Patterson v. Mahwah Bergen Retail Grp.

• Decision Date: 13 January 2022
• Docket Number: CIVIL 3:21cv167 (DJN)
• Court: U.S. District Court — Eastern District of Virginia
• Parties: JOEL PATTERSON, et al., Appellants, v. MAHWAH BERGEN RETAIL GROUP, INC. Appellee.

JOEL PATTERSON, et al., Appellants, v. MAHWAH BERGEN RETAIL GROUP, INC. Appellee.

CIVIL No. 3:21cv167 (DJN)

United States District Court, E.D. Virginia, Richmond Division

January 13, 2022

MEMORANDUM OPINION

David J. Novak United States District Judge

This case arises out of the bankruptcy cases commenced by Mahwah Bergen Retail Group, Inc. (f/k/a Ascena Retail Group, Inc.) (“Mahwah” or “Ascena”) and sixty-three of its affiliates (collectively, the “Debtors”). The United States Bankruptcy Court for the Eastern District of Virginia (“Bankruptcy Court”) confirmed the reorganization plan (“the Plan”) set forth by the parties in interest, and Joel Patterson and Michaella Corporation (“Securities Litigation Lead Plaintiffs”) filed notices of appeal to this Court. Likewise, the United States Trustee (“Trustee”) filed a notice of appeal of the confirmation to this Court.^[1] The appeals were consolidated into this action.^[2] In these appeals, Appellants challenge third-party (non-debtor) releases, as well as an exculpation provision, contained in the Plan.

This appeal implicates the most fundamental right guaranteed by the due process clause in our judicial system: the right to be heard before the loss of one's rights. “For more than a century the central meaning of procedural due process has been clear: ‘Parties whose rights are to be affected are entitled to be heard; and in order that they may enjoy that right they must first be notified.'” Fuentes v. Shevin, 407 U.S 67, 80 (1972) (quoting Baldwin v. Hale, 68 U.S. 223 233 (1863)). “And, the Supreme Court has explained that the particular constitutional protection afforded by access to the courts is ‘the right conservative of all other rights, and lies at the foundation of orderly government.'” Cromer v. Kraft Foods N Am Inc., 390 F.3d 812, 817 (4th Cir. 2004) (quoting Chambers v. Baltimore & O. R. Co., 207 U.S. 142, 148 (1907)). Furthermore, “[t]his right... has little reality or worth unless one is informed that the matter is pending and can choose for himself whether to appear or default, acquiesce or contest.” Schroeder v. City of New York, 371 U.S. 208, 212 (1962) (quoting Mullane v. Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950)). Relatedly, “parties who choose to resolve litigation through settlement may not dispose of the claims of a third party, and a fortiori may not impose duties or obligations on a third party, without that party's agreement.” Loc. No. 93, Int'l Ass 'n of Firefighters AFL-CIO C.L.C. v. City of Cleveland, 478 U.S. 501, 529 (1986). This is so, because the general rule provides “that a person cannot be deprived of his legal rights in a proceeding to which he is not a party.” Martin v. Wilks, 490 U.S. 755, 759 (1989); see also id. at 762 (“A judgment or decree among parties to a lawsuit resolves issues as among them, but it does not conclude the rights of strangers to those proceedings”).

These fundamental principles resonate with force in this appeal from the Bankruptcy Court, as third-party releases strike at the heart of these foundational rights. The United States Trustee - a statutory watchdog over bankruptcy proceedings - and the Securities Litigation Lead Plaintiffs, as designated by a United States District Judge in a putative class action alleging securities fraud, challenge the approval by the Bankruptcy Court^[3] of exceedingly broad third-party (non-debtor) releases, as well as an exculpation provision, contained in the Plan submitted by Debtors.

Third-party releases, such as those at issue here, carry much controversy, for they are a “device that lends itself to abuse.” In re Metromedia Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005). Indeed, several Courts of Appeals (the Fifth, Ninth and Tenth Circuits) prohibit the use of third-party releases. See, e.g, In re Pac. Lumber Co., 584 F.3d 229, 251-53 (5th Cir. 2009); In re Lowenschuss, 67 F.3d 1394, 1401-02 (9th Cir. 1995); In re W. Real Estate Fund, Inc., 922 F.2d 592, 600-02 (10th Cir. 1990). And a District Judge in the Southern District of New York recently concluded in a thoughtful opinion that no statutory basis exists for their use. In re Purdue Pharma, L.P., 2021 WL 5979108 (S.D.N.Y. Dec. 16, 2021).

The Fourth Circuit has made clear that the use of third-party releases is disfavored, saying that such releases should be “granted cautiously and infrequently.” Behrmann v. Nat'l Heritage Found., 663 F.3d 704, 712 (4th Cir. 2011). Other circuits that permit their use likewise reserve their utilization for the rare or exceptional case. See, e.g, In re Millennium Lab Holdings II, LLC, 945 F.3d 126, 139 (3d Cir. 2019) (directing that “courts considering such releases do so with caution .... [and] with the utmost care and to thoroughly explain the justification for any such inclusion”); In re Seaside Eng'g & Surveying, Inc., 780 F.3d 1070, 1078 (11th Cir. 2015) (permitting releases and bar orders but cautioning that they “ought not to be issued lightly, and should be reserved for those unusual cases in which such an order is necessary for the success of the reorganization, and only in situations in which such an order is fair and equitable under all the facts and circumstances”); In re Metromedia Fiber Network, Inc., 416 F.3d at 141-43 (holding that involuntary releases should only be approved if they form an important part in a reorganization plan, and that they are proper “only in rare cases”); In re Dow Corning Corp., 280 F.3d 648, 657-58 (6th Cir. 2002) (“Because such an injunction is a dramatic measure to be used cautiously, we follow those circuits that have held that enjoining a non-consenting creditor's claim is only appropriate in ‘unusual circumstances.'”).

Despite these admonitions, the Bankruptcy Court for the Richmond Division of this district regularly approves third-party releases, as acknowledged by Debtors' counsel during oral argument. (Tr. of Dec. 20, 2021 Argument (“Arg. Tr.”) at 6:8-14 (ECF No. 75).) This recurrent practice contributes to major companies like Mahwah (a New Jersey company) using the permissive venue provisions of the Bankruptcy Code to file for bankruptcy here.^[4] Indeed, according to the Trustee, the Richmond Division (just the division, not the entire Eastern District of Virginia) joins the District of Delaware, the Southern District of New York, and the Houston Division of the Southern District of Texas as the venue choice for 91% of the “mega” bankruptcy cases. (Reply Br. of Appellant John P. Fitzgerald, III, Acting United States Trustee for Region 4 (“Trustee Reply Br.”) at 22-23 (ECF No. 45).) The ubiquity of third-party releases in the Richmond Division demands even greater scrutiny of the propriety of such releases. And, their prevalence also undermines assertions that they are integral to the success of this particular reorganization plan. As District Judge Colleen McMahon astutely observed: “When every case is unique, none is unique.” In re Purdue Pharma, L.P., 2021 WL 5979108, at *3.

The Third-Party Releases at issue in this case represent the worst of this all-too-common practice, as they have no bounds. The sheer breadth of the releases can only be described as shocking. They release the claims of at least hundreds of thousands of potential plaintiffs not involved in the bankruptcy, shielding an incalculable number of individuals associated with Debtors in some form, from every conceivable claim - both federal and state claims - for an unspecified time period stretching back to time immemorial. In doing so, the releases close the courthouse doors to an immeasurable number of potential plaintiffs, while protecting corporate insiders who had no role in the reorganization of the company. Yet, the Bankruptcy Court - acting with its limited Article I powers - extinguished these claims with little or no analysis. In doing so, the Bankruptcy Court exceeded the constitutional limits of its authority as delineated by the Supreme Court in Stern v. Marshall, 564 U.S. 462 (2011), ignored the mandates of the Fourth Circuit in Behrmann, and offended the most fundamental precepts of due process.

Likewise, the Bankruptcy Court erred by approving an overly broad Exculpation Provision that exceeds the bounds of similar provisions approved in other cases. However, unlike the Third-Party Releases that must be voided and severed from the reorganization plan, redrafting can salvage the Exculpation Provision on remand.

Accordingly, this case will be remanded to the Bankruptcy Court for further proceedings consistent with this opinion.

I. FACTUAL BACKGROUND^[5]

Ascena provided specialty retail apparel for women and girls, operating approximately 2, 800 stores in the United States, Canada and Puerto Rico, which served more than 12.5 million customers and employed nearly 40, 000 employees. Debtors held a portfolio of recognizable brands, including Ann Taylor, LOFT, Lane Bryant, Catherines, Justice, Lou & Grey and Cacique.

Beginning in March 2020, Debtors had to temporarily close all of their retail stores due to the CO VID-19 pandemic, and in so doing furloughed nearly all of their store-level workforce as well as a substantial portion of their corporate workforce. At the time, Debtors had approximately $1.6 billion in secured debt and $700 to $800 million in unsecured debt. (USTAPP 1592, 1599.) Before filing for bankruptcy, Debtors negotiated with many of their secured lenders to arrive at a restructuring support agreement, which formed the basis of the original chapter 11 plan. (USTAPP 1591.) Then, on July 23, 2020, Debtors commenced the Bankruptcy Cases that ultimately were consolidated into Case No. 20bk33113 in the Bankruptcy Court. However, rather than reorganize, Debtors ultimately largely liquidated the businesses, selling...