Reorganization Plan Releases Employers’ Non-Debtor Affiliates From NLRB Backpay Liabilty

By Peter D. DeChiara

pdechiara@cwsny.com

Posted March 2014

Section 524(e) of the Bankruptcy Code provides that the discharge of a debtor does not affect the liability of any other entity.  So is it contrary to Section 524(e) to have an employer’s Chapter 11 plan of reorganization release from NLRB backpay liability certain corporate affiliates of the employer that were not themselves in the Chapter 11 case?  In a March 2014 decision, the bankruptcy court for the District of New Jersey said such releases were permissible when the corporate affiliates were making financial contributions that were critical to the plan of reorganization.  See In re 710 Long Ridge Road Operating Company, Case No. 13-13653 (Bankr. D.N.J. March 5, 2014).

The Chapter 11 case in 710 Long Ridge Road grew out of a bitter labor dispute between District 1199, SEIU and five affiliated nursing home operators in Connecticut, a dispute that included failed contract negotiations, a strike and the hiring of permanent replacements.  The NLRB,  which charged the companies with unlawfully imposing their final contract offer before reaching bargaining impasse with the union, obtained a preliminary injunction requiring reinstatement of the replaced strikers and of the expired labor contract pending outcome of the unfair labor practice case.  Faced with this injunction, the companies sought refuge in Chapter 11.  In the bankruptcy case, the union and the Labor Board both filed claims for backpay and other relief related to the unfair labor practice proceedings.

The debtors’ plan of reorganization put the labor claims in a separate class and proposed some partial funding for them, funding that was to come from the ultimate parent company of the debtors and from another corporate affiliate.  The plan also contained a third-party release discharging from all liability these corporate affiliates, as well as the managers, directors and officers of the debtors and of the corporate affiliates.  In the plan confirmation hearing, the union and the NLRB claimed that these third party releases violated Section 524(e).

Bankruptcy judge Donald Steckroth began his analysis by noting that certain circuits – the Fifth, Ninth and Tenth – read Section 524(e) as prohibiting third-party releases, period.  Judge Steckroth explained that no such prohibition exists in the Third Circuit, where bankruptcy courts assess the validity of third-party releases on a case-by-case basis.  He concluded that the third party releases for the corporate affiliates were valid in this case because the affiliates were contributing financially to the reorganization and because, the judge concluded, their contribution was critical: “[m]ake no mistake,” he wrote, “without these contributions … there is no Plan and Debtors’ reorganization is impossible.”

The judge, however, struck the third-party releases for the companies’ individual managers, directors and officers because these individuals were making no substantial financial contribution to the plan.  Just performing their jobs, the court concluded, wasn’t enough to warrant giving them a release.

The bankruptcy court in 710 Long Ridge Road acted prudently in not stretching the third-party release blanket to cover the company executives.  But its decision to bless the release of the corporate affiliates downplayed two factors that under applicable case law were important:  that those with backpay claims had voted to reject the plan and that they were not being paid in full or even substantially on their claims.

What clinched the decision for the judge was the fact that the corporate affiliates held the money need to make the plan work and they demanded the releases as the price of their financial contribution.  As is often the case in bankruptcy, once the complex legal analysis is stripped away, it is such pragmatic considerations that drive the decision.