Nondebtor Release Prohibition Act of 2021

Nondebtor Release Prohibition Act of 2021

This bill addresses the release by bankruptcy courts of creditor or other third-party claims against non-debtors. Complex bankruptcies may involve third-party claims against non-debtors associated with the debtor, such as the debtor's officers, directors, or employees. Currently, in carrying out a bankruptcy plan, bankruptcy courts may release non-debtors from liability (there is a split in the judicial circuits regarding this practice).

The bill generally prohibits a bankruptcy court from (1) releasing or modifying a non-debtor's liability through the approval of a bankruptcy plan or through an order, or (2) enjoining a judicial proceeding or other act to collect or otherwise enforce such a claim or cause of action against a non-debtor. However, the bill provides for the release of such liability if express consent is given by the third party.

The bill also generally limits an order or decree to temporarily enjoin a proceeding against a non-debtor to 90 days.

Additionally, the bill gives appellate jurisdiction to the appropriate U.S. court of appeals regarding an order or decree to temporarily enjoin or stay a proceeding against a non-debtor in a Chapter 11 reorganization bankruptcy case. Currently, U.S. district courts have appellate jurisdiction for these matters.

Upon request of an interested party, and after notice and a hearing, the court shall dismiss a Chapter 11 reorganization bankruptcy case if the debtor was involved in certain restructuring activity that (1) had the intent or foreseeable effect of separating a debtor's assets from a debtor's liabilities and the debtor assuming or retaining such liabilities, and (2) occurred in the 10-year period prior to the filing of the bankruptcy petition.

Written by the nonpartisan Congressional Research Service. All summary versions on Congress.gov