United States: In Re Seaside Engineering: Eleventh Circuit Holds Fast On Legitimacy Of Nonconsensual Third Party Plan Releases

Last Updated: August 3 2015
Article by Genna L. Ghaul

In a recent decision, the United States Court of Appeals for the Eleventh Circuit reaffirmed its position sanctioning, under appropriate circumstances, nonconsensual third party release provisions in chapter 11 plans. In SE Prop. Holdings, LLC v. Seaside Eng'g & Surveying, Inc.(In re Seaside Eng'g & Surveying, Inc.), 780 F.3d 1070 (11th Cir. 2015), the Eleventh Circuit affirmed bankruptcy and district court decisions approving a debtor's chapter 11 plan that released the debtor's former principals over the objection of a noninsider equity holder. In so ruling, the Eleventh Circuit maintained its alignment with the majority position on the third party release issue, along with the Second, Third, Fourth, Sixth, and Seventh Circuits.

Validity of Nonconsensual Third Party Releases in a Chapter 11 Plan

The federal circuit courts of appeal are split as to whether a bankruptcy court has the authority to approve chapter 11 plan provisions that, over the objection of creditors or other stakeholders, release specified nondebtors from liability and/or enjoin dissenting stakeholders from asserting claims against such nondebtors. The minority view, held by the Fifth, Ninth, and Tenth Circuits, bans such nonconsensual releases on the basis that section 524(e) of the Bankruptcy Code, which provides generally that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt," prohibits them. See Bank of N.Y. Trust Co. v. Official Unsecured Creditors' Comm. (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009); In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re W. Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990).

On the other hand, the majority of circuits to consider the issue—the Second, Third, Fourth, Sixth, and Seventh Circuits—have found such releases and injunctions permissible, under certain circumstances. See In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285 (2d Cir. 1992); In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000); In re A.H. Robins Co., Inc., 880 F.2d 694 (4th Cir. 1989); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002); In re Airadigm Communications, Inc., 519 F.3d 640 (7th Cir. 2008). For authority, these courts generally rely on section 105(a) of the Bankruptcy Code, which authorizes courts to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." Moreover, as the Seventh Circuit held in Airadigm, the majority view is that section 524(e) does not limit a bankruptcy court's authority to grant such a release. The First and D.C. Circuits have indicated that they agree with the "pro-release" majority, as did the Eleventh Circuit in a decision that had long predated Seaside Engineering. See In re Monarch Life Ins. Co., 65 F.3d 973 (1st Cir. 1995); In re Munford, Inc., 97 F.3d 449 (11th Cir. 1996); In re AOV Industries, 792 F.2d 1140 (D.C. Cir. 1986).

In Dow Corning, the Sixth Circuit identified seven factors that bankruptcy courts should consider when evaluating the propriety of a nonconsensual release of claims against a nondebtor third party in a chapter 11 plan:

  1. An identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the nondebtor is, in essence, a suit against the debtor or will deplete the assets of the estate;
  2. Substantial contribution by the nondebtor of assets to the reorganization;
  3. The essential nature of the injunction to the reorganization, namely, the fact that the reorganization hinges on the debtor's being free from indirect suits against parties who would have indemnity or contribution claims against the debtor;
  4. Overwhelming acceptance of the plan by the impacted class or classes;
  5. Provision in the plan for payment of all or substantially all of the claims of the class or classes affected by the injunction;
  6. Provision in the plan for an opportunity for claimants who chose not to settle to recover in full; and
  7. A record of specific factual findings by the bankruptcy court that supports its conclusions.

The list is nonexclusive, and not all of the factors need to be satisfied. Courts have the discretion and flexibility to determine which of the factors will be relevant in each case.

In In re Master Mortgage Invest. Fund, Inc., 168 B.R. 930 (Bankr. W.D. Mo. 1994), the bankruptcy court articulated a similar five-factor test that considers: (i) the identity of interests between the debtor and the third party, including any indemnity relationship; (ii) any value (monetary or otherwise) contributed by the third party to the chapter 11 case or plan; (iii) the need for the proposed release in terms of facilitating the plan or the debtor's reorganization efforts; (iv) the level of creditor support for the plan; and (v) the payments and protections otherwise available to creditors affected by the release. Like the Dow Corning factors, the Master Mortgage test has been cited with approval by many other courts. See, e.g., In re Charles St. African Methodist Episcopal Church of Bos., 499 B.R. 66 (Bankr. D. Mass. 2013); In re Riverbend Leasing, LLC, 458 B.R. 520 (Bankr. S.D. Iowa 2011); In re Wash. Mut., Inc., 442 B.R. 314 (Bankr. D. Del. 2011); In re Zenith Elecs. Corp., 241 B.R. 92 (Bankr. D. Del. 1999).

The Eleventh Circuit revisited the third party release issue in Seaside Engineering.


Seaside Engineering & Surveying, Inc. ("Seaside") was a closely held civil engineering and surveying firm that conducted hydrographic surveying and navigational mapping. Seaside's five principal shareholders were also its officers, directors, and key operating personnel.

Seaside's principal shareholders also formed two wholly separate real estate companies. These companies borrowed money from Vision-Park Properties, LLC, and an affiliate (collectively, "Vision"). Seaside's shareholders personally guaranteed the loans, but Seaside was neither a borrower nor a guarantor.

The real estate ventures ultimately defaulted on the loans, triggering a $4.5 million obligation under the personal guarantees. Three of Seaside's principal shareholders then filed chapter 7 cases. The chapter 7 trustee in one of the cases auctioned the debtor's Seaside shares, which Vision acquired for $100,000.

Seaside filed for chapter 11 protection in the Northern District of Florida on October 7, 2011 (after Vision acquired the Seaside shares). Seaside filed a chapter 11 plan (the "Plan") under which Seaside proposed to reorganize and continue operating under a new name—Gulf Atlantic, LLC ("Gulf"). Gulf would be owned by irrevocable family trusts settled for Seaside's principal shareholders, who would also manage the reorganized company. Under the Plan, nonmanager equity holders, including Vision, were to receive promissory notes with interest accruing at the rate of 4.25 percent annually in exchange for their interests in Seaside and would not receive an ownership interest in Gulf.

The Plan also included provisions releasing Seaside's officers, directors, and members; Gulf; Gulf's officers, directors, and members; and the representatives of each of these nondebtor entities. The releases covered liability for acts, omissions, transactions, and other occurrences related to Seaside's chapter 11 case, except actions amounting to fraud, gross negligence, or willful misconduct.

Vision objected to various aspects of the Plan, including the releases. According to Vision, the releases were "inappropriate, unjust and unnecessary" and improperly sought to frustrate Vision's efforts to collect from the principal shareholders and their respective bankruptcy estates.

The bankruptcy court approved the releases after Seaside amended the Plan provisions to remove subsidiaries and affiliates from the list of released parties and agreed to terminate litigation against Vision seeking sanctions. In doing so, the court applied the multifactor Dow Corning test.

The bankruptcy court confirmed the amended Plan over Vision's objections. Vision appealed to the U.S. District Court for the Northern District of Florida, which affirmed the confirmation order. Vision then appealed to the Eleventh Circuit.

The Eleventh Circuit's Ruling

A three-judge panel of the Eleventh Circuit affirmed.

At the outset of its ruling, the Eleventh Circuit noted that, in Munford, the court previously held that section 105(a) of the Bankruptcy Code provides bankruptcy courts with authority to approve nonconsensual third party releases. The court approved the release in Munford because: (i) it was "integral to settlement in an adversary proceeding," and (ii) the released party was a settling defendant that would not have agreed to the settlement without the release. Despite the factual dissimilarities between the two cases, the Eleventh Circuit in Seaside Engineering wrote that "Munford is the controlling case here" and held that the Eleventh Circuit follows the "majority view" that nonconsensual third party releases are permissible under certain circumstances.

The Eleventh Circuit rejected the argument endorsed by the "minority circuits" that such releases are prohibited by section 524(e) of the Bankruptcy Code. In doing so, the court agreed with the Seventh Circuit's rationale in Airadigm, where the court stated that "[t]he natural reading of this provision does not foreclose a third-party release from a creditor's claims." Moreover, the Eleventh Circuit explained, if Congress had intended to limit the power of bankruptcy courts in this respect, it would have done so unequivocally.

With this groundwork, the Eleventh Circuit ruled that the bankruptcy court's application of Dow Corning was consistent with existing Eleventh Circuit precedent. In commending those factors to bankruptcy courts within the circuit, the Eleventh Circuit emphasized that bankruptcy courts have discretion to determine which of the factors will be relevant in each case and that the factors should be considered a nonexclusive list of considerations. Moreover, the Eleventh Circuit noted, the Dow Corning factors should be applied flexibly, always keeping in mind that such releases should be used "cautiously and infrequently" and only where essential, fair, and equitable.

The Eleventh Circuit determined that the bankruptcy court did not abuse its discretion in finding that, overall, application of the Dow Corning factors demonstrated that the Plan releases were appropriate. However, the Eleventh Circuit explained that, in accordance with Munford, bankruptcy courts should also consider whether a proposed release is "fair and equitable." Although the bankruptcy court did not explicitly make such a finding in the case before it, the Eleventh Circuit was satisfied that the bankruptcy court, in discussing considerations relevant to such a finding and requiring Seaside to cease litigation against Vision, properly considered whether the releases had satisfied this requirement. Among other things, the Eleventh Circuit, noting that the bankruptcy court had described the chapter 11 case as a "death struggle," stated that "the non-debtor releases are a valid tool to halt that fight."

Impact of Seaside Engineering

Seaside Engineering confirms that the Eleventh Circuit is still firmly in the majority camp concerning the propriety of nonconsensual third party releases in a chapter 11 plan, depending on the circumstances. This can be viewed as a positive development for proponents of such releases as a tool for overcoming confirmation obstacles in complex, contested chapter 11 cases.

The final report issued on December 8, 2014, by the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11 highlights the circuit split on this controversial issue. Although the Commission endorsed the majority view in favor of plan releases under appropriate circumstances, it also examined which text better determines whether such circumstances exist: the Dow Corning test or the Master Mortgage test.

The two tests overlap significantly. However, unlike the Dow Corning factors, the Master Mortgage factors do not consider whether "[t]he bankruptcy court made a record of specific factual findings that supports its conclusions." The Commission ultimately recommended that courts adopt a standard based on the factors articulated in Master Mortgage rather than those in Dow Corning. The Commission declined "to incorporate separate identification of unique or unusual circumstances," stating that "the Master Mortgage factors adequately capture[] the careful review required in these cases."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.