Behrmann v. Nat'l Heritage Found., Inc.

Behrmann v. Nat'l Heritage Found., Inc.

Opinion

 [*706]  DIAZ, Circuit Judge:

We consider in this case the circumstances under which a bankruptcy court may approve nondebtor release, injunction, and exculpation provisions as part of a final plan of reorganization under Chapter 11 of the Bankruptcy Code.

We hold that equitable relief provisions of the type approved in this case are permissible in certain circumstances. A bankruptcy court must, however, find facts sufficient to support its legal conclusion that a  [*707]  particular debtor's circumstances entitle it to such relief. Because the bankruptcy court in this case failed to make such findings,  [**2] the district court erred in affirming the bankruptcy court's confirmation order. Accordingly, we vacate the judgment of the district court and remand for further proceedings consistent with this opinion.

Appellee National Heritage Foundation ("NHF") is a non-profit public charity that administers and maintains Donor-Advised Funds ("DAFs").¹ Appellants John R. Behrmann, Nancy Behrmann, the Highbourne Foundation, Dolores F. Anderson, and the Dodie Anderson Foundation are among the more than 9000 donors that established DAFs to be administered by NHF.

Following a state court judgment of over six million dollars entered against NHF in Texas, NHF filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Virginia, seeking to reorganize under Chapter 11 of the Bankruptcy Code. NHF notified its donors and other parties in interest,  [**3] including Appellants, of the deadline for filing proofs of claim in its bankruptcy proceeding.

As part of its reorganization plan, NHF proposed three categories of unsecured claims: Class III(A), consisting of a claim by the Mancillas family, the holder of the Texas state court judgment; Class III(B), consisting of claims held by NHF's charitable gift annuitants; and Class III(C), consisting of all other general unsecured claims. Although NHF contended that its donors were not creditors, it provided that a donor's claim would be treated as an unsecured Class III(C) claim provided that the claim was allowed.²

NHF's proposed plan of reorganization also  [**4] included certain release, injunction, and exculpation provisions (collectively, the "Release Provisions") that prevented potential claimants from asserting claims against NHF, the Official Committee of Unsecured Creditors (the "Committee"), and other parties closely connected with NHF or the Committee, such as NHF's officers and directors, that accrued on or before the effective date of the reorganization plan. At a hearing before the bankruptcy court, NHF representative Janet Ridgely testified that the Release Provisions were essential to NHF's successful reorganization as a going concern. Specifically, Ridgely asserted that (1) NHF's proposed plan of reorganization and bylaws required NHF to indemnify its officers and directors for costs, expenses, and liabilities arising out of lawsuits filed against them relating to acts taken in their official capacities; (2) NHF's officers and directors were concerned about the possibility of protracted litigation against them relating to acts predating NHF's petition for bankruptcy, and in particular litigation initiated by donors; (3) NHF's officers and  [*708]  directors might be unwilling to continue to serve after confirmation of NHF's proposed plan  [**5] of reorganization if third parties could sue them for their pre-petition conduct; and (4) retaining NHF's officers and directors was essential to NHF's success as a reorganized debtor. The bankruptcy court, however, declined to approve the Release Provisions, concluding that they were overly broad.

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