Fifth Circuit Bars Creditors’ Own Claims Against Settling Defendants

In a 2/1 opinion arising from the R. Allen Stanford Ponzi scheme, the Fifth Circuit held that third parties who paid a receiver more than $130 million to settle claims are entitled to an order barring creditors from suing on the creditors’ own claims. This week’s opinion stands in contrast to the Fifth Circuit’s long-held ruling that bankruptcy courts lack power to grant nonconsensual, third-party releases in chapter 11 plans. See, e.g., Bank of N.Y. Trust Co. v. Official Unsecured Creditors’ Comm. (In re Pacific Lumber Co.), 584 F.3d 229, 251 (5th Cir. 2009). Is it therefore fair to say that bar orders are proper in settlements in the Fifth Circuit but not in chapter 11 plans? And if that is a correct statement of the law in the Fifth Circuit, why is it true? The dissenter in the Fifth Circuit would have held that the receivership court lacked subject matter jurisdiction to bar creditors from suing.

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