Third Party Releases in Bankruptcy

Third-Party Releases are the source of some contention in SquareTwo Financial's bankruptcy case with the SEC and UST objecting to the company's proposed plan of reorganization. There are concerns that Mom and Pops with no vote in the reorganization will have no right to pursue causes of action against the debtor - like violations of the Fair Debt Collection Practices Act. This act is meant to prevent "Johnny" from coming over and basically busting kneecaps to collect on some debt - which, according to the UST at least, may not even be outstanding anymore. Now, remember: venue in that case is the Southern District of New York and NOT some random off-center jurisdiction with more favorable (or non-existent) third-party release precedent. Hold on to your butts. Recently third-party releases were approved in the First District in the Cosi Inc. matter despite an objection from the United States Trustee. Because there was an opt-out provision in the plan for those who didn't want to grant releases, the Judge let it slide. Yup, opt-out. Right. Because people read 200-page plans.