2014 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-3-2014

In Re: Lower Bucks Hospital

Precedential or Non-Precedential: Non-Precedential

Docket No. 13-1311

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Recommended Citation

"In Re: Lower Bucks Hospital" (2014). 2014 Decisions. Paper 661.

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NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

________________

No. 13-1311

________________

IN RE: LOWER BUCKS HOSPITAL

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.,

Appellant

________________

Appeal from the United States District Court

for the Eastern District of Pennsylvania

(D.C. Civil Action No. 2-12-cv-03399)

District Judge: Honorable Timothy J. Savage

________________

Argued June 12, 2014

Before: AMBRO and BARRY, Circuit Judges

and RESTANI,

*

Judge

(Opinion filed: July 3, 2014)

Christine B. Cesare, Esquire (Argued)

Howard M. Rogatnick, Esquire

Thomas J. Schell, Esquire

Stephanie Wickouski, Esquire

Bryan Cave LLP

1290 Avenue of the Americas

New York, NY 10104

 

* Honorable Jane A. Restani, Judge, United States Court of International Trade, sitting by 

designation.
2

Laurie A. Krepto, Esquire

Natalie D. Ramsey, Esquire

Patrick T. Ryan, III, Esquire

Richard L. Scheff, Esquire

Montgomery, McCracken, Walker & Rhoads, LLP

123 South Broad Street, 28th Floor

Philadelphia, PA 19109

Counsel for Appellant

Daniel E. Bacine, Esquire

Lisa M. Port, Esquire

Barrack, Rodos & Bacine

3300 Two Commerce Square

2001 Market Street

Philadelphia, PA 19103

D. Alexander Barnes, Esquire (Argued)

Edmond M. George, Esquire

Obermayer, Rebmann, Maxwell & Hippel LLP

One Penn Center, 19th Floor 

1617 John F. Kennedy Boulevard

Philadelphia, PA 19103

Counsel for Appellee

________________

OPINION 

________________

AMBRO, Circuit Judge

The Bank of New York Mellon Trust Company, N.A. (“BNYM”) appeals the 

order of the District Court that affirmed a Bankruptcy Court decision denying approval of 

a release provision in the plan of confirmation of Debtor Lower Bucks Hospital (the 

“Debtor” or “Lower Bucks”). The provision purported to prohibit a class of creditors that 
3

held corporate bonds in the Debtor from bringing claims against their trustee, BNYM. 

Because we agree that the third-party release was not adequately disclosed, we affirm.

I. Background

In 1992, Lower Bucks issued bonds to refinance some of its debt and fund various 

capital improvements. The debt was secured by an interest in the gross revenues of 

Lower Bucks. An indenture trustee was appointed to act on behalf of the holders of the 

bonds (the “Bondholders”) and was responsible for, among other things, maintaining an 

accurate financing statement with respect to the Bondholders’ security interest.

Lower Bucks filed for bankruptcy in 2010. When it did, it still owed about $26 

million in principal and interest to the Bondholders. The debt should have held a secured 

status given the security interest in the gross revenues. However, Lower Bucks filed an

adversary proceeding against BNYM (who became indenture trustee in 2007) alleging 

the indenture trustee failed to maintain a correct financing statement with respect to the 

Bondholders’ security interest during the Debtor’s name changes in 1997 and 2006. 

Although BNYM amended the financing statement in October 2009 to reflect the correct 

name of the Debtor, that was within 90 days of the bankruptcy filing and thus the secured 

claim, if based on that version of the financing statement, was voidable as a preference 

under 11 U.S.C. § 547(b). BNYM contested the allegations, arguing that, under the terms 

of the bond documents, Lower Bucks was required to notify BNYM when it changed its

name.

Lower Bucks and BNYM ultimately settled the adversary proceeding: in exchange 

for Lower Bucks giving the Bondholders secured status, their secured claim was reduced 
4

to $8.15 million. Included within the settlement were releases not only between the 

agreement’s signers (Lower Bucks and BNYM) but also a provision releasing all claims 

by the Bondholders against BNYM (the “Third-Party Release” or “Release”). The 

proposed settlement was presented to Bankruptcy Judge Frank via a Rule 9019 motion. 

The transcript of the hearing and subsequent events reveal that Judge Frank was not 

aware of the Third-Party Release. Although there were brief references to it in the

motion, App. at 1040, and in a related proposed order, id. at 1062, his questions at the 

hearing demonstrated that he did not know of the Release, and no party took the 

opportunity to direct his attention to it. See id. at 1072-74, 1078-80.

It is in this context that Judge Frank approved the settlement and Lower Bucks 

later filed a proposed plan of reorganization and disclosure statement. In those filings, 

the Third-Party Release was referenced on page 42 of the plan (out of 47 pages), id. at 

1174, and on page 55 of the disclosure statement (out of 62 pages). Id. at 1262. In 

neither instance was the Release highlighted or emphasized in any way. Still unaware of 

the Release, Judge Frank approved the disclosure statement and it was distributed to the 

Bondholders.

In the wake of Judge Frank’s approval of the disclosure statement, AppelleeBondholder Leonard Becker took several steps to challenge the Third-Party Release and 

BNYM’s actions with respect to the settlement. First, he filed a motion asking the 

Bankruptcy Court to reconsider its earlier approval of the settlement.

1 He then filed a 

putative class-action lawsuit in the Eastern District of Pennsylvania alleging that BNYM 

 

1 Becker withdrew the motion, however, before Judge Frank reviewed it.
5

breached its contractual and fiduciary duties to the Bondholders by failing to maintain 

proper financing statements with respect to their security interest. Finally, Becker filed 

an objection to the proposed plan, arguing that the provision was “an impermissible, noncrucial, nondebtor third[-]party release[]” that was not properly disclosed. Id. at 1716. 

Judge Frank entered an order amending his earlier approval of the settlement to 

clarify that it did not limit the ability of the Bondholders to bring claims against BNYM. 

Because of questions surrounding the Third-Party Release and the risk of jeopardizing the 

reorganization of Lower Bucks (with the resulting chaos affecting it as well as its staff 

and patients), at the confirmation hearing the parties (including BNYM) jointly requested 

that Judge Frank sever the Third-Party Release from the proposed plan and hold a 

separate hearing on that provision at a later date. He agreed, and in December 2011 

approved the proposed plan of reorganization without the Release. 

After a post-confirmation hearing in March 2012, Judge Frank issued a detailed 

opinion denying approval of the Third-Party Release. In re Lower Bucks Hosp., 471 B.R. 

419 (Bankr. E.D. Pa. 2012). He candidly acknowledged that he “did not notice, and 

certainly did not appreciate, the legal significance of” the Third-Party Release during the 

Rule 9019 hearing. Id. at 432. He emphasized that, in response to questions he posed 

throughout the hearing that should have prompted the litigants to direct the Court’s 

attention to the Release, counsel for Lower Bucks and BNYM repeatedly failed to apprise 

him of it. Id. at 432-36. He concluded his discussion of the hearing as follows:

[W]hat is perhaps most disappointing is that in a hearing filled with opportunities 

for counsel to reveal the existence of the Third[-]Party Release—a provision that 

BNYM now contends was a critical part of the global settlement and that [Lower 
6

Bucks] acknowledge[s] was the product of intense negotiation—at no point did 

any attorney disclose candidly that the . . . Proposed Findings [in the order] . . . 

were requested to provide a foundation for approval of the Third[-]Party Release. 

Whether purposeful or not, counsel’s conduct served to conceal this material issue 

from the court.

Id. at 435-36.

Next, Judge Frank reviewed the substance of the various disclosures sent to the 

Bondholders and concluded that “the Bondholders did not receive adequate disclosures 

before they voted to accept the Plan.” Id. at 459. He found that “there was nothing 

conspicuous regarding the disclosure of the Third[-]Party Release in any of the 

documents sent to the Bondholders[,]” id. at 460, and that the disclosure statement “failed 

to provide the Bondholders with any information regarding the merits or value of the 

potential claims against BNYM that would be released by the Plan.” Id. at 462. Thus he 

held that the disclosure to the Bondholders was inadequate and that the Third-Party 

Release could not be approved as a non-consensual release absent adequate disclosure.

BNYM appealed the Bankruptcy Court’s order to the District Court, where Judge 

Savage affirmed. BNYM now appeals.2

II. Standard of Review

“We exercise plenary review over the District Court’s appellate review of the 

Bankruptcy Court’s decision and exercise the same standard of review as the District 

 

2

The Bankruptcy Court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157 because 

the Third-Party Release related to the proposed plan of confirmation of Lower Bucks. 

Specifically, the bond documents required Lower Bucks to indemnify the indenture 

trustee (BNYM), thus satisfying the necessary nexus between the release and the 

bankruptcy. See In re Lower Bucks Hosp., 488 B.R. 303, 312-16 (E.D. Pa. 2013). We 

have jurisdiction under 28 U.S.C. §§ 1291 and 158(d).
7

Court in reviewing the Bankruptcy Court’s determinations.” In re Miller, 730 F.3d 198, 

203 (3d Cir. 2013) (internal quotation marks and citation omitted). “[W]e review a 

bankruptcy court’s legal determinations de novo, its factual findings for clear error, and 

its exercises of discretion for abuse thereof.” Id. (alteration in original) (internal 

quotation marks and citations omitted).

The parties dispute what standard of review should apply to the Bankruptcy 

Court’s determination that the Third-Party Release was not adequately disclosed to the 

Bondholders. The District Court reviewed for abuse of discretion. See In re Lower 

Bucks Hosp., 488 B.R. 303, 317 (E.D. Pa. 2013) (citation omitted). We agree that the 

determination under 11 U.S.C. § 1125(a) “is subjective and made on a case by case basis

[and] . . . . is largely within the discretion of the bankruptcy court.” In re Tex. Extrusion 

Corp., 844 F.2d 1142, 1157 (5th Cir. 1988). Thus we too review for abuse of discretion. 

See id.; see also Tenn-Fla Partners v. First Union Nat’l Bank of Fla., 229 B.R. 720, 733 

(W.D. Tenn. 1999); In re Aspen Limousine Serv., Inc., 193 B.R. 325, 334 (D. Colo. 

1996); C.J. Kirk v. Texaco, Inc., 82 B.R. 678, 681 (S.D.N.Y. 1988); cf. In re BH & P, 

Inc., 949 F.2d 1300, 1313 (3d Cir. 1991) (“Historically, bankruptcy courts have been 

accorded wide discretion in connection with fact-intensive matters . . . . The bankruptcy 

judge is on the front line, in the best position to gauge the ongoing interplay of factors 

and to make the delicate judgment calls which such a decision entails.” (quoting In re 

Martin, 817 F.2d 175, 182 (1st Cir. 1987))). “[A]n abuse of discretion exists where 

the . . . decision rests upon a clearly erroneous finding of fact, an errant conclusion of 
8

law, or an improper application of law to fact.” In re SGL Carbon Corp., 200 F.3d 154, 

159 (3d Cir. 1999) (citation omitted).

We exercise de novo review over the procedural aspects of the Bankruptcy Court’s 

decision to amend its earlier determination about the adequacy of disclosure. We 

similarly review de novo its decision to deny approval of the non-consensual Third-Party 

Release. Both issues present purely legal questions. In re Telegroup, Inc., 281 F.3d 133, 

136 (3d Cir. 2002).

III. Analysis

Section 1125 of the Bankruptcy Code requires that a court approve a disclosure 

statement as containing “adequate information,” which is “information of a kind, and in 

sufficient detail, . . . that would enable such a hypothetical investor of the relevant class 

to make an informed judgment about the plan.” 11 U.S.C. § 1125(a)(1). Federal Rule of 

Bankruptcy Procedure 3016 further requires that “[i]f a plan provides for an 

injunction . . . , the plan and disclosure statement shall describe in specific and 

conspicuous language (bold, italic, or underlined texts) all acts to be enjoined and 

identify the entities that would be subject to the injunction.” Fed. R. Bankr. P. 3016(c). 

The Third-Party Release is, for practical purposes, an injunction, as it, by releasing 

BNYM, bars the Bondholders from suing it. Indeed, the initial order approving the 

settlement purported to “permanently enjoin[] [the Bondholders] from asserting, pursuing 
9

or prosecuting, in any manner and in any forum, any and all claims and causes of 

action . . . against . . . the Bond Trustee[.]” App. at 1112.3

For the reasons explained in Judge Frank’s candid and comprehensive opinion 

accompanying his order denying approval of the Third-Party Release, we discern no 

abuse of discretion in his determination that it was not adequately disclosed. As noted, 

the reference to the Release in the disclosure statement was contained in a single 

paragraph in a 62-page document. Id. at 1262. No use was made of underlined, italicized 

or boldfaced text to emphasize the Release or to distinguish it from the more typical 

releases between the parties to the settlement. 

The reference in the proposed plan of reorganization was even less direct and 

similarly obscured by myriad other information disclosed. Id. at 1174. The Release was 

also omitted from numerous sections of the disclosure statement where it was arguably

relevant, including: (1) Summary of Key Terms of the Plan; (2) Summary of 

Distributions Under the Plan; (3) The Bond Trustee Litigation; (4) Treatment of Claims 

Against the Debtors; and (5) Conditions Precedent to Confirmation of the Plan and the 

Occurrence of the Effective Date. See Lower Bucks, 471 B.R. at 437-38, 461. As Judge 

Frank explained, “[i]n both presentation and placement, the documents sent to the 

Bondholders did not differentiate the Third[-]Party Release from any of the other 

information provided, and no effort was made to bring the existence of the Third-Party 

Release to the eyes and attention of the Bondholders.” Id. at 460. Far from an abuse of 

 

3 Once Judge Frank realized the potential implications of that order, he amended it to 

delete the language enjoining the Bondholders. App. at 2089-91.
10

discretion, the record in this case amply supports Judge Frank’s conclusion about the 

inadequacy of disclosure.

We also reject BNYM’s argument that, because Judge Frank initially approved the 

disclosure statement, he could not revisit or reconsider that decision. Federal Rule of 

Bankruptcy Procedure 9024 incorporates Rule 60(b) of the Federal Rules of Civil 

Procedure and allows bankruptcy courts, like district courts, to reconsider earlier orders 

in the case of “mistake, inadvertence, surprise, . . . excusable neglect,” “newly discovered 

evidence,” or “any other reason that justifies relief.” Fed. R. Civ. P. 60(b); see also In re 

Kirwan, 164 F.3d 1175, 1177 (8th Cir. 1999) (noting a bankruptcy court’s “broad 

remedial powers” to revisit claim approval sua sponte). When Judge Frank reviewed the 

disclosure statement and, even earlier, the proposed settlement between Lower Bucks and 

BNYM, he was unaware of the Third-Party Release. That was due in no small part to the 

parties’ failure to disclose adequately or otherwise draw the Court’s attention to that 

provision. Once he became aware of the Release (through Becker’s objection to the 

proposed plan), it was within the Bankruptcy Court’s discretion to revisit its approval of 

the disclosure statement in light of the new information. Any other rule would encourage 

debtors to obscure information in their disclosure statements.

Finally, the Bankruptcy Court was correct to withhold approval of the nonconsensual Third-Party Release. In In re Continental Airlines, 203 F.3d 203 (3d Cir. 

2000), we left open the possibility that some small subset of non-consensual third-party 

releases might be confirmable where the release is “both necessary [to the plan of 

confirmation] and given in exchange for fair consideration.” Id. at 214 n.11. We 
11

identified the “hallmarks” of a permissible non-consensual third-party release as

“fairness, necessity to the reorganization, and specific factual findings to support these 

conclusions[.]” Id. at 214. 

We agree with Judge Frank that this is not an appropriate case for approval of a 

non-consensual third-party release. In the absence of adequate disclosure, it is impossible 

to conclude that “a large majority of the Bondholders supported the Plan and acquiesced 

to the release of their potential claims against BNYM.” Lower Bucks, 471 B.R. at 462. If 

the Bankruptcy Judge was not aware of it, it seems highly unlikely that a typical 

Bondholders was. Put simply, we cannot conclude that the Release was exchanged for 

adequate consideration or was otherwise fair to the Bondholders. See Continental, 203 

F.3d at 215; In re Spansion, Inc., 426 B.R. 114, 144 (Bankr. D. Del. 2010) (describing an 

element of the Continental-derived test as “whether the non-consenting creditors received 

reasonable compensation in exchange for the release”). 

Key terms of a plan of confirmation, particularly those that release a non-debtor 

from claims by creditors, must be adequately disclosed. Failure to do so in a clear and 

conspicuous manner risks excision of the release from the plan. That is what occurred 

here, and thus we affirm.