The Constitutional Problem of Nondebtor Releases in Bankruptcy

By Adam J. Levitin
October 21, 2022

In recent years, nondebtor releases have become a common feature of big-case Chapter 11 bankruptcy practice.  Nondebtor releases involve the release of creditor claims against third-party nondebtors pursuant to a bankruptcy plan confirmation order.  Some nondebtor releases are consensual, meaning that they are done with the assent of the releasing creditor, but some are not.

This Essay argues that all nonconsensual nondebtor releases in bankruptcy are unconstitutional.  The constitutional infirmities of nondebtor releases are layered: (1) all nondebtor releases—consensual and nonconsensual—are outside the scope of Congress’s authority under an original understanding of the Bankruptcy Clause; (2) all nonconsensual nondebtor releases are inconsistent with due process’s requirement of an adjudication; and (3) all releases of claims that have not yet ripened into actual litigation or that do not involve sufficiently immediate and real disputes are outside the scope of Article III jurisdiction.

These layered constitutional restrictions do not preclude all nondebtor releases.  Consensual releases of ripened claims are still possible pursuant to the organic powers of federal courts.  In light of the concern about constitutional abuses, however, courts should apply strict scrutiny when reviewing the adequacy of consent and when determining whether there is federal subject-matter jurisdiction.