On March 27, 2023, Delaware Bankruptcy Court Judge Craig Goldblatt issued an opinion in the case Arsenal Intermediate Holdings, LLC, No. 23-10097 (CTG) (“Arsenal”) addressing third-party releases.  While Judge Goldblatt has previously addressed the topic in bench rulings, this is his first such written opinion.  In short, the Court held that prominently and conspicuously disclosed third party releases contained in a plan that permit creditors to opt out of the releases may be deemed valid and consensual as to those who do not exercise that option.  

Background and Ruling
 
The Arsenal debtors (“Debtors”) operate captive insurance and alternative risk management companies that are part of a larger risk-management business known as Beyond Risk.  The Debtors proposed to sell their assets and filed a liquidating plan to effectuate the same.  “[T]he proposed plan contains a consensual third-party release under which creditors release claims against Beyond Risk and its ‘Related Parties,’ which include its directors and officers.” 
 
The Debtors asked the “Court to approve procedures under which creditors will be deemed to consent to the third-party release unless they affirmatively opt out.”  The Trustee opposed the request on the basis that consensual third-party releases require creditors to opt in.  The Trustee argued further that “even if an opt-out procedure is appropriate in a ‘typical case,’ . . . the unusual circumstances of this case provide reason to require an opt-in procedure.”    
 
Judge Goldblatt first addressed the issue of whether an opt-out mechanism is sufficient to obtain the consent of a creditor to third party releases.  Judge Goldblatt began his analysis by noting that his opinion “does not speak to the authority of the bankruptcy court . . . to grant a non-consensual third-party release.”  The Court then observed that in In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000), the Third Circuit suggested nonconsensual releases are appropriate in exceptional circumstances.  Given the Third Circuit’s suggestion that non-consensual releases may be authorized in exceptional cases, Judge Goldblatt found that consensual third-party releases should be “noncontroversial.”  However, as noted by the Court, the Third Circuit has never “articulate[d] what it means for a release to be ‘consensual.’”  Courts are divided as to whether consent exists when (a) a “creditor must provide some affirmative expression of consent, such as voting in favor of the plan or checking a box on a form” or (b) a “creditor[] had the opportunity to opt out of the release and did not exercise it[.]”  Judge Goldblatt found that there was not a “right or wrong” answer as to what is consensual and that it is a “matter of judgment rather than a question of law.” 
 
Judge Goldblatt continued his analysis by discussing the different views taken by courts.  He stated that on one end of the spectrum, courts find “a third-party release to be consensual . . . based on principles of contract law [where] some affirmative expression of consent is required[.]”  “At the other end of the spectrum, there are [courts] . . . that view a third-party release just like any other plan provision.”  The Court explained that as “with any other plan provision whose compliance with the [law] is disputable, if an affected party objects to the inclusion of that plan provision, the debtor (or other proponent of the plan) is faced with a choice[: the] proponent may seek to meet its burden, at the confirmation hearing, of demonstrating that the plan is confirmable under the demanding standard applicable to non-consensual third-party releases [or] the plan proponent may carve the objecting party out of the release, leaving the plan, including the third-party release, as ‘consensual’ to all other parties.”  
 
Ultimately, in holding that the opt-out model typically applies for the approval of third-party releases, Judge