Ruling from the bench on April 4, Bankruptcy Judge Alan Koschik of the United States Bankruptcy Court for the Northern District of Ohio denied approval of a disclosure statement proposed by FirstEnergy Solutions Corp. because the plan it described was “patently unconfirmable.”[1]

Ordinarily, objections to confirmation of a plan are reserved for the confirmation hearing, not addressed at the hearing to consider adequacy of the disclosure statement. However, courts “have recognized that if it appears there is a defect that makes a plan inherently or patently unconfirmable, the Court may consider and resolve that issue at the disclosure stage before requiring the parties to proceed with solicitation of acceptances and rejections and a contested confirmation hearing.” In re Am. Capital Equip., LLC, 688 F.3d 145, 154 (3d Cir. 2012). “The rationale is that the court's equitable powers [. . . ] enable it to control its own docket and thus, a court should not proceed with the time-consuming and expensive proposition of hearings on a disclosure statement and plan when the plan may not be confirmable because it does not comply with confirmation requirements.” Id (internal citations and quotations omitted).

It is common for opponents of a plan to air their grievances at the disclosure statement hearing in the guise of a “patently unconfirmable” objection, but it is the exception and not the rule when a judge agrees that a proposed plan is so fatally flawed that it should not even be sent to creditors for a vote. In this case, however, the United States, on behalf of the U.S. Environmental Protection Agency and the U.S. Nuclear Regulatory Commission, as well as the Office of the Ohio Attorney General (the “Governments”), argued that the proposed release and injunction provisions in the plan were incompatible with Sixth Circuit law.

The Governments opposed the third-party releases on two grounds. First, they maintained that the release and injunction provisions would impermissibly enjoin claims that fall outside of the boundaries of the Bankruptcy Court’s subject matter jurisdiction. Second, the Governments argued that even assuming the Bankruptcy Court did have subject matter jurisdiction to grant the broad releases requested by the Debtor, the proposed releases did not satisfy the standard set forth in In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002), because, in the Sixth Circuit, “the injunction of a non-consenting third party’s claim against a non-debtor ‘is a dramatic measure to be used cautiously,’ and only when a number of factors are present.”[2]

The Debtor responded that the Court should defer consideration of the third-party releases until the confirmation hearing, where the evidentiary record would demonstrate the plan’s compliance with the Dow Corning standard and prove that “without these releases and the consideration being granted by the [beneficiaries of the proposed third-party releases], the Debtors would not be able to reorganize and emerge as well capitalized entities able to meet their ongoing obligations.”[3] But Judge Koschik was unpersuaded, expressing particular concern that the proposed plan “‘makes no provision’ for the governments who could get stuck with the bill for potential pollution traced to” the Debtor.[4]