Timothy Blixseth v. Credit Suisse ( 2020 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TIMOTHY L. BLIXSETH, No. 16-35304
Appellant,
D.C. No.
v. 2:11-cv-00065-SHE
CREDIT SUISSE,
Appellee. OPINION
Appeal from the United States District Court
for the District of Montana
Sam E. Haddon, District Judge, Presiding
Argued and Submitted June 17, 2019
San Francisco, California
Filed June 11, 2020
Before: Richard A. Paez, Marsha S. Berzon,
and Jay S. Bybee, Circuit Judges.
Opinion by Judge Berzon
2 BLIXSETH V. CREDIT SUISSE
SUMMARY *
Bankruptcy
The panel affirmed, on different grounds, the district
court’s dismissal of a challenge to an exculpation clause
approved by the bankruptcy court as part of a settlement and
confirmation plan in Chapter 11 proceedings.
The Chapter 11 proceedings were filed by Yellowstone
Club companies founded by appellant Timothy Blixseth and
his then-wife. The exculpation clause released certain non-
debtors, including Credit Suisse, from liability for acts or
omissions arising out of the Chapter 11 proceedings. In a
prior appeal, this court affirmed the district court in part and
reversed in part, holding that Blixseth had standing to
challenge the bankruptcy court’s order approving the plan
and that Blixseth’s challenge to the exculpation clause was
not equitably moot.
As an initial matter, the panel declined to dismiss
Blixseth’s appeal as a sanction for his failure to respond to
an order to show cause for why his appeal should persist in
the wake of a purported global settlement.
The panel held that, on remand, the district court erred
by dismissing Blixseth’s challenge on the ground that it was
barred by equitable mootness. The panel held that its prior
holding on equitable mootness was law of the case and was
sound.
*
This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
BLIXSETH V. CREDIT SUISSE 3
The panel nonetheless affirmed on the ground that the
exculpation clause was valid, and the bankruptcy court
properly released Credit Suisse, a creditor, from liability for
certain potential claims against it. Consistent with the Third
Circuit, the panel held that 11 U.S.C. § 524(e), providing
that discharge of a debt of the debtor does not affect the
liability of any other entity on such debt, did not bar the
exculpation clause, which narrowly focused on actions of
various participants in the plan approval process and related
only to that process.
COUNSEL
Becky S. James (argued) and Rachael A. Robinson, James
& Associates, Calabasas, California, for Appellant.
Christopher J. Cariello (argued), Orrick Herrington &
Sutcliffe LLP, New York, New York; Robert M. Loeb,
Orrick Herrington & Sutcliffe LLP, Washington, D.C.; J.
Richard Orizotti, Poore Roth & Robinson P.C., Butte,
Montana; Evan R. Levy, Mark A. McDermott, and Shaud G.
Tavakoli, Skadden Arps Slate Meagher & Flom LLP, New
York, New York; for Appellee.
4 BLIXSETH V. CREDIT SUISSE
OPINION
BERZON, Circuit Judge:
We have been here, or nearly here, before. Timothy
Blixseth (“Blixseth”) appeals the district court’s dismissal of
his challenge to an exculpation clause (the “Exculpation
Clause” or the “Clause”) approved by the bankruptcy court
as a part of a settlement plan to which Blixseth objected. The
district court dismissed the challenge because it determined
that Blixseth’s case is equitably moot, even though we
previously held his challenge to the Exculpation Clause not
equitably moot. Although the court erred in doing so, we
hold the Exculpation Clause valid, and so affirm the
dismissal.
I
Timothy Blixseth and Edra Blixseth, his wife at the time,
founded the Yellowstone Club in 2000 as an “exclusive ski
and golf community” in Big Sky, Montana. In 2005,
representing that he was planning to take the Yellowstone
Club global, Blixseth borrowed $375 million from Credit
Suisse and other lenders. See Blixseth v. Kirschner (In re
Yellowstone Mountain Club, LLC), 436 B.R. 598, 607, 609–
13. (Bankr. D. Mont. 2010), amended in part by No. 08-
61570-11, 2010 WL 3504210 (Bankr. D. Mont. Sept. 7,
2010). To secure the loan, Blixseth offered the assets of
companies related to the Club—Yellowstone Mountain
Club, LLC; Yellowstone Development, LLC; Big Sky
Ridge, LLC; and Yellowstone Club Construction Company,
LLC. Id. at 608–13.
Blixseth and Edra Blixseth divorced in 2008. As a result
of the divorce proceedings, Edra Blixseth became the
indirect owner of the Yellowstone companies. Id. at 632. The
BLIXSETH V. CREDIT SUISSE 5
companies had entered “a downward spiral,” id. at 618,
largely because Blixseth mismanaged and misused the
money from the 2005 loan, see id. at 613–15. As a result,
repayment of that loan was no longer viable. Id. at 620. Edra
Blixseth decided to take the companies (collectively, the
“Debtors”) through Chapter 11 bankruptcy proceedings,
with the intention of selling the Debtors’ assets to
CrossHarbor Capital Partners, LLC, a real estate
management company that had purchased residential lots in
the Yellowstone Club and had offered to buy the Club. Id.
at 619–21, 630–31.
The bankruptcy proceedings were contentious. The
Debtors, Blixseth, CrossHarbor, Credit Suisse—the
Debtors’ largest creditor—and a committee of unsecured
creditors battled over the companies’ assets. As the
bankruptcy court noted, “litigation and the threat of litigation
is and was plentiful in this case.” In re Yellowstone Mountain
Club, LLC, 460 B.R. 254, 274 (Bankr. D. Mont. 2011).
Settlement negotiations narrowed the scope of the
litigation. On April 3, 2009, the Debtors filed a Second
Amended Reorganization Plan and Disclosure Statement,
which included an exculpation clause releasing certain non-
debtors from liability for acts or omissions arising out of the
Chapter 11 proceedings. Credit Suisse was not included as
an exculpated party. It objected to the plan and, specifically,
the Clause, on the ground that “such releases are strictly
forbidden in the Ninth Circuit and grounds for denial of
confirmation of the Plan.” Blixseth, who was also not
included as an exculpated party, adopted and joined Credit
Suisse’s objections.
Credit Suisse’s objection threatened the confirmation of
the plan and set off another intense round of negotiations.
Over the course of a weekend in May 2009, Credit Suisse,
6 BLIXSETH V. CREDIT SUISSE
CrossHarbor, and the Debtors negotiated a “global
settlement” that allowed the Debtors to avoid liquidating
their assets. Id. at 264–65. This settlement formed the basis
for the Third Amended Joint Plan (the “Plan”). The Plan
resolved lingering litigation between the parties and,
relevant here, included the Exculpation Clause at issue,
which now covered Credit Suisse as an exculpated party.
The full Clause, set out in Section 8.4 of the Plan, provides:
None of [the Exculpated Parties, including
Credit Suisse, CrossHarbor, and Edra
Blixseth], shall have or incur any liability to
any Person for any act or omission in
connection with, relating to or arising out of
the Chapter 11 Cases, the formulation,
negotiation, implementation, confirmation or
consummation of this Plan, the Disclosure
Statement, or any contract, instrument,
release or other agreement or document
entered into during the Chapter 11 Cases or
otherwise created in connection with this
Plan; provided, however, that nothing in this
Section 8.4 shall be construed to release or
exculpate any Exculpated Party from willful
misconduct or gross negligence as
determined by a Final Order or any breach of
the Definitive Agreement or any documents
entered into in connection therewith.
Blixseth, who was not covered by the revised
exculpation clause, again objected to the Plan. The
bankruptcy court approved the Plan on June 2, 2009, and
Blixseth appealed. The district court reversed the bankruptcy
court’s confirmation of the Plan because of the breadth of
the Exculpation Clause. The court instructed the bankruptcy
BLIXSETH V. CREDIT SUISSE 7
court to “explicitly identify and delineate those persons or
representatives determined to be within the scope of the
release parameters of Section 524(e).”
On remand, the bankruptcy court conducted two days of
evidentiary hearings and argument on the Exculpation
Clause. On September 30, 2011, the court confirmed the plan
once more, not modifying the Plan but construing the Clause
to be “narrow in both scope and time.” In re Yellowstone
Mountain Club, LLC, 460 B.R. at 272.
Blixseth appealed again. The district court rejected the
Plan proponents’ argument that Blixseth’s appeal was barred
by the doctrine of equitable mootness but concluded that
Blixseth did not have standing to appeal the bankruptcy
court’s approval of the Plan. Blixseth and the Plan
proponents cross appealed to this Court. In an unpublished
disposition, we affirmed the district court in part and
reversed in part, holding (1) that Blixseth was a “person
aggrieved” by the bankruptcy court’s order and thus had
standing to challenge that order, and (2) that Blixseth’s
challenge to the Exculpation Clause was not equitably moot
because it was “apparent that one or more remedies is still
available.” Blixseth v. Yellowstone Mountain Club, LLC,
609 F. App’x 390, 391–92 (9th Cir. 2015) (citation omitted).
We remanded to the district court with instructions to
consider the merits of Blixseth’s challenge to the Clause.
But on remand, the district court did not rule on the
merits of Blixseth’s challenge to the Clause. Instead, it
dismissed Blixseth’s challenge on the ground that it was
barred by equitable mootness.
This appeal followed.
8 BLIXSETH V. CREDIT SUISSE
II
As an initial matter, we face a procedural question:
Credit Suisse contends Blixseth’s appeal should be
dismissed outright because of his failure to respond to our
order requiring him to show cause for why his appeal should
persist in the wake of a purported global settlement.
During the pendency of this appeal, we became aware
that settlement negotiations among the parties to the dispute
had been ongoing and the parties might have reached a
settlement. We issued an order stating:
It appears that these appeals may be moot
because of settlement or should otherwise be
dismissed. Within 21 days after the filing
date of this order, appellant shall move to
voluntarily dismiss these appeals or show
cause why these appeals should not be
dismissed. If appellant fails to respond to this
order, these appeals will be automatically
dismissed by the Clerk for failure to
prosecute. See 9th Cir. R. 42-1. If appellant
files a response, appellees shall file a
response or an appropriate motion within
14 days after service of appellant’s filing.
Further briefing is stayed pending resolution
of this order.
It turned out that Blixseth had settled with two parties,
CrossHarbor and Yellowstone Mountain Club, LLC, but not
with Credit Suisse. In response to our order, Blixseth moved
to dismiss CrossHarbor and Yellowstone Mountain Club; he
did not explain why he made no motion concerning Credit
Suisse, nor did he explain why his appeal with regard to
Credit Suisse was not moot.
BLIXSETH V. CREDIT SUISSE 9
Our order had stated that Blixseth’s appeal would be
“automatically dismissed by the Clerk,” if he failed to
respond to the order. In fact it was not dismissed. Blixseth
did respond to the order, albeit incompletely, by moving to
dismiss two defendants but not responding with regard to
Credit Suisse.
Blixseth finally did respond as to mootness with regard
to Credit Suisse—a month and a half later than required by
our order—after Credit Suisse moved to dismiss his appeal. 1
Given Blixseth’s belated response with regard to Credit
Suisse, we have the authority to dismiss Blixseth’s appeal
now for incomplete compliance with our order. But
equitable factors persuade us not to do so.
Under our Circuit’s rules,
[w]hen an appellant fails to file a timely
record, pay the docket fee, file a timely brief,
or otherwise comply with rules requiring
processing the appeal for hearing, an order
may be entered by the clerk dismissing the
appeal. In all instances of failure to prosecute
an appeal to hearing as required, the Court
may take such other action as it deems
appropriate.
9th Cir. R. 42-1 (emphases added). In general, “[d]ismissal
is a harsh penalty and is to be imposed only in extreme
circumstances,” because, inter alia, “public policy favor[s]
disposition of cases on their merits.” Henderson v. Duncan,
1
According to Blixseth, Credit Suisse contributed to his failure to
respond by unexpectedly refusing to sign the settlement release the other
parties executed.
10 BLIXSETH V. CREDIT SUISSE
779 F.2d 1421, 1423 (9th Cir. 1986). We routinely dismiss
cases pursuant to Rule 42-1 when an appellant fails to file an
opening brief. See, e.g., Hinds & Shankman, LLP v. Lapides,
No. 19-56236, 2020 WL 1943511, at *1 (9th Cir. Mar. 24,
2020). But in circumstances closer to those here, we have
chosen not to dismiss.
Radici v. Associated Insurance Cos., for instance,
involved an appellant who filed a Civil Appeal Docketing
Statement late, in violation of an order that “specifically
provided that failure to file [the statement] in timely manner
would result in dismissal.” 217 F.3d 737, 746 (9th Cir.
2000). We nonetheless declined to dismiss the appeal in
Radici, because “Appellees’ counsel conceded that
Appellants’ delay . . . did not prejudice or harm her clients’
interests,” making dismissal “appear[] harsher than
necessary.” Id.
Credit Suisse does not concede that Blixseth’s delay
caused it no prejudice, but we cannot identify any interest of
Credit Suisse’s that was harmed as a result of the delay. And,
like the appellant in Radici, Blixseth did respond—if
incompletely—to our order, by moving to dismiss
CrossHarbor and Yellowstone Mountain Club. In light of
those factors, and given the extensive litigation that has
occurred to date over the validity of the Exculpation Clause,
dismissal “appears harsher than necessary.” Id. Rather than
sanction Blixseth for his incomplete compliance with our
directive, we consider the substance of his appeal.
III
A
On remand from Blixseth’s earlier appeal, the district
court dismissed his case on the ground that Blixseth’s
BLIXSETH V. CREDIT SUISSE 11
challenge to the Exculpation Clause was equitably moot. In
reaching this conclusion the district court disregarded our
earlier holding that “Blixseth’s appeal as to the exculpation
clause is not equitably moot, because it is apparent that one
or more remedies is still available.” Blixseth, 609 F. App’x.
at 392. Our holding bound the district court, and it binds us
now, as the law of the case. See Herrington v. Cty. of
Sonoma, 12 F.3d 901, 904–05 (9th Cir. 1993).
Even if we were not bound by our earlier decision, we
remain convinced that it was sound. Credit Suisse argues,
and the district court concluded, that Blixseth’s appeal is
moot because his only proposed remedy, invalidating the
Exculpation Clause, “would require that the [Bankruptcy]
Plan be vacated and constructed anew, thereby creating ‘an
uncontrollable situation for the bankruptcy court.’” Blixseth
v. Yellowstone Mountain Club, LLC, CV-11-65-BU-SEH,
slip op. at 4 (D. Mont. Mar. 23, 2016) (quoting Motor
Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe
Insulation Co.), 677 F.3d 869, 881 (9th Cir. 2012)). But
equitable mootness involves the capacity of courts, not
parties, to fashion a remedy. As In re Thorpe stated,
“[b]ecause traditional equitable remedies are extremely
broad and vest great discretion in a court devising a remedy,
we expect that if there is violation of Appellants’ legal rights
from the plan, the bankruptcy court should be able to find a
remedy that is appropriate.” 677 F.3d at 883 (emphases
added). There are “plan modifications adequate to give”
Blixseth at least some relief—for example, the bankruptcy
court could modify the Plan to make even more express the
limited temporal and substantive scope of the Exculpation
Clause. Id. “Where equitable relief, though incomplete, is
available, the appeal is not moot.” Id.
12 BLIXSETH V. CREDIT SUISSE
B
Because it improperly dismissed the case as equitably
moot, the district court did not determine whether the
Exculpation Clause is valid. We could remand the case once
more, but will not do so. “We are in as good a position to
review the bankruptcy court's decision as is the district
court.” Sousa v. Miguel (In re United States Tr.), 32 F.3d
1370, 1372 (9th Cir. 1994) (citation and internal quotation
marks omitted). “Whether a bankruptcy court has the power
to release claims against a non-debtor is a question of law
which we review de novo.” Resorts Int’l, Inc. v.
Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401 (9th
Cir. 1995) (citation omitted). We hold that the Clause, as
applied to Credit Suisse, is valid.
The question before us is whether the bankruptcy court
could release Credit Suisse, a creditor, from liability for
certain potential claims against it by approving the
Exculpation Clause. 2
The liability release here is “narrow in both scope and
time,” In re Yellowstone Mountain Club, 460 B.R. at 272,
limited to releasing the parties from liability for “any act or
omission in connection with, relating to or arising out of the
Chapter 11 cases” or bankruptcy filing, id. at 267. It does not
affect obligations relating to the claims filed by creditors and
discharged through the bankruptcy proceedings, as it
exclusively exculpates actions that occurred during the
bankruptcy proceeding, not before. And, during that time
period, the Clause’s release applies only to negligence
2
As Blixseth has settled with the other parties covered by the
Clause, we discuss the validity of the clause only as it releases Credit
Suisse from liability.
BLIXSETH V. CREDIT SUISSE 13
claims; it does not release parties “from willful misconduct
or gross negligence.” Id. Further, the Clause covers only
parties “closely involved” in drafting the Plan—as relevant
here, Credit Suisse. Id. at 277. The bankruptcy court
reasoned that Credit Suisse should be covered because, as
the largest creditor, it “had the ability to single-handedly
disrupt the entire confirmation process,” but had become a
“plan proponent[]” through its direct participation in the
negotiations that preceded the adoption of the Plan. Id.
at 275–77. Altogether, as the bankruptcy court noted, the
Exculpation Clause is not “a broad sweeping provision that
seeks to discharge or release nondebtors from any and all
claims that belong to others.” Id. at 270. 3
Blixseth primarily contends the Exculpation Clause
violates 11 U.S.C. § 524(e). Subject to exceptions not
relevant here, § 524(e) establishes 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.” We
have interpreted the section generally to prohibit a
bankruptcy court from discharging the debt of a non-debtor.
See In re Lowenschuss, 67 F.3d at 1402. 4
3
Neither party contests on appeal the bankruptcy court’s
interpretation of the Clause.
4
There is a long-running circuit split on this issue. Other circuits do
allow bankruptcy plans to “discharge the debts of certain non-debtor
third parties.” Deocampo v. Potts, 836 F.3d 1134, 1143 (9th Cir. 2016)
(citing Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d 694,
702 (4th Cir. 1989)). See generally Joshua M. Silverstein, Hiding in
Plain View: A Neglected Supreme Court Decision Resolves the Debate
over Non-Debtor Releases in Chapter 11 Reorganizations, 23 Emory
Bankr. Dev. J. 13 (2006).
14 BLIXSETH V. CREDIT SUISSE
We conclude, however, that § 524(e) does not bar a
narrow exculpation clause of the kind here at issue—that is,
one focused on actions of various participants in the Plan
approval process and relating only to that process.
Section 524(e) establishes that “discharge of a debt of the
debtor does not affect the liability of any other entity on . . .
such debt.” 11 U.S.C. § 524(e) (emphases added). In other
words, “the discharge in no way affects the liability of any
other entity . . . for the discharged debt.” 4 Collier on
Bankruptcy ¶ 524.05 (emphasis added). By its terms,
§ 524(e) prevents a bankruptcy court from extinguishing
claims of creditors against non-debtors over the very debt
discharged through the bankruptcy proceedings. See In re
PWS Holding Corp., 228 F.3d 224, 245–46 (3d Cir. 2000)
(making the same point).
That § 524(e) confines the debt that may be discharged
to the “debt of the debtor”—and not the obligations of third
parties for that debt—conforms to the basic fact that “a
discharge in bankruptcy does not extinguish the debt itself
but merely releases the debtor from personal liability. . . .
The debt still exists, however, and can be collected from any
other entity that may be liable.” Landsing Diversified
Props.-II v. First Nat’l Bank & Tr. Co. of Tulsa (In re W.
Real Estate Fund), 922 F.2d 592, 600 (10th Cir. 1990)
(alteration in original) (quoting In re Lembke, 93 B.R. 701,
702 (Bankr. D.N.D. 1988)); see also Lewis v. Scott (In re
Lewis), 97 F.3d 1182, 1185 (9th Cir. 1996). As § 524(a)
elucidates, a discharge
voids any judgment at any time obtained, to
the extent that such judgment is a
determination of the personal liability of the
debtor with respect to any debt discharged
. . . [;] operates as an injunction against the
BLIXSETH V. CREDIT SUISSE 15
commencement or continuation of an action
. . . to collect, recover or offset any such
[discharged] debt as a personal liability of the
debtor . . . [;] and operates as an
injunction against the commencement or
continuation of an action . . . to collect or
recover from, or offset against, property of
the debtor.
11 U.S.C. § 524(a). A bankruptcy discharge thus protects the
debtor from efforts to collect the debtor’s discharged debt
indirectly and outside of the bankruptcy proceedings; it does
not, however, absolve a non-debtor’s liabilities for that same
“such” debt.
The legislative history of § 524(e) makes clearer the
distinction between claims for the underlying debt and other
claims, such as those relating specifically to the bankruptcy
proceedings. As Underhill v. Royal summarized, § 524(e)
is a
reenactment of Section 16 of the 1898 Act
which provided that “[t]he liability of a
person who is a co-debtor with, or guarantor
or in any manner a surety for, a bankrupt shall
not be altered by the discharge of such
bankrupt.” Act of July 1, 1898, ch. 541, § 16,
30 Stat. 550 (formerly codified at 11 U.S.C.
§ 34 (1976)).
769 F.2d 1426, 1432 (9th Cir. 1985) (alteration in original).
The emphasis on the liability of co-debtors and guarantors,
but not creditors or other third parties, indicates the intended
scope of Section 16 and, by extension, § 524(e). “The import
of Section 16 [of the 1898 Act] is that the mechanics of
16 BLIXSETH V. CREDIT SUISSE
administering the federal bankruptcy laws, no matter how
suggestive, do not operate as a private contract to relieve co-
debtors of the bankrupt of their liabilities.” Id. (alterations in
original) (quoting Union Carbide Corp. v. Newboles,
686 F.2d 593, 595 (7th Cir. 1982) (per curiam)). Like its
predecessor provision in the 1898 Bankruptcy Act, § 524(e)
prevents a reorganization plan from inappropriately
circumscribing a creditor’s claims against a debtor’s co-
debtor or guarantors over the discharged debt, and so does
not apply to the Clause before us.
Consistent with our analysis, the Third Circuit has
upheld an exculpation clause similar to the one here at issue.
PWS, 228 F.3d at 245–46. In doing so, the court took into
account that the exculpated non-debtors there were members
of the creditors’ committee and related professionals and
individuals. At the same time, and more broadly, PWS stated
that “Section 524(e), by its terms, only provides that a
discharge of the debtor does not affect the liability of non-
debtors on claims by third parties against them for the debt
discharged in bankruptcy,” id. at 245 (emphasis added), and
held that the partial exculpation for acts committed during
the process of developing and confirming a Chapter 11 plan
did not “affect the liability of another entity on a debt of the
debtor within the meaning of § 524(e),” id. at 247.
Contesting this limited view of § 524(e), Blixseth directs
us toward broad language we have used in three cases in
which we interpreted § 524(e) to bar nondebtor releases. The
first of these cases, Underhill, stated that “the bankruptcy
court has no power to discharge the liabilities of a nondebtor
pursuant to the consent of creditors as part of a
reorganization plan.” 769 F.2d at 1432, rejected on other
grounds by Reves v. Ernst & Young, 494 U.S. 56 (1990). In
re American Hardwoods, Inc. added that “Section 524(e) . . .
BLIXSETH V. CREDIT SUISSE 17
limits the court’s equitable power under section 105 to order
the discharge of the liabilities of nondebtors.” 885 F.2d 621,
626 (9th Cir. 1989). Finally, based on Underhill and
American Hardwoods, Lowenschuss declared “[t]his court
has repeatedly held, without exception, that § 524(e)
precludes bankruptcy courts from discharging the liabilities
of non-debtors.” 67 F.3d at 1401.
But Underhill, American Hardwoods, and Lowenschuss
all involved sweeping nondebtor releases from creditors’
claims on the debts discharged in the bankruptcy, not
releases of participants in the plan development and approval
process for actions taken during those processes. Underhill,
for example, disapproved a release provision that discharged
“all claims against the debtor, any affiliate of the Debtor, and
any insider of the debtor,” including for securities law
violations that occurred prior to the bankruptcy filing.
769 F.2d at 1429–30 (emphases added) (internal quotations
marks omitted). American Hardwoods involved an
injunction that, like a release provision, would have
permanently prevented a creditor from collecting any debt
from American Hardwoods’ guarantors—the president and
vice president of American Hardwoods—on American
Hardwoods’ discharged debts. 885 F.2d at 622. And
Lowenschuss dealt with a “Global Release” provision that,
true to its title, “released numerous parties . . . from all
claims.” 67 F.3d at 1397, 1401. In each of these cases, the
breadth of the coverage—the “Global Release” in
Lowenschuss; the permanent injunction in American
Hardwoods; and the “all claims” exculpation in Underhill—
would have affected the ability of creditors to make claims
against third parties, including guarantors and co-debtors,
for the debtor’s discharged debt.
18 BLIXSETH V. CREDIT SUISSE
In contrast, the Exculpation Clause here deals only with
the highly litigious nature of Chapter 11 bankruptcy
proceedings. 5 As one of the bankruptcy attorneys in this case
stated during the bankruptcy court’s hearing on the
Exculpation Clause, in bankruptcy proceedings lawyers
“battle each other tirelessly . . . . oxes [sic] are gored.”
460 B.R. at 274 (internal quotation marks omitted). Rather
than provide an unauthorized “fresh start” to a non-debtor,
Bank of N.Y. Tr. Co., NA v. Official Unsecured Creditors’
Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 251–53
(5th Cir. 2009), the Clause does nothing more than allow the
settling parties—including Credit Suisse, the Debtors’
largest creditor—to engage in the give-and-take of the
bankruptcy proceeding without fear of subsequent litigation
over any potentially negligent actions in those proceedings. 6
Under 11 U.S.C. § 105(a), which empowers a
bankruptcy court to “issue any order, process, or judgment
5
Notably, Blixseth has never shown that the Exculpation Clause
impermissibly releases Credit Suisse—or anyone—from any potential
viable claims he might bring. At oral argument, Blixseth raised the
dismissal of a breach of contract claim against Credit Suisse in a separate
suit he filed in the District of Colorado. See Blixseth v. Cushman &
Wakefield of Colo., Inc., 2013 WL 5446791 (D. Colo. 2013). The district
court there did determine that the Exculpation Clause barred his claim,
but the claim involved Credit Suisse’s participation in the bankruptcy
proceedings, not its conduct outside those proceedings. Id. at *9.
6
Blixseth does not challenge the Exculpation Clause on the grounds
that it violates the “hallmarks of permissible non-consensual releases—
fairness, necessity to the reorganization, and specific factual findings to
support these conclusions.” Gillman v. Continental Airlines (In re
Continental Airlines), 203 F.3d 203, 214 (3d Cir. 2000). We therefore do
not consider that possibility in detail, but we do note that, based on the
bankruptcy courts findings, In re Yellowstone Mountain Club, LLC,
460 B.R. at 272, the Clause almost certainly displays these hallmarks.
BLIXSETH V. CREDIT SUISSE 19
that is necessary or appropriate to carry out the provisions of
[Chapter 11],” and 11 U.S.C. § 1123, which establishes the
appropriate content of a bankruptcy plan, the bankruptcy
court here had the authority to approve an exculpation clause
intended to trim subsequent litigation over acts taken during
the bankruptcy proceedings and so render the Plan viable.
Section 524(e) constrains this power by ensuring that no
third party is released from its obligation for the underlying
debt. See 11 U.S.C. § 1123(a); Am. Hardwoods, 885 F.2d
at 625–26. But, as we have discussed, the Exculpation
Clause does not affect claims for that debt, and so it was
within the bankruptcy court’s power to approve the
Exculpation Clause as a part of the Plan. 7 According to PWS,
similar limited exculpatory clauses focused on acts
committed as part of the bankruptcy proceedings are
“apparently a commonplace provision in Chapter 11 plans,”
228 F.3d at 245; see also In re Yellowstone Mountain Club,
460 B.R. at 271, 274, presumably because of the features of
bankruptcy litigation just noted. 8
7
The Fifth Circuit has reached a conclusion opposite ours. In re
Pacific Lumber Co. held that § 524(e) barred a release provision that
would have released non-debtors who were not “co-liable for the
Debtors’ pre-petition debts . . . . from any negligent conduct that
occurred during the course of the bankruptcy,” except insofar as the
release covered negligent conduct of members of the creditors’
committee already protected by a limitation on liability implied from the
bankruptcy code. 584 F.3d at 252. In re Pacific Lumber Co. reasoned
that “[t]he fresh start § 524(e) provides to debtors is not intended to serve
this purpose.” Id. at 252-53. But, as we have discussed, the Exculpation
Clause does not provide a “fresh start” to Credit Suisse, because it affects
only claims arising from the bankruptcy proceedings themselves.
8
Unlike the creditors committee in PWS, one of the exculpated
parties in that case, Credit Suisse, the Debtors’ largest creditor, does not
have an implied fiduciary duty derived from the statute to the participants
20 BLIXSETH V. CREDIT SUISSE
Aside from his § 524(e) argument, Blixseth also argues
he is not bound by the Plan’s settlement because there was
no consideration for the settlement and he was not in privity
with the parties. These arguments misunderstand the source
of a bankruptcy court’s power. As Underhill explained,
“When a bankruptcy court discharges the debtor, it does so
by operation of the bankruptcy laws, not by consent of the
creditors. . . . [T]he payment which effects a discharge is not
consideration for any promise by the creditors, much less for
one to release non-party obligators.” 769 F.2d at 1432
(internal quotation marks omitted) (quoting Union Carbide
Corp., 686 F.2d at 595). Whether or not there was
consideration and privity, the bankruptcy court had the
power to confirm the Plan.
IV
In sum, we shall not dismiss Blixseth’s appeal because
of his failure to reply to our show cause order. We remain
bound by our earlier decision that Blixseth’s challenge to the
Exculpation Clause is not equitably moot. Considering the
merits of Blixseth’s challenge, we hold that § 524(e) does
not prohibit the Exculpation Clause at issue, because the
Clause covers only liabilities arising from the bankruptcy
proceedings and not the discharged debt. Perhaps we have
reached the end of this matter.
AFFIRMED.
of the bankruptcy proceedings. 228 F.3d at 246; see also 11 U.S.C.
§ 1103(c). But the fundamental point remains that the Clause, as applied
to Credit Suisse, does not reach “such debt” within the meaning of
§ 524(e)—it merely releases Credit Suisse from some potential liability
that might arise from its actions in the bankruptcy proceedings.