In re Astria Health

• Decision Date: 22 January 2021
• Docket Number: Lead Case No. 19-01189-WLH11 (Jointly Administered)
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of Washington
• Parties: IN RE: ASTRIA HEALTH, et al., Debtors.

623 B.R. 793

IN RE: ASTRIA HEALTH, et al., Debtors.

Lead Case No. 19-01189-WLH11 (Jointly Administered)

United States Bankruptcy Court, E.D. Washington.

Signed January 22, 2021

Sam Alberts, Dentons US LLP, Washington, DC, Thomas A. Buford, James L. Day, Christine M Tobin, Bush Strout & Kornfeld, Seattle, WA, for Debtor.

Gary W. Dyer, US Trustee's Office, Spokane, WA, for Trustee.

MEMORANDUM OPINION

Whitman L. Holt, Bankruptcy Judge

Chapter 11 plan releases are a perennial hot topic among bankruptcy professionals. In some cases, a plan's proposed release provisions receive more attention than most or even all other parts of the plan. The releases are not just a tail wagging the plan dog, they effectively become a separate dog altogether. Indeed, bankruptcy lore includes tales of chapter 11 cases filed with the targeted purpose of using the plan process to release claims (estate claims, nondebtor claims, or both) against nondebtors. Given the potentially broad consequences of plan releases, it is no surprise that they are and will remain an important issue.

These cases involved a dispute about the release and exculpation provisions contained in a proposed chapter 11 plan. The United States trustee (the "UST") objected to confirmation of a plan proposed by the debtors and their primary secured lenders based on, among other issues, the asserted impropriety of the plan's exculpations and releases. During the confirmation hearing the court overruled the UST's objections and confirmed the proposed plan. The following details the bases for the court's ruling regarding the exculpation and release provisions.

BACKGROUND & PROCEDURAL POSTURE

The joint debtors in these cases are part of the medical industry. When they filed bankruptcy petitions in May 2019, the debtors owned and operated three hospitals and several healthcare clinics in Yakima County, Washington. Not long after, the debtors closed one of the hospitals and some clinics. The debtors faced several other challenges as well, including the unprecedented effects of the COVID-19 situation.

The bankruptcy cases also featured several skirmishes with and among major stakeholders. Soon after the cases were filed, the debtors litigated a motion to obtain postpetition financing and use cash collateral with their main secured creditor (Lapis Advisers, LP in various capacities) and the unsecured creditors' committee.

Over the next year, other assorted disputes arose among the debtors, Lapis, and the creditors' committee – as is typical in many chapter 11 cases, alliances shifted as the parties' positions and facts on the ground evolved.

The debtors eventually struck a restructuring deal with Lapis. In addition to Lapis' role as the major prepetition secured creditor, Lapis had become the debtor-in-possession lender through a mid-case refinancing. The bilateral settlement was detailed in a joint plan of reorganization for which both the debtors and Lapis parties were plan proponents.

The creditors' committee disliked this initial plan and threatened to litigate against its confirmation on various grounds. The costs and risks associated with the threatened legal warfare brought the parties to the negotiating table and resulted in a three-way deal among the debtors, the Lapis parties, and the creditors' committee. The parties sought to solicit votes on and confirm the revised plan, and voting classes accepted that plan by significant margins.¹

The plan supported by all the major stakeholders included release and exculpation provisions as part of its proposed global resolution. In their final proposed forms,² the main features of these provisions are as follows:

• Key case participants – including the debtors, Lapis parties, creditors' committee, members of the board of directors of the debtors and nondebtor affiliates, patient care ombudsman, and defined "Related Parties" of the foregoing³ – are exculpated from "liability to any Entity for any postpetition act taken or omitted to be taken in connection with the Chapter 11 Cases, or related to formulating, negotiating, soliciting, preparing, disseminating, confirming, or implementing the Plan or consummating the Plan, the Disclosure Statement, or any contract, instrument, release, or other agreement or document created or entered into in connection with the Plan, or any other postpetition act taken or omitted to be taken in connection with or in contemplation of the restructuring of the Reorganized Debtors, liquidation of the Liquidating Debtors, or administration of the GUC Distribution Trust."⁴ The exculpation provision includes a customary carveout for liability stemming "from any act or omission that is determined in a final order to have constituted gross negligence or willful misconduct."⁵

• The debtors and their respective bankruptcy estates release a similar set of "Released Parties" from all causes of action "arising from or related in any way to the Debtors, any of the Debtors' present or former assets, the Released Parties' interests in or management of the Debtors, the Plan, the Disclosure Statement, this Chapter 11 Case, or any restructuring of claims or interests undertaken prior to the Effective Date."⁶

• Various nondebtor "Releasing Parties" provide releases of similar scope (but including a separate carveout for any claims and causes of action for actual fraud, gross negligence, or willful misconduct) to the same "Released Parties."⁷ The term "Releasing Parties" includes the "Released Parties" (thereby making the releases reciprocal) as well as any creditors "that (i) vote to accept the Plan, and (ii) do not affirmatively opt out of the third party release ... pursuant to a duly executed Ballot."⁸ Thus, individual creditors do not provide releases to any nondebtor party unless those creditors take the voluntary act of voting for the plan and further do not opt out. The plan includes no reward for individual creditors who do not opt out and no punishment for those who do.

The UST objected to confirmation on, among other grounds, the basis that the plan's release and exculpation provisions are overbroad and inconsistent with Ninth Circuit authority.⁹ As stated earlier, the court overruled the UST's objections and entered an order confirming the plan.¹⁰

DISCUSSION

Jurisdiction & Power

The court has subject matter jurisdiction regarding these bankruptcy cases pursuant to 28 U.S.C. §§ 157(a) & 1334(b) and LCivR 83.5(a) (E.D. Wash.). The parties' dispute regarding confirmation of a bankruptcy plan is statutorily "core"¹¹ and "the action at issue stems from the bankruptcy itself."¹² Accordingly, the court may properly exercise the judicial power necessary to finally decide this dispute.

Chapter 11 Plan Confirmation Generally

The apex of many chapter 11 cases is confirmation. A chapter 11 plan provides a detailed framework for how a debtor's assets and liabilities are to be addressed, either through reorganization, liquidation, or a combination of the two. Bankruptcy plans vary in length and complexity; chapter 11 can operate as a tool to address simple overleverage as well as to resolve some of the world's most difficult and complex business and legal issues.

The Bankruptcy Code's drafters recognized the futility of any exercise to anticipate the boundless issues requiring treatment in a given chapter 11 plan. As a result of this recognition, Congress provided flexibility to accommodate case-specific provisions. Bankruptcy Code section 1123(b)(6) allows chapter 11 plans to "include any other appropriate provision not inconsistent with the applicable provisions of this title." This language invites creativity in drafting a plan and allows bankruptcy professionals to tailor a plan to the specific needs of the case so long as the plan terms are not inconsistent with specific provisions elsewhere in the Bankruptcy Code.¹³

With this background in mind, the court turns to the details of the plan proposed in these cases.

The Plan's Exculpation Provision Is Appropriate

Nothing in the Bankruptcy Code forbids (or otherwise addresses) inclusion of an exculpation provision in a chapter 11 plan. As such, section 1123(b)(6) permits the inclusion of an appropriately tailored exculpation provision. Indeed, in Blixseth v. Credit Suisse , the Ninth Circuit Court of Appeals recently affirmed confirmation of a plan with an exculpation clause generally similar to the one at issue here.¹⁴ The UST contends that the exculpation provision proposed here is inappropriately broader. The court disagrees.

The UST first contends that the temporal scope of the exculpated acts and omissions exceeds the scope contemplated in Blixseth . The exculpation provision here expressly limits itself to "any postpetition act" and thus to a period during which the debtors and their affairs were subject to this court's supervision.¹⁵ This is appropriate.

An exculpation provision may sweep broadly and cover the entire period after the filing of a bankruptcy petition insofar as one function of such a provision is to calibrate "the standard of care in [the] bankruptcy proceeding which would preempt the assertion of any state law claims which seek to impose a different standard of care" – a task "within the bankruptcy court's power because the bankruptcy court has exclusive jurisdiction over the parties and their conduct in the bankruptcy proceedings."¹⁶

The UST also contends that the class of parties included in the exculpation clause is improperly broad. Again, the court determines that this aspect of the clause is appropriate. Each of the covered parties played a significant role during these cases and engaged in conduct potentially subject to second guessing or hindsight-driven criticism. For example, the debtors and the board members had difficult decisions forced upon them, including the closing of a hospital, reacting to the external and internal impacts of COVID-19, and responding to the conflicting demands of stakeholders; the patient care ombudsman filed papers...