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By: Andrew J. Olejnik and Abraham M. Salander
In In re Greektown Holdings, LLC, 728 F.3d 567 (6th Cir. 2013) (No. 12-2434), the Sixth Circuit addressed questions of first impression in that Circuit concerning when a district court can enter an order barring third party claims against settling defendants. The Sixth Circuit vacated the district court’s order which, as a condition to a proposed settlement, enjoined any person or entity from pursuing any claim against settling defendants relating to the underlying suit. The district court had analyzed whether the order would bar any viable claims, and, after finding that it would not, entered the injunction. The Sixth Circuit disagreed with this approach, explaining that, if there are no claims to bar, there is no need for such an order, and that the district court’s approach would be time-consuming and unwieldy.
Instead, the Sixth Circuit identified three issues for lower courts to resolve before deciding to enter such a bar order. First, the court should determine if it has jurisdiction to enter the bar order by examining whether the actions subject to the bar order are “related to” the bankruptcy case. In particular, the court should assess whether the outcome of the actions enjoined by the bar order would affect the bankruptcy estate. If not, then there is not “related to” jurisdiction. Second, the court must decide whether it has the power to enter the bar order under Section 105 of the Bankruptcy Code. The Sixth Circuit guided the district court to the Sixth Circuit’s holding in In re Dow Corning that Section 524 of the Bankruptcy Code does not prohibit a court from releasing a non-debtor from liability. Third, the court should closely scrutinize the scope of the bar order to ensure that the only claims that are extinguished are claims where the non-settling defendant’s injury arises from its liability to the plaintiff. The Sixth Circuit further explained that a “bar order that enjoins independent claims and provides no compensation is problematic to say the least.”