Generally speaking, bankruptcy proceedings do not impact non-debtor third parties liabilities. However, bankruptcy courts are courts of equity. This raises the issue of what provisions may be included in a confirmable plan. Specifically, there is the issue of whether a bankruptcy court can confirm a plan if it contains a non-debtor release provision which impacts non-debtor third party liabilities.
A non-debtor release provision shields third parties who share an identity of interest with the debtor, usually corporate officers and directors in a Chapter 11 proceeding, from any claim, obligation, cause of action, or liability to any party in interest who has filed a claim or been given notice of the debtor’s bankruptcy. Directors and officers want these provisions included in the reorganization plan to shield themselves from liability and the crux of their argument is that these provisions are essential to a successful reorganization. Critics of the non-debtor release provision argue that altering third-party rights in a bankruptcy proceeding is unfair to claimants, and usually does not provide any real benefit to the debtor or the bankruptcy estate.