SC SJ Holdings, LLC, et al. v. Pillsbury Winthrop Shaw Pittman, LLP

Chapter 11 reorganization plans often contain binding consensual releases. See, e.g., In re Specialty Equip. Cos., 3 F.3d 1043, 1047 (7th Cir. 1993). Non-consensual releases of non-debtor third parties are invalid. See Harrington v. Purdue Pharma L.P., 144 S. Ct. 2071 (2024). Attorneys generally may not contract with their clients to prospectively release claims for the attorneys’ malpractice. See, e.g., Model Rules of Prof’l Conduct R. 1.8(h) (2018). Following Third Circuit precedent, the lower courts concluded that a non-consensual release immunizing Petitioners’ bankruptcy attorneys from malpractice claims LV HQIRUFHDEOH RQFH D EDQNUXSWF\ SODQ LV FRQÀUPHG DQG substantially consummated, even if Petitioners’ attorneys did not obtain their clients’ informed consent to the release and Petitioners could not know of the malpractice or harm until afterWKHSODQZDVFRQÀUPHGDQGVXEVWDQWLDOO\ consummated. The lower courts found that 11 U.S.C. §§ 1127 and 1144 provide the exclusive means to modify or revoke a Chapter 11 plan and rejected Petitioners’ request to review the validity of the release pursuant to Fed. R. Civ. P. 60 and Fed. R. Bankr. P. 9024. The circuits are split on WKLVLVVXHDVSOLWWKLV&RXUWVSHFLÀFDOO\LGHQWLÀHGEXWGLG not settle, in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 270 n.9 (2010). The questions presented are: 1. Whether a non-consensual third-party release of debtors’ attorneys for malpractice claims is HQIRUFHDEOHZKHQLQFOXGHGLQDFRQÀUPHG&KDSWHU 11 plan even though debtors’ attorneys did not advise or inform debtors of the scope of the release or obtain the debtors’ informed consent?