PUBLISHED
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
No. 13-1608
NATIONAL HERITAGE FOUNDATION, INCORPORATED,
Plaintiff – Appellant,
v.
HIGHBOURNE FOUNDATION; JOHN R. BEHRMANN; NANCY BEHRMANN,
Defendants – Appellees.
Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Anthony J. Trenga, District Judge. (1:12-cv-01329-AJT-JFA; 09-10525-BFK; 09-01342- SSM)
Argued: May 14, 2014 Decided: June 27, 2014
Before WILKINSON, AGEE, and DIAZ, Circuit Judges.
Affirmed by published opinion. Judge Diaz wrote the opinion, in which Judge Wilkinson and Judge Agee joined.
ARGUED: David B. Goroff, FOLEY & LARDNER LLP, Chicago, Illinois, for Appellant. Glenn W. Merrick, G.W. MERRICK & ASSOCIATES, LLC, Centennial, Colorado, for Appellees. ON BRIEF: Erika L. Morabito, Rory E. Adams, FOLEY & LARDNER LLP, Washington, D.C., for Appellant. Daniel J. Schendzielos, COLORADO TRIAL LAWYERS & LEGAL SERVICES, LLC, Greenwood Village, Colorado, for Appellees. DIAZ, Circuit Judge:
On remand following an earlier appeal in this case, a
bankruptcy court ruled that the non-debtor release provision in
National Heritage Foundation’s Chapter 11 reorganization plan
was unenforceable. The district court affirmed. On appeal to
this court, NHF argues that the courts below erred, claiming
that the facts and circumstances surrounding its bankruptcy are
sufficiently unique to justify the release. Finding
insufficient evidence to support NHF’s contentions, we affirm.
I.
A detailed recitation of the facts underlying this case is
contained in our previous opinion, Behrmann v. National Heritage
Foundation, Inc., 663 F.3d 704 (4th Cir. 2011) (NHF I). We
recite only those facts relevant to this appeal.
NHF is a non-profit public charity 1 that administers and
maintains Donor-Advised Funds. These are funds in which donors
relinquish all right and interest in the assets they donate.
The sponsoring charitable organization--in this case, NHF--owns
and controls all of the donated assets, although donors retain
1 In November 2011, the IRS revoked NHF’s status as a section 501(c) public charity.
2 the right to make non-binding recommendations regarding the use
of the assets.
In 2009, NHF filed a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code after a state court
entered a multimillion dollar judgment against it. After
multiple revisions, the bankruptcy court approved NHF’s Fourth
Amended and Restated Plan of Reorganization (the “Plan”). The
Plan contained a Non-Debtor Release Provision covering NHF; the
Official Committee of Unsecured Creditors (the “Committee”) and
its members; any designated representatives of the Committee;
and any officers, directors, or employees of NHF, the Committee,
or their successors and assigns (collectively, the “Released
Parties”). The Release Provision provided that the Released
Parties
shall not have or incur, and are hereby released from, any claim, obligation, cause of action, or liability to any party in interest who has filed a claim or who was given notice of the Debtor’s Bankruptcy Case (the “Releasing Parties”) for any act or omission before or after the Petition Date through and including the Effective Date in connection with, relating to, or arising out of the operation of the Debtor’s business, except to the extent relating to the Debtor’s failure to comply with its obligations under the Plan.
J.A. 1059. 2
2 The Plan also contained an Exculpation Provision, barring suits against the Released Parties for any acts or omissions in connection with the bankruptcy, and an Injunction Provision, enjoining suits in violation of either the Release or (Continued) 3 Certain NHF donors--the appellees in this case--challenged
the Plan’s confirmation on the ground that the Release Provision
was invalid. The district court affirmed the bankruptcy court’s
confirmation of the Plan.
On the first appeal, we vacated that portion of the
district court’s judgment affirming the Release Provision,
holding that the bankruptcy court failed to make sufficient
factual findings to support its conclusion that the Release
Provision was essential. See NHF I, 663 F.3d at 712-13.
Although we reiterated this circuit’s longstanding rule that
non-debtor releases may be enforced in appropriate
circumstances, we cautioned that they should only be approved
“cautiously and infrequently.” Id. at 712. To determine
whether such circumstances exist, we directed the bankruptcy
court to consider the six substantive factors enumerated in
Class Five Nevada Claimants v. Dow Corning Corp. (In re Dow
Corning Corp.), 280 F.3d 648 (6th Cir. 2002). These include
whether:
Exculpation Provision. The bankruptcy court upheld the Exculpation Provision, see In re Nat’l Heritage Found., Inc., 478 B.R. 216, 234 (Bankr. E.D. Va. 2012), a decision that neither party challenged. It also approved the Injunction Provision, but only to the extent that it enforced the Exculpation Provision and not the Release Provision. See id. Based on our holding that the Release Provision is unenforceable, we find no error in that judgment.
4 (1) There is an identity of interests between the debtor and the third party . . . ; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization . . . ; (4) The impacted class, or classes, has overwhelmingly voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; [and] (6) The plan provides an opportunity for those claimants who choose not to settle to recover in full.
Id. at 658. On remand, we instructed the bankruptcy court--“if
the record permits it--to set forth specific factual findings
supporting its conclusions” that the Release Provision in NHF’s
Plan was valid. NHF I, 663 F.3d at 713.
A different bankruptcy court judge considered the case on
remand. That court gave the parties the option of reopening the
record to present more evidence, but they declined to do so.
Reviewing the then-existing record, the bankruptcy court made
factual findings with respect to each of the Dow Corning
factors. It concluded that only one factor--an identity of
interests between NHF and the Released Parties--clearly weighed
in favor of NHF, and it declared the Release Provision
unenforceable. See In re Nat’l Heritage Found., Inc., 478 B.R.
216, 232 (Bankr. E.D. Va. 2012). The district court affirmed
the bankruptcy court’s ruling. See Nat’l Heritage Found., Inc.
v. Behrmann, No. 1:12-cv-1329, 2013 WL 1390822, at *9 (E.D. Va.
Apr. 3, 2013). NHF timely appealed.
5 II.
We review the legal conclusions of the bankruptcy court and
district court de novo. Gold v. First Tenn. Bank Nat’l Ass’n
(In re Taneja), 743 F.3d 423, 429 (4th Cir. 2014). Like the
district court below, we review the bankruptcy court’s factual
findings for clear error. Id. 3
A.
Based on the record before us, we conclude that NHF has
failed to carry its burden of proving that the facts and
circumstances of this case justify the Release Provision. Like
the courts below, we consider the evidence with respect to each
Dow Corning factor in turn.
3 Relying on Henry A. Knott, Co. v. Chesapeake & Potomac Telephone Co. of West Virginia, 772 F.2d 78 (4th Cir. 1985), NHF argues that the district court should have reviewed the bankruptcy court’s factual findings on remand de novo. In Henry A. Knott, we held that a de novo hearing may be required before a successor judge “if the case requires the trier of fact to make credibility determinations concerning the testimony of witnesses.” Id. at 85. Here, however, there was only one witness, Janet Ridgely, and her credibility was not in dispute. Rather, both courts simply found her testimony insufficient to support the Release Provision even if fully credited. Given this, we see no reason why the district court was required to depart from the general rule that the bankruptcy court’s “[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous.” Fed. R. Bankr. P. 8013.
6 1.
Under the first Dow Corning factor, a court must consider
whether there is an identity of interests--usually an indemnity
obligation--between the debtor and the released parties. A non-
debtor release may be appropriate in such circumstances because
a suit against the non-debtor may, “in essence, [be] a suit
against the debtor” that risks “deplet[ing] the assets of the
estate.” NHF I, 663 F.3d at 711 (quoting In re Dow Corning, 280
F.3d at 658).
We conclude that NHF has demonstrated an identity of
interests between itself and the Released Parties. Under the
terms of its bylaws, NHF must advance legal expenses and
indemnify its officers and directors for “any action . . . in
which such person may be involved by reason of his being or
having been a director or officer of” NHF. J.A. 868. No
security is required to ensure the covered parties repay NHF for
any advanced expenses. See also In re Nat’l Heritage Found.,
478 B.R. at 227-28 (describing the scope of NHF’s
indemnification provisions). Such an expansive indemnity
obligation is sufficient to satisfy the first Dow Corning
factor.
2.
The second Dow Corning factor required NHF to demonstrate
that the Released Parties made a substantial contribution of
7 assets to its reorganization. NHF I, 663 F.3d at 711. In
effect, this factor ensures that in order for a Released Party
to achieve that status, it must have provided a cognizable and
valid contribution to the debtor as part of the debtor’s
reorganization.
None of the Released Parties in this case made any
financial contribution to the reorganization. NHF nonetheless
argues that its officers and directors satisfied this
requirement by promising to continue serving NHF.
As an initial matter, there is no evidence in the record to
support NHF’s assertion that its officers and directors actually
promised to continue serving NHF. 4 Even if such a promise had
been made, we find no error in the district court’s conclusion
that it would not constitute a substantial contribution of
assets in this case. As the bankruptcy court found, NHF’s
“officers and directors, all of whom are insiders, performed
their duties either because they were paid to do so (in the case
of the officers), or because they had a fiduciary obligation to
do so (in the case of the directors).” In re Nat’l Heritage
Found., 478 B.R. at 229. Under these circumstances, the
Released Parties did not provide meaningful consideration for
4 The departure of Dr. John T. Houk, NHF’s former CEO, seems to belie such a claim.
8 their release from liability. Cf. In re SL Liquidating, Inc.,
428 B.R. 799, 804 (Bankr. S.D. Ohio 2010) (concluding that
directors and officers did not make a substantial contribution
when their “described efforts . . . [were] consistent with their
preexisting fiduciary duties and job responsibilities”). The
absence of such consideration weighs against NHF’s Release
Provision.
3.
The third Dow Corning factor also counsels against the
Release Provision. To satisfy this factor, a debtor must
demonstrate that the non-debtor release is “essential” to its
reorganization, such that “the reorganization hinges on the
debtor being free from indirect suits against parties who would
have indemnity or contribution claims against the debtor.” NHF
I, 663 F.3d at 711-12 (quoting In re Dow Corning, 280 F.3d at
658).
NHF primarily contends that the risk of litigation from its
donors, whose numbers run in the thousands, renders the Release
Provision essential, as NHF would likely have to indemnify its
officers and directors for their legal expenses should such
suits arise.
Although we are sympathetic to NHF’s concern about the
possibility of donor suits, the evidence does not suggest that
its reorganization is doomed without the Release Provision. NHF
9 has provided little to no evidence regarding the number of
likely donor claims, the nature of such claims, or their
potential merit. NHF’s vice president, Janet Ridgely, stated
that NHF insiders are concerned about donors bringing suit, but
that is simply too vague to substantiate the risk of litigation.
Cf. In re Dow Corning Corp., 287 B.R. 396, 411 (E.D. Mich. 2002)
(finding a release provision essential when more than 14,000
lawsuits had already been filed against a non-debtor). 5
Nor does the fact that a prior judgment against NHF was, by
itself, sufficient to trigger bankruptcy establish that donor
litigation, should it materialize, would imperil NHF’s
reorganization. Based on the dearth of evidence in the record,
we can only speculate as to the potential impact of any donor
suits on NHF’s financial bottom line.
NHF also argues that the Release Provision is essential
because its current officers and directors may refuse to serve
without such a release. In support, it points to Ridgely’s
5 We recognize that the Behrmanns, the appellees in this case, filed a fraud action against NHF and its officers and directors, notwithstanding a stay leaving the Release Provision in effect. But the mere fact that a single donor suit has been filed does not establish that NHF will face a flood of litigation without the Release Provision. We also note that the district court ordered the dismissal of the Behrmanns’ action and required them to pay attorney’s fees to NHF. See In re Nat’l Heritage Found., Inc., ___ B.R. __, 2014 WL 1783943, at *9-*10, *18-*19 (E.D. Va. May 5, 2014).
10 testimony that the continued service of NHF’s officers and
directors is critical to the reorganization, and that a fear of
third-party suits “might render [them] unwilling to serve.”
J.A. 949.
We find no error in the bankruptcy court’s finding that the
risk of officer-and-director flight in this case is minimal.
Although not irrelevant, Ridgely’s statement is hardly
conclusive evidence that NHF’s officers and directors would
leave without the Release Provision. And as the bankruptcy
court noted, the risk of NHF’s insiders “abandon[ing] ship” is
particularly low, given that most of them are members of a
single family. In re Nat’l Heritage Found., 478 B.R. at 229.
The bankruptcy court also correctly found that the Release
Provision itself provides little inducement for these
individuals to stay. NHF’s insiders have already been exposed
to whatever liability they may have for their pre-petition
conduct, and the release does not shield them from liability
going forward. And even if NHF’s officers and directors do
leave, NHF has not suggested that it would face difficulty
recruiting new personnel. See id. at 230-31.
If this failure of proof were not enough, the severability
clause contained in NHF’s Reorganization Plan cements our view
that the Release Provision is not essential. That clause
provides that the Plan would remain in effect “[s]hould any
11 provision in this Plan be determined to be unenforceable.” J.A.
643 (emphasis added). As we have already concluded, such
language “suggests that the plan would remain viable absent the
Release Provision[].” NHF I, 663 F.3d at 714.
Under these circumstances, we do not believe NHF has
carried its burden of demonstrating that the Release Provision
is essential to its reorganization. This failure weighs
strongly against the validity of the Release Provision.
4.
To satisfy the fourth Dow Corning factor, NHF was required
to prove that the class or classes affected by the Release
Provision overwhelmingly voted in favor of the Plan. 6 Id. at
712.
In this case, the Release Provision most directly impacted
the class of individuals who made donations to NHF’s Donor-
Advised Funds (the “donor class”). Under applicable bankruptcy
rules, the donor class’s support for the Plan was presumed
without a formal vote because, under its terms, donor claims
were eligible for full payment with interest. NHF maintains
that the donor class’s presumed support for the plan weighs in
6 Appellees argue that NHF has waived argument with respect to the last three Dow Corning factors because it did not address them below. As NHF would not prevail on the merits anyway, we need not resolve this question.
12 favor of the Release Provision, and that, regardless, the
class’s support for the Plan is irrelevant because its donors
are not actually creditors.
We recognize that there is some uncertainty regarding
whether an unimpaired class’s presumed support for a
reorganization plan is sufficient to satisfy this Dow Corning
factor. As a legal matter, the bankruptcy court was entitled to
presume the donor class’s support because their claims were
unimpaired. See 11 U.S.C. § 1126(f) (“[A] class that is not
impaired under a plan, and each holder of a claim or interest of
such class, are conclusively presumed to have accepted the plan,
and solicitation of acceptances with respect to such class . . .
is not required.”). But the power to authorize non-debtor
releases is rooted in a bankruptcy court’s equitable authority.
See Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d
694, 701 (4th Cir. 1989). Here, the equities weigh against NHF,
as the class most affected by the Release Provision was not
given the opportunity to accept or reject the plan. Cf. In re
Specialty Equip. Cos., 3 F.3d 1043, 1047 (7th Cir. 1993)
(finding releases consensual and valid when “each creditor could
choose to grant, or not to grant, the release irrespective of
the vote of the class of creditors or interest holders of which
he or she is a member,” meaning that “a creditor who . . .
13 abstains from voting may still pursue any claims against third-
party nondebtors”).
In any event, we need not resolve this question today.
Even if NHF is correct, this factor only marginally weighs in
its favor, and it would not alter our ultimate conclusion that
NHF has failed to demonstrate that the circumstances warrant the
Release Provision. Creditor support does not make up for the
fact that most of the other Dow Corning factors weigh against
enforcing the Release Provision.
5.
Under the fifth Dow Corning factor, we consider whether the
debtor’s reorganization plan provides a mechanism to consider
and pay all or substantially all of the class or classes
affected by the non-debtor release. See NHF I, 663 F.3d at 712.
As the district court noted, “[t]his consideration has typically
been used to justify release provisions where the reorganization
plan includes a mechanism such as a dedicated settlement fund to
pay the claims . . . of those affected by an injunction.”
Behrmann, 2013 WL 1390822, at *8; see also In re Metromedia
Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005) (“Courts
have approved nondebtor releases when . . . the enjoined claims
were ‘channeled’ to a settlement fund rather than extinguished
. . . .”).
14 For example, we have upheld a release provision in a
reorganization plan when the debtor created a separate fund to
settle, among other things, untimely claims or those that
otherwise failed to comply with applicable procedures. See A.H.
Robins Co., 880 F.2d at 700-02. Although there is no per se
requirement that a debtor “channel” claims, the absence of such
a mechanism can weigh against the validity of a non-debtor
release, especially when the result is that the impacted class’s
claims are extinguished entirely.
The absence of such a mechanism here weighs against the
Release Provision. Any donor claims not filed or allowed during
the bankruptcy proceedings have simply been extinguished. Thus,
NHF’s plan lacks an important element of the plan endorsed in
A.H. Robins--“a second chance for even late claimants to
recover.” Id. at 702.
To be sure, NHF provided notice and opportunity for donors
to file claims against it during the bankruptcy proceedings.
But NHF has provided no evidence--in the form of expert
testimony or otherwise--that this process adequately protected
the donors’ interests. NHF certainly did not encourage donors
to participate in the bankruptcy process. See, e.g., J.A. 503
(informing donors in the disclosure statement that NHF would
object to any donor-filed claims and that “Donors are not
creditors of the Debtor and will have no rights to vote or
15 reject the Debtor’s Plan or receive Distributions under the
Plan”). This hardly strikes us as a bona fide effort to ensure
the consideration of nearly all of the donor class’s claims, and
we agree with the district court’s conclusion that this factor
weighs against the Release Provision.
6.
The final substantive Dow Corning factor is whether the
plan provides an opportunity for those who chose not to settle
to recover in full. NHF I, 663 F.3d at 712.
Our analysis of this factor largely overlaps with the
preceding factor. To that effect, we reiterate the import of
NHF’s failure to provide any mechanism to pay donor claims
outside of the bankruptcy proceedings. As the bankruptcy court
found, “the very purpose of the Release Provision[] is to . . .
preclud[e] any recovery from third party sources outside of the
Plan.” In re Nat’l Heritage Found., 478 B.R. at 232.
B.
Our review of the record shows that one factor--the
possibility that NHF will have to indemnify its officers and
directors for litigation expenses--weighs clearly in favor of
the Release Provision. But NHF has failed to provide sufficient
evidence that it faces a strong possibility of suits that would
trigger its indemnity obligation, much less that such suits
would threaten its reorganization. And an indemnity obligation
16 is not, by itself, sufficient to justify a non-debtor release.
If it were, “third party releases would be the norm, not the
exception, in Chapter 11 cases.” Id. at 232. Given the
extraordinary breadth of this particular release, we are also
troubled by NHF’s failure to provide a mechanism outside of the
bankruptcy process to satisfy donor claims.
In sum, we agree with the district court that NHF has
failed to demonstrate that it faces exceptional circumstances
justifying the enforcement of the Release Provision in its
Reorganization Plan.
We emphasize that our decision is ultimately rooted in
NHF’s failure of proof rather than circumstance alone. A debtor
need not demonstrate that every Dow Corning factor weighs in its
favor to obtain approval of a non-debtor release. But, as we
noted in NHF I, a debtor must provide adequate factual support
to show that the circumstances warrant such exceptional relief,
and NHF has failed to do so here.
We also note that NHF is not without options should
circumstances change--in particular, if damaging donor suits do
materialize. For example, NHF can petition the bankruptcy court
to reopen the case. See 11 U.S.C. § 350(b); Fed. R. Bankr. P.
5010; see also Goodman v. Phillip R. Curtis Enters., Inc., 809
F.2d 228, 232 (4th Cir. 1987) (noting that bankruptcy court
jurisdiction “is specifically retained to modify a previously
17 confirmed plan”). It can also file another petition for
reorganization under Chapter 11.
At this point, however, NHF has not made the necessary
showing to support the risk of donor litigation, nor has it
carried its broader burden of justifying the non-debtor release
in its Reorganization Plan.
III.
For these reasons, we affirm the district court’s judgment.
AFFIRMED