# Retail Group, Inc.

> United States Bankruptcy Court, E.D. Virginia · January 18, 2022

URL: https://www.frixlaw.com/law-library/cases/10463135

## Case

- **Court:** United States Bankruptcy Court, E.D. Virginia
- **Decided:** January 18, 2022
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

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

Page 2 of 87

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).
Page 3 of 87

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.)
Page 4 of 87

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.

Page 5 of 87

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.
Page 6 of 87

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

Page 7 of 87

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”):

Page 8 of 87

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
Page 9 of 87

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:

Page 10 of 87

[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

Page 12 of 87

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.).
Page 13 of 87

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.

Page 14 of 87

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.

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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.

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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,

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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”)).

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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.
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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.

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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 typica

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10463135. Public record. Not legal advice.