The U.S. Trustee assigned to Novation Companies’ case filed with the U.S. Bankruptcy Court an objection to the confirmation of First Amended Joint Chapter 11 Plan of Reorganization of Novation Companies and Novastar Mortgage.
The trustee asserts, “Preliminarily, it should be noted that this Opt-Out clause is misleading and inaccurate when it indicates that ‘all creditors’ have the ability to elect to ‘opt out’ of the Third-Party Releases. In fact, a large group of creditors do not have the ability to opt out of the Third-Party Releases. Specifically, those creditors whose claims are deemed ‘unimpaired’ and, therefore, who do not get to vote to accept or reject the Plan cannot opt out….Here, the Third-Party Releases and the Exculpation Provision are improper and overly broad. The Exculpation Provision here purports to preclude liability on the back end for the very things Judge Derby held were improper to exclude on the front end….The Exculpation Provision also releases some creditors from liability, so long as those creditors are members of the Creditors Committee. The United States Trustee appoints members of the Creditors Committee to adequately represent the various types of creditors in the case, not so they can bootstrap their membership into undeserved releases of liability by parties who did nothing but happen to be creditors of the same debtor who were not selected to serve on the Creditors Committee. Finally, to be permissible, an exculpation clause must contain a “gatekeeper function” by which the Court may, ‘in its discretion, permit an action to go forward against the exculpated parties.’ The Plan here does not provide for such a “gatekeeper function” by the Court.
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