Nondebtor Release Prohibition Act of 2021
Bill: H.R.4777 | Sponsor: Rep. Nadler, Jerrold (D-NY)
Policy area: Finance and Financial Sector

Summary:
Nondebtor Release Prohibition Act of 2021
This bill addresses the release by bankruptcy courts of creditor or other third-party claims against non-debtors. Complex bankruptcies may involve third-party claims against non-debtors associated with the debtor, such as the debtor's officers, directors, or employees. Currently, in carrying out a bankruptcy plan, bankruptcy courts may release non-debtors from liability (there is a split in the judicial circuits regarding this practice).
The bill generally prohibits a bankruptcy court from (1) releasing or modifying a non-debtor's liability through the approval of a bankruptcy plan or through an order, or (2) enjoining a judicial proceeding or other act to collect or otherwise enforce such a claim or cause of action against a non-debtor. However, the bill provides for the release of such liability if express consent is given by the third party.
The bill also generally limits an order or decree to temporarily enjoin a proceeding against a non-debtor to 90 days.
Additionally, the bill gives appellate jurisdiction to the appropriate U.S. court of appeals regarding an order or decree to temporarily enjoin or stay a proceeding against a non-debtor in a Chapter 11 reorganization bankruptcy case. Currently, U.S. district courts have appellate jurisdiction for these matters.
Upon request of an interested party, and after notice and a hearing, the court shall dismiss a Chapter 11 reorganization bankruptcy case if the debtor was involved in certain restructuring activity that (1) had the intent or foreseeable effect of separating a debtor's assets from a debtor's liabilities and the debtor assuming or retaining such liabilities, and (2) occurred in the 10-year period prior to the filing of the bankruptcy petition.

To amend title 11, United States Code, to prohibit nonconsensual 
 release of a nondebtor entity's liability to an entity other than the 
                    debtor, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Nondebtor Release Prohibition Act of 
2021''.

SEC. 2. PROHIBITION OF NONDEBTOR RELEASES.

    (a) In General.--Chapter 1 of title 11, United States Code, is 
amended by adding at the end the following:
``Sec. 113. Prohibition of nondebtor releases
    ``(a) Except as provided in subsection (b) of this section, 
subsection (a)(3), (g), (h), or (i) of section 524, section 1201, and 
section 1301, the court may not--
            ``(1) with respect to the liability of an entity other than 
        the debtor or the estate on, or the liability of property of an 
        entity other than the debtor or the estate for, a claim or 
        cause of action of an entity other than the debtor or the 
        estate--
                    ``(A) approve any provision, in a plan of 
                reorganization or otherwise, for the discharge, 
                release, termination, or modification of such 
                liability; or
                    ``(B) order the discharge, release, termination, or 
                modification of such liability; or
            ``(2) with respect to a claim or cause of action of an 
        entity other than the debtor or the estate against an entity 
        other than the debtor or the estate, or against property of an 
        entity other than the debtor or the estate, enjoin--
                    ``(A) the commencement or continuation (including 
                the issuance or employment of process) of a judicial, 
                administrative, or other action or proceeding to 
                assert, assess, collect, recover, offset, recoup, or 
                otherwise enforce such claim or cause of action; or
                    ``(B) any act to assert, assess, collect, recover, 
                offset, recoup, or otherwise enforce such claim or 
                cause of action.
    ``(b) Nothing in subsection (a) of this section shall affect any 
power the court may have--
            ``(1) to authorize a sale, transfer, or other disposition 
        of property free and clear of claims or interests;
            ``(2) to prevent an entity other than the debtor or the 
        estate from exercising control over or otherwise interfering 
        with a right or interest (including a claim or cause of action) 
        that is property of the estate;
            ``(3) to bar a claim or cause of action for indemnity, 
        reimbursement, contribution, or subrogation against an entity 
        that the estate has released from a claim or cause of action 
        for which the holder of the barred claim or cause of action 
        also is or may be liable or has or may have secured;
            ``(4) under applicable nonbankruptcy law, title 28, or the 
        Federal Rules of Bankruptcy Procedure, with respect to any 
        claim or cause of action the court is hearing under section 
        157(a) or 1334(b) of title 28;
            ``(5) to approve any disposition of a claim or cause of 
        action of an entity other than the debtor or the estate to 
        which such entity expressly consents in a signed writing 
        provided that--
                    ``(A) such consent is given only after clear and 
                conspicuous notice to such entity of the proposed 
                disposition in language appropriate for the typical 
                holder of such claim or cause of action;
                    ``(B) such consent cannot be given by--
                            ``(i) accepting a proposed plan; or
                            ``(ii) failing to accept or reject a 
                        proposed plan, failing to object to a proposed 
                        plan, or any other silence or inaction; and
                    ``(C) treatment of such entity, and any claims or 
                interests of such entity, under a plan cannot be more 
                or less favorable by reason of such entity's consent or 
                failure to consent; or
            ``(6) to enjoin the commencement or continuation (including 
        the issuance or employment of process) of a judicial, 
        administrative, or other action or proceeding against an entity 
        appointed or employed (or whose appointment or employment was 
        approved) by or under the auspices of the court, in another 
        court and without leave of the court, with respect to acts or 
        omissions for which the entity was so appointed or employed.
    ``(c) In a case under chapter 11 of this title, no order or decree 
temporarily staying or enjoining, pursuant to this title, the 
commencement or continuation (including the issuance or employment of 
process) of a judicial, administrative, or other action or proceeding 
to assert, assess, collect, recover, offset, recoup, or otherwise 
enforce a claim or cause of action against an entity other than the 
debtor or the estate against an entity other than the debtor or the 
estate, or against property of an entity other than the debtor or the 
estate, shall extend (or be extended) beyond 90 days after the date of 
the order for relief without the express consent of the entity whose 
claim or cause of action is stayed or enjoined.
    ``(d) Nothing in subsection (b) or (c) shall be construed to 
authorize relief within the scope of subsection (b) or (c).''.
    (b) Clerical Amendment.--The table of sections for chapter 1 of 
title 11, United States Code, is amended by adding at the end the 
following:

``113. Prohibition of nondebtor releases.''.

SEC. 3. APPEAL OF NONDEBTOR STAYS.

    Section 158 of title 28, United States Code, is amended--
            (1) in subsection (a), by striking ``The'' and inserting 
        ``Except as provided in subsection (d)(3), the''; and
            (2) by inserting after subsection (d)(2) the following:
            ``(3)(A) The appropriate court of appeals shall have 
        jurisdiction of appeals from all orders and decrees (whether 
        interlocutory or final) temporarily staying or enjoining (or 
        increasing the duration of any temporary stay or injunction of) 
        the commencement or continuation (including the issuance or 
        employment of process) of a judicial, administrative, or other 
        action or proceeding to assert, assess, collect, recover, 
        offset, recoup, or otherwise enforce a claim or cause of action 
        of an entity other than the debtor or the estate against an 
        entity other than the debtor or the estate, or against property 
        of an entity other than the debtor or the estate, entered in a 
        case under chapter 11 of title 11 by--
                    ``(i) a bankruptcy judge under section 157 of this 
                title; or
                    ``(ii) a district court under section 1334 of this 
                title.
            ``(B) If an appeal is taken under subparagraph (A), the 
        stay order or decree shall immediately terminate and dissolve 
        and be of no further force or effect 90 days after its issuance 
        by the bankruptcy judge or district court, unless the appeal is 
        dismissed or the court of appeals affirms the stay order or 
        decree before that date.''.

SEC. 4. DIVISIONAL MERGERS.

    Section 1112 of title 11, United States Code, is amended--
            (1) by redesignating subsection (f) as subsection (g); and
            (2) by inserting after subsection (e) the following:
    ``(f) On a request of a party in interest, and after notice and a 
hearing, the court shall dismiss a case under this chapter if the 
debtor or a predecessor of the debtor was the subject of, or was formed 
or organized in connection with a divisional merger or equivalent 
transaction or restructuring that--
            ``(1) had the intent or foreseeable effect of--
                    ``(A) separating material assets from material 
                liabilities of an entity eligible to be a debtor under 
                this title; and
                    ``(B) assigning or allocating all or a substantial 
                portion of those liabilities to the debtor, or the 
                debtor assuming or retaining all or a substantial 
                portion of those liabilities; and
            ``(2) occurred during the 10-year period preceding the date 
        of the filing of the petition.''.

SEC. 5. RULE OF CONSTRUCTION.

    Nothing in this Act, or the amendments made by this Act, shall be 
construed to independently grant the court authority to issue nondebtor 
releases, injunctions, or stays in connection with an order for relief 
under chapter 11 of title 11, United States Code, or in connection with 
an order confirming a plan of reorganization, nor shall anything in 
this Act or such amendments be construed to imply that any other 
provision of title 11 of such Code or of nonbankruptcy law grants such 
authority.

SEC. 6. EFFECTIVE DATE.

    (a) In General.--Except as provided in subsection (b), this Act and 
the amendments made by this Act shall take effect on the date of the 
enactment of this Act and shall apply to any case under title 11, 
United States Code, that is--
            (1) pending in bankruptcy as of the date of the enactment 
        of this Act; or
            (2) filed or reopened on or after the date of the enactment 
        of this Act.
    (b) Validity of Final Orders.--Nothing in this Act, or the 
amendments made by this Act, shall affect the validity of any final 
judgment, order, or decree as applied under section 158 of title 28, 
United States Code, entered before the date of the enactment of this 
Act.
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