Deloitte Turnaround and Restructuring (T&R) Newsletter

The problem at issue is “whether a court in bankruptcy may effectively extend to non-debtors the benefits of a Chapter 11 discharge usually reserved for debtors”. The Court equated the release of third-party claims against the defendant to the type of “clean slate” a debtor receives at the culmination of its bankruptcy case, after a distribution of its assets has been made to its creditors. Unlike a debtor in bankruptcy, the defendant did not submit themselves to the comprehensive process of a bankruptcy while achieving a benefit – a fresh start.²

Going forward, bankruptcy courts will have to pay close attention to plan provisions that purport to provide releases or injunctions to third parties. On the other hand, parties objecting to Plans of Reorganization (POR) may now have an additional basis for those objections. In addition, although the Court expressly limited its opinion to POR’s subject to a stay, it remains to be seen whether parties will seek to undo POR’s that have already become effective based on the Court’s decision and whether bankruptcy judges will allow such challenges to be heard. For bankruptcy professionals, this decision may have an impact on their ability to negotiate and implement broad settlements with various parties in interest in exchange for meaningful contributions to creditors.

Another important issue that will have far reaching effects on balance sheet restructurings is the December 31, 2024, decision in the Serta case. Liability Management Exercises (LMEs) are the flavor du jour for solving issues such as impending maturities and tight liquidity. They involve an ad hoc group of lenders taking advantage of loopholes in credit agreements to rearrange a capital structure to the detriment of lenders not participating in the transaction. This behavior has given rise to multiple lawsuits and the overwhelming majority of these LMEs have resulted in these companies filing for Chapter 11 later or otherwise remaining distressed. Thus far, ad-hoc lenders engaging in LMEs have generally enjoyed getting their way from judges overseeing LME litigation. The Serta decision appears to be signaling judicial skepticism toward these types of transactions in favor of disadvantaged parties especially given how so many LMEs result in bankruptcy or recurring distress.³

2025 will likely be a year of twists and turns in restructuring. We will keep a close eye on the developments in the marketplace and share insights on potential opportunities.

1. ¹Financial Content, “Octus Releases Americas Restructuring Advisor Rankings Showing Surge in 2024 Engagement Activity”, January 23, 2025.
2. ²Chapman, “Supreme Court Rejects Non-Consensual Third-Party Releases for Sacklers in Purdue Pharma Bankruptcy, Reversing Second Circuit”, July 3, 2024.
3. ³Akin, “Serta - Fifth Circuit Decision”, January 9, 2025.