On Sept. 22, 2017, the First Circuit issued a decision holding that the official unsecured creditors’ committee (UCC) appointed in the Commonwealth of Puerto Rico’s Title III debt-adjustment case has an unrestricted right to intervene in an associated adversary proceeding (AP). This decision joins similar opinions by the Second Circuit (permitting intervention by a term loan holder committee) and Third Circuit (permitting intervention by the appointed UCC in that case). Although Financial Management only addressed the UCC’s right to intervene in the AP, it can be read broadly to provide other parties in interest under § 1109(b) of the Bankruptcy Code — including, but not limited to, indenture trustees and equity committees — the unconditional right to intervene in any adversary proceeding associated with the bankruptcy case in which they are involved, subject to two important caveats.

Background

Upon the commencement of the Title III case on May 3, 2017, three of Puerto Rico’s bonds insurers initiated the AP to, among other things, challenge the constitutionality of certain provisions of PROMESA. Shortly after its appointment, the UCC filed a motion to intervene in the AP. 

Bankruptcy courts “generally presume that good chapter 11 lawyers can and should negotiate without the help of an outside mediator.” However, some Chapter 11 cases are “so inherently complex” or “riddled” with “high levels of distrust” that “the presiding judge (or more rarely, the parties) views the appointment of a plan mediator as a virtual necessity from the outset.”

Mediation processes for plan confirmation in a chapter 11 case are different from mediation processes in a typical lawsuit. A typical lawsuit wends its way, at a leisurely pace, from the pleadings stage, into written discovery and then depositions, followed by pre-trial wrangling, then into trial, concluding with appellate action (with the possibility of a remand restarting the entire process). Mediation in a typical lawsuit occurs toward the end of the case in a one-and-done session: either the case settles in that session or the mediation is viewed as a failure. Chapter 11 plan-confirmation processes are nothing like a typical lawsuit.

The issue of nonconsensual third-party releases in chapter 11 plans continues to generate litigation. Releases and corresponding injunctions frequently insulate nondebtors — such as directors, officers or parent entities — from claims asserted by other nondebtors. Litigation regarding third-party releases has also involved jurisdictional issues, including those addressed in Stern v. Marshall. In March 2017, the U.S. District Court for the District of Delaware addressed that intersection in an appeal from the case of Millennium Lab Holdings II LLC.

The issue on appeal was whether the bankruptcy court had “the authority post-Stern to enter a final order discharging [the] Appellant’s non-bankruptcy state law claims against non-debtors without [the] Appellant’s consent.”