In re Dr. Gail Van Diepen, P.A., No. 06-14517, 2007 U.S. App. LEXIS 12796 (11th Cir. May 31, 2007).

After judgments were entered against the debtor entity, the principal closed the debtor and started a new company to provide health care services.  Assets of the debtor were transferred to the new company.  After the debtor went into Bankrutcy, the trustee evaluated claims that the debtor’s estate may have against the new company, the principal and other non-debtors.  The trustee did so, and negotiated a settlement with those parties. 

The proposed settlement enjoined the judgment creditors from pursuing or prosecuting actions against the debtor and non-debtor entities.  The judgment creditors objected. 

The Eleventh Circuit upheld the Bankruptcy Court’s approval of the settlement, and the District Court’s affirmance –

[The Judgment Creditor] cites In re Transit Group Inc., 286 B.R. 811, 817 (Bankr. M.D. Fla. 2002) for the proposition that the release of third party non-debtors in bankruptcy cases is the exception and should be done only under "unusual circumstances." However, as the district court correctly noted, In re Transit is inapplicable to this case. In re Transit dealt with a confirmation of a reorganization plan under Chapter 11, not a liquidation under Chapter 7. Id. at 814. In a Chapter 11 case, upon the confirmation of a plan of reorganization, the debts of the bankrupt debtor are no longer subject to collection and are discharged. Id. at 815. In In re Transit, the debtor sought to expand the scope of the discharge to include non-debtor third parties. The bankruptcy court noted that a problem with releasing third party non-debtors liability in approving a reorganization plan of the debtor is that under 11 U.S.C. § 524(e) the "discharge of the debt of debtor does not affect the liability of any other entity on . . . such debt." Id. The court stated that since section 524(e) does not provide for a release of third parties from liability, a release of non-debtors can only be done in unusual circumstances. Id. at 817.

Unlike a situation in a case involving the reorganization plan of a debtor, the settlement agreement in this case does not discharge the P.A.’s debts. To the contrary, the agreement supplies the bankrupt estate with additional funds to pay the P.A.’s creditors. Furthermore, unlike In re Transit, the Trustee had the sole authority to prosecute, and therefore settle, the fraudulent conveyance claims against Van Diepen and OIM. Therefore, the factors that the bankruptcy court discussed in In re Transit as concerning a release of a third party non-debtor’s liability to creditors under a proposed reorganization plan are not applicable to the circumstances in this case.