One of the key elements of a Chapter 11 plan that bankruptcy courts must tackle is the extent of the plan’s releases, including whether a requirement that parties must affirmatively “opt-out” of a plan’s releases sufficiently manifests consent to the releases for those that do not opt-out. The U.S. Supreme Court’s 2024 decision in Harrington v. Purdue Pharma sparked nationwide debate over how consent to third-party releases is addressed in Chapter 11 bankruptcy plans.

While the Supreme Court clarified that claimants must consent to third-party releases, it left a critical question unanswered: Do release opt-out provisions constitute valid consent?

In the wake of this ambiguity, New Jersey bankruptcy courts have continued their consistent pre-Purdue trend of approving opt-out provisions in Chapter 11 plans, emphasizing a pragmatic and flexible approach. This stands in contrast to certain other jurisdictions, including Delaware, where some bankruptcy judges have intensified their scrutiny of plan release language in recent cases and have favored opt-in mechanisms over opt-out provisions to manifest consent.

This consistency in New Jersey in approving opt-outs—even post-Purdue Pharma—along with other practical considerations, such as bidding procedures and full DIP roll-ups being approved on day one and efficient management of cases, is why New Jersey has become a hotbed for Chapter 11 bankruptcy filings, including well-known companies such as Rite Aid, WeWork, Bed Bath & Beyond, David’s Bridal, Sam Ash and BowFlex, among many others.

In the 12-month period ending Sept. 30, 2024, there were 1,148 Chapter 11 filings in New Jersey—a 575% increase over the 170 Chapter 11 cases in the 12-month period ending Sept. 30, 2021 (see chart). Compare that to the increase of roughly 60.2% in Chapter 11 filings nationwide in 2024 vis-à-vis 2021.

The Chapter 11 filing statistics clearly show that New Jersey has emerged as a strong venue option. The question is why? The answer, we submit, is consistency and pragmatism.

New Jersey’s Distinctive Approach to Releases

The U.S. Trustee has generally opposed non-debtor third-party releases that rely on opt-out mechanisms, arguing that they do not constitute true consent under applicable case law. Objectors have contended that these provisions unfairly bind creditors who fail to opt out, effectively treating silence as agreement.

Despite these objections, New Jersey bankruptcy courts have repeatedly upheld the validity of opt-out releases, including since the Purdue Pharma decision, provided the releases and opt-outs are supported by clear, conspicuous notice and due process. Judges have reasoned that, absent explicit guidance from Purdue Pharma on what constitutes consent, the traditional opt-out mechanisms can effectively establish consensual releases under the right circumstances. Since Purdue Pharma, the confirmed plans in the Invitae (Aug. 2, 2024), Sam Ash (Aug. 14, 2024), and BowFlex (Aug. 19, 2024) cases all included third-party releases with opt-outs. In BowFlex, for example, U.S. Bankruptcy Judge Andrew Altenburg of the District of New Jersey highlighted that Purdue Pharma did not define consent in the context of opt-out provisions, concluding that these mechanisms remain appropriate if notice is clear, and the opt-out consequences are fully disclosed.

These cases continue the pre-Purdue Pharma trend in New Jersey exhibited in Chapter 11 cases such as Thrasio (June 23, 2024), Cyxtera (Nov. 17, 2023), BlockFi (Oct. 4, 2023), Bed Bath & Beyond (Sept. 14, 2023), Congoleum (Jan. 5, 2021), Modell’s Sporting Goods (Nov. 12, 2020), and SLT Holdco (Sur La Table) (Oct. 21, 2020). The rare recent exception in New Jersey came in the Rite Aid case, where the debtors voluntarily implemented an opt-in release as a strategic choice.

Scope of Releases and Gatekeeping Provisions

Beyond the question of consent, New Jersey courts have also addressed concerns over the scope of third-party releases, such as whether they can extend to “affiliates” or “related parties” And whether there is mutuality for consideration for third-party releases.

In pre-Purdue Pharma cases like BlockFi and Cyxtera, New Jersey courts approved broad release provisions that included “related parties,” and supported by gatekeeping mechanisms that require parties to seek a bankruptcy court ruling before challenging a plan’s releases and injunctions in other forums, adding an extra layer of consistency and predictability and avoiding the potential for inconsistent applications by non-bankruptcy courts. While gatekeeping provisions have faced objections from the U.S. Trustee and have not been enough to assuage concerns of some bankruptcy judges in other jurisdictions, New Jersey bankruptcy judges view them as important safeguards to avoid inconsistent interpretations of a plan’s release and injunction terms. For instance, in Cyxtera, U.S. Bankruptcy Judge John Sherwood noted that the gatekeeping provision was among the facets of that plan that gave him comfort with the plan’s third-party releases.

This ongoing tension highlights a key dynamic in Chapter 11 cases that results from the posture of certain parties that will often advocate for stricter limits on third-party releases to protect creditors. Courts in New Jersey successfully balance those concerns against the practical needs of debtors seeking confirmation of their plans.

National Contrasts

New Jersey’s flexible stance on third-party releases and the use of opt-outs, particularly post-Purdue Pharma, contrasts with several other jurisdictions, including Delaware. A number of recent Delaware rulings have rejected opt-out provisions, requiring affirmative opt-ins to establish valid consent. For instance, in the Smallhold (Sept. 25, 2024) case, the bankruptcy court recently found that Purdue Pharma limits opt-out releases and that affirmative consent to the releases is required. Previously, in Aerofarms, the bankruptcy court found that the inclusion of an opt-out provision, rather than an opt-in, was insufficient to demonstrate consent to the plan’s third-party releases. In Tricida, the bankruptcy court rejected the proposed opt-out procedure with respect to non-voting interest holders (the plan was ultimately confirmed when the non-voting class was carved out from the third-party releases). In Reverse Mortgage Funding LLC, the bankruptcy court ruled that the proposed opt-out mechanism was unworkable.

Similar trends have emerged in other jurisdictions, such as the Southern District of New York (In re 2u (Sept. 6, 2024)), the Northern District of New York (In re Tonawanda Coke Corp. (Aug. 27, 2024)), the Northern District of Texas (In re Ebix (Aug. 2, 2024)), and the Middle District of Florida (In re Red Lobster (Sept. 5, 2024)), where courts have increasingly favored opt-in mechanisms following the Purdue Pharma decision.

Takeaways

New Jersey bankruptcy courts have demonstrated a consistent and pragmatic framework for handling third-party releases, even in the face of evolving national standards. By upholding opt-out provisions and embracing gatekeeping mechanisms, New Jersey bankruptcy courts offer a flexible and legally sound alternative to more restrictive or unpredictable jurisdictions.

This distinct approach has made New Jersey a preferred venue for Chapter 11 filings, attracting major companies like Rite Aid, WeWork, and Bed Bath & Beyond. As courts across the country continue to grapple with Purdue Pharma’s implications, New Jersey’s consistency provides much-needed clarity for debtors, boards of directors, secured lenders, and creditors alike.

Reprinted with permission from the December 11, 2024 issue of New Jersey Law Journal© 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.