of the Plan will remain in full force and effect and will in

no way be affected, impaired, or invalidated by such holding, alteration, or

interpretation. The Confirmation Order shall constitute a judicial determination

and shall provide that each term and provision of the Plan, as it may have been

altered or interpreted in accordance with the foregoing, is: (1) valid and

enforceable pursuant to its terms; (2) integral to the Plan and may not be deleted

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or modified without the Debtors’ or the Reorganized Debtors’ consent, as

applicable; and (3) nonseverable and mutually dependent.

(the “Nonseverability Provision”) (USTAPP 2528).) Boiled down to its essence, the Plan

explicitly provides that the Bankruptcy Court could sever any provision before confirmation

without it affecting the rest of the Plan, but following confirmation all provisions are integral and

only the Debtors can consent to severance of a particular provision. It does not explain why each

provision becomes integral only upon confirmation.

As explained above, after having found a Stern violation and vacated the Confirmation

Order, the Plan now comes before the Court under Rule 8018.1 “as proposed findings of fact and

conclusions of law.” Therefore, the Court steps into the shoes of the Bankruptcy Court in terms

of the Nonseverability Provision. That is, the first half of the Nonseverability provision remains

the operative provision, and the Plan itself has not declared the Third-Party Releases

nonseverable. Consequently, the Plan provides that the Court should sever the voided Third-

Party Releases from the Plan. And the Court will do so. However, just as the Court would not

find the Third-Party Releases nonseverable after confirmation based only on the boilerplate

Nonseverability Provision, it will not rely solely on the Nonseverability Provision to find the

provisions severable now that the Plan returns to the pre-confirmation phase. Instead, the Court

will analyze the law surrounding severability and the record to determine that it can sever these

Third-Party Releases that lack any connection to the reorganization.

1. The Nonseverability Provision’s Textual Support for Severability

As described above, the Nonseverability Provision provides that, before confirmation, the

Plan remains in full effect in the event that the Bankruptcy Court finds any provision

unenforceable. Having now vacated the Confirmation Order, the Court steps into the shoes of

the Bankruptcy Court before confirmation, when the parties agreed that the Third-Party Releases

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could be severed. Yet, Debtors maintain that the Nonseverability Provision reinforces that the

Third-Party Releases carry too much import in the Plan for it to survive without the Releases.

However, the contradictory text and operation of the Nonseverability Provision belies the

argument that the Plan cannot survive without the Third-Party Releases. The Nonseverability

Provision expressly provides that, before confirmation, the Bankruptcy Court could find the

Third-Party Releases (or any provision) unenforceable, as the Court is now doing. In the event

of such a holding, the Plan would “in no way be affected, impaired, or invalidated.” The fact

that the Plan would have survived if the Bankruptcy Court had severed the Third-Party Releases

just before confirmation, without any further changes, demonstrates that the Third-Party

Releases are not inextricably tied to the rest of the Plan. Therefore, just as the Bankruptcy Court

could sever the Third-Party Releases before confirmation, this Court can sever the Third-Party

Releases after vacating the Confirmation Order.

Likewise, the Nonseverability Provision provides that a provision of the Plan can be

deleted with Debtors’ consent. Again, this demonstrates that the Plan could survive in the

absence of any particular provision. Debtors attempted to reserve for themselves the right to

sever provisions of the Plan — without the consent of any other affected parties — while arguing

here that the Court lacks the same authority to sever legally unenforceable provisions. This

confirms that the Nonseverability Provision amounts to nothing more than a hollow attempt to

evade judicial review of the Third-Party Releases. The negotiating parties here have attempted

to release a wide variety of claims of a wide variety of absent and nonconsenting individuals and

then use a boilerplate Nonseverability Provision to constrain Article III review of those releases.

The Court cannot let such gamesmanship occur. Therefore, the Court will look to the record in

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determining that the releases do not form an integral part of the Plan and, consequently, the

Court may sever this provision without upending the entire Plan.

2. The Importance of the Provision to the Plan’s Determination of

Severability

In determining severability, courts must look to the evidence in the record and not simply

whether the parties state in a conclusory fashion that the provision cannot be severed. As the

Second Circuit has explained, “normally a nonseverability clause standing on its own cannot

support a finding of equitable mootness.” Jn re Charter Commc’ns, Inc., 691 F.3d 476, 485 (2d

Cir. 2012). The Second Circuit’s reasoning in the equitable mootness context provides sound

guidance in examining severability generally. The Second Circuit explained that “[a]llowing a

boilerplate nonseverability clause, without more, to determine the equitable mootness question

would give the debtor and other negotiating parties too much power to constrain Article III

review,” and would “moot virtually every appeal where a stay had not been granted.” Jd.

Importantly, “[w]hile a nonseverability clause may be one indication that a particular term was

important to the bargaining parties, a district court cannot rely on such a clause to the exclusion

of other evidence.” /d.

The Second Circuit ultimately found the release provisions nonseverable, but only

because courts below “did not rest [their] decision exclusively on the nonseverability clause.”

Id. at 486. Instead, it relied on specific testimony regarding the importance of the releases. Id.

This included an examination of how the releases induced a specific released party to settle and

an explanation of why the plan required that released party’s contribution. Jd. The court relied

on evidence that “these provisions could not be excised without seriously threatening Charter’s

ability to re-emerge successfully from bankruptcy,” because the parties would need to reenter

negotiations. /d.

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Other circuits, including the Fourth Circuit, have followed a similar approach in looking

to the facts to determine severability. For example, in Behrmann, the Fourth Circuit rejected the

equitable mootness argument based not only on a severability provision, but also on the absence

of any factual support that the releases “[were] important to the overall objectives of the Plan” as

argued. 663 F.3d at 714. The debtor had “failed to demonstrate how the relief requested by

Appellants would jeopardize the success of the Confirmed Plan.” Jd. After explaining that the

importance of the releases to the overall plan lacked factual support, the Fourth Circuit “also

note[d]” the existence of a severability provision — allowing provisions to be severed, like the

posture here now — “suggests that the plan would remain viable absent the Release Provisions.”

Id. Thus, the Fourth Circuit relied on the facts to determine the importance of a provision to the

plan, not just the provisions in the plan addressing severability.

Similarly, in the Jn re Continental Airlines case, the Third Circuit rejected an argument as

to the essential nature of third-party releases to a plan where the debtors presented “[n]Jo

evidence or arguments . . . that Plaintiffs’ appeal, if successful, would necessitate the reversal or

unraveling of the entire plan of reorganization.” 203 F.3d at 210. It explained that the debtors

had provided no evidence that “investors and creditors, in deciding whether to support the

Continental Debtors’ plan, ever considered Plaintiffs’ claims.” Jd. The Third Circuit ultimately

invalidated the releases. Jd. at 217-18.

3. Other Areas of the Law’s Support for Focusing on the Provision’s

Importance to the Plan

This focus on the overall importance of the provision proposed to be severed finds

support in other areas of severability. For example, when confronted with an unconstitutional

provision in a statute, courts typically “sever[] any problematic portions while leaving the

remainder intact.” Free Enter. Fund v. Pub. Co. Acct. Oversight Bd., 561 U.S. 477, 508 (2010).

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This presumption operates in the presence or absence of a severability provision. See Barr v.

Am. Ass'n of Pol. Consultants, Inc., 140 S. Ct. 2335, 2352-53 (2020) (“Even if the severability

clause did not apply to the government-debt provision at issue in this case (or even if there were

no severability clause in the Communications Act), we would apply the presumption of

severability as described and applied in cases such as Free Enterprise Fund. And under that

presumption, we likewise would sever the 2015 government-debt exception, the constitutionally

offending provision.”).

With this presumption in mind, courts look to the importance of the provision to the

overall statute. “The more relevant inquiry in evaluating severability is whether the statute will

function in a manner consistent with the intent of Congress.” Alaska Airlines, Inc. v. Brock, 480

U.S. 678, 685 (1987). Indeed, if “the unconstitutionality of a part of an Act does not necessarily

defeat or affect the validity of its remaining provisions,” then courts will invalidate only the

unconstitutional portion. Free Enter. Fund, 561 U.S. at 508. Thus, courts look to whether

severing the offending provision would upend the entire statute and, if not, they default to

severing the provision.

Likewise, contract law supports looking to the overall importance of the unenforceable

provision. As the Fourth Circuit has described Virginia contract law: “Generally, when a

contract covers several subjects, some of whose provisions are valid and some void, those which

are valid will be upheld if they are not so interwoven with those illegal as to make divisibility

impossible.” Alston Studios, Inc. v. Lloyd V. Gress & Assocs., 492 F.2d 279, 285 (4th Cir. 1974).

Similarly, “Delaware law is clear that an invalid term of an otherwise valid contract, if severable,

will not defeat the contract. Thus, a court will enforce a contract with an indefinite provision if

the provision is not a material or essential term.” VICI Racing, LLC v. T-Mobile USA, Inc., 763

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F.3d 273, 284-85 (3d Cir. 2014) (cleaned up). Thus, when faced with an unenforceable

provision in a contract, courts will look to whether severing the provision will upset the entire

contract.

4. The Evidence in This Case Supports Severing the Third-Party

Releases

Applying these principles, the Court finds that severing the Third-Party Releases at this

stage would not upset the viability of the Plan. In fact, the evidence demonstrates otherwise.

Indeed, Carrie Teffner testified that, as of February 22, 2021, “Debtors have sold substantially all

of their assets and all that remains is to distribute cash proceeds in accordance with the terms of

the plan.” (Teffner Decl. | 30.) To that end, the three main sales of the assets had all closed

months before the confirmation hearing. No evidence exists that severing the Third-Party

Releases would upset these already-closed sales, require Debtors to return any of the funds

generated by the sales or disrupt the distribution of the cash proceeds.

Teffner further testified that the various release provisions “are the product of extensive

good faith, arm’s-length negotiations and were material inducements for the parties to enter into

the comprehensive settlement embodied in the plan.” (Teffner Decl. § 41.) Yet, this “arm’s-

length” negotiation occurred without the Releasing Parties having a seat at the negotiating table.

Teffner admitted as much during cross-examination during the Confirmation hearing. (Confirm.

Tr. at 23:1-10.) Moreover, she did not describe how the releases operated as a material

inducement for the parties to enter into the settlement, especially given that many of the parties

did not enter into the settlement. Instead, she testified that it was the Debtors, not third parties,

who sought the broad releases. (Confirm. Tr. at 36:1-4.) Again, she admitted as much on cross-

examination. (Confirm Tr. at 23:21-24:2.) In fact, she admitted that with respect to her

statement regarding the material inducement, “the third-party releases were addressed in totality

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with no specific individuals called out.” (Confirm. Tr. 23:25-24:2.) The Court cannot agree that

the Third-Party Releases provided a material inducement to such a broad array of individuals

without examining the inducemen

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