Perils Of Mediating / Settling With Less Than All Defendants (Kennedy v. Alliance)

Include them all? (photo by Marilyn Swanson)

By: Donald L Swanson

Settling with less than all defendants in a lawsuit is always tricky.

And mediating without all interested parties involved is also tricky.

The problem is that non-settling / non-participating parties might, (i) blow a settlement up, once they learn of it, (ii) be released unintentionally or inadvertently, or (iii) impair the settlement or its intended effects in some other way.

Example

A recent example is this opinion: Kennedy v. Alliance Prime Associates, Inc., et al. (In re Cambrian Holding Co., Inc.), Adv. No. 19-5021 in the Eastern Kentucky Bankruptcy Court (decided May 4, 2021, Doc. 42).

Here’s what happened.

Through a series of transactions, Debtor and various non-debtor affiliates borrow tens of millions of dollars from various lenders in a series of transactions.  The borrowers default and enter into forbearance agreements.

Debtor then files Chapter 11 bankruptcy and obtains authority to use cash collateral and obtain post-petition financing.  The final order granting such authorization also grants authority to the Official Creditors Committee to pursue various related claims against pre-petition lenders.

So, the Committee files two adversary proceedings in the bankruptcy:

  1. The Term Loan Litigation (No. 19-5021) against multiple defendants, (i) to avoid term loan liens as constructively fraudulent and unperfected, and (ii) for equitable subordination and turnover of adequate protection payments; and
  2. The ABL Credit Litigation (No. 19-5022) against other defendants, (i) to avoid ABL credit liens as constructively fraudulent, and (ii) for turnover of adequate protection payments.

Settlement negotiations ensue, including a formal mediation, between the Committee and various defendants, resulting in settlements with some—but not all—defendants.  The settlements are approved by the Bankruptcy Court, and various defendants are dismissed from the lawsuits with prejudice.

Then, the remaining defendants move for dismissal of all remaining claims against them, claiming to be released from all liability by the generalized release language in the court approved settlement agreements—because, they argue, the remaining claims against them “are derivative of” the released claims.

The Bankruptcy Court rejects this argument, finding that the settlement language “does not release any claims against” any of the remaining defendants, and the Court denies the dismissal motion. 

The remaining defendants appeal, of course—which is where the case now stands.

Conclusion

The Committee successfully opposed the dismissal motion of the remaining defendants.  And they may well prevail on appeal.

But the risk of a contrary conclusion cannot be ignored.

Such is the peril that exists in negotiating, mediating and settling with some—but not all—defendants.

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