National Heritage Foundation v. John Behrmann

Filing

PUBLISHED AUTHORED OPINION filed. Originating case number: 1:12-cv-01329-AJT-JFA, 09-10525-BFK, 09-01342-SSM. [999402894]. [13-1608]

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 1 of 17

ON REHEARING
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 13-1608

NATIONAL HERITAGE FOUNDATION, INCORPORATED,
Plaintiff – Appellant,
v.
HIGHBOURNE FOUNDATION; JOHN R. BEHRMANN; NANCY BEHRMANN,
Defendants – Appellees.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria.
Anthony J. Trenga,
District Judge. (1:12-cv-01329-AJT-JFA; 09-10525-BFK; 09-01342SSM)

Argued:

May 14, 2014

Decided:

July 25, 2014

Before WILKINSON, AGEE, and DIAZ, Circuit Judges.

Affirmed by published opinion. Judge Diaz wrote the opinion, in
which Judge Wilkinson and Judge Agee joined.

ARGUED: David B. Goroff, FOLEY & LARDNER LLP, Chicago, Illinois,
for Appellant.
Glenn W. Merrick, G.W. MERRICK & ASSOCIATES,
LLC, Centennial, Colorado, for Appellees.
ON BRIEF: Erika L.
Morabito, Rory E. Adams, FOLEY & LARDNER LLP, Washington, D.C.,
for Appellant. Daniel J. Schendzielos, COLORADO TRIAL LAWYERS &
LEGAL SERVICES, LLC, Greenwood Village, Colorado, for Appellees.

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 2 of 17

DIAZ, Circuit Judge:
On

remand

following

an

earlier

appeal

in

this

case,

a

bankruptcy court ruled that the non-debtor release provision in
National

Heritage

Foundation’s

was unenforceable.

Chapter

11

reorganization

The district court affirmed.

plan

On appeal to

this court, NHF argues that the courts below erred, claiming
that the facts and circumstances surrounding its bankruptcy are
sufficiently

unique

to

justify

the

release.

Finding

insufficient evidence to support NHF’s contentions, we affirm.

I.
A detailed recitation of the facts underlying this case is
contained in our previous opinion, Behrmann v. National Heritage
Foundation, Inc., 663 F.3d 704 (4th Cir. 2011) (NHF I).

We

recite only those facts relevant to this appeal.
NHF is a non-profit public charity 1 that administers and
maintains Donor-Advised Funds.

These are funds in which donors

relinquish all right and interest in the assets they donate.
The sponsoring charitable organization--in this case, NHF--owns
and controls all of the donated assets, although donors retain

1

In November 2011, the
section 501(c) public charity.

IRS

2

revoked

NHF’s

status

as

a

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 3 of 17

the right to make non-binding recommendations regarding the use
of the assets.
In 2009, NHF filed a voluntary petition for reorganization
under Chapter 11 of the Bankruptcy Code after a state court
entered

a

multimillion

dollar

judgment

against

it.

After

multiple revisions, the bankruptcy court approved NHF’s Fourth
Amended and Restated Plan of Reorganization (the “Plan”).

The

Plan contained a Non-Debtor Release Provision covering NHF; the
Official Committee of Unsecured Creditors (the “Committee”) and
its members; any designated representatives of the Committee;
and any officers, directors, or employees of NHF, the Committee,
or

their

successors

Parties”).

and

assigns

(collectively,

the

“Released

The Release Provision provided that the Released

Parties
shall not have or incur, and are hereby released from,
any claim, obligation, cause of action, or liability
to any party in interest who has filed a claim or who
was given notice of the Debtor’s Bankruptcy Case (the
“Releasing Parties”) for any act or omission before or
after the Petition Date through and including the
Effective Date in connection with, relating to, or
arising out of the operation of the Debtor’s business,
except to the extent relating to the Debtor’s failure
to comply with its obligations under the Plan.
J.A. 1059. 2

2

The Plan also contained an Exculpation Provision, barring
suits against the Released Parties for any acts or omissions in
connection with the bankruptcy, and an Injunction Provision,
enjoining
suits
in
violation
of
either
the
Release
or
(Continued)
3

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 4 of 17

Certain NHF donors--the appellees in this case--challenged
the Plan’s confirmation on the ground that the Release Provision
was invalid.

The district court affirmed the bankruptcy court’s

confirmation of the Plan.
On

the

district

first

court’s

holding

that

factual

Although

the

was
we

we

judgment

findings

Provision

appeal,

affirming

bankruptcy
to

support

essential.

court
its
See

reiterated

this

releases

non-debtor

vacated

may

that

the

circuit’s
be

the

Provision,

to

sufficient

conclusion
I,

of

Release

failed

NHF

portion

663

make
that

the

Release

at

712-13.

F.3d

longstanding

enforced

in

rule

that

appropriate

circumstances, we cautioned that they should only be approved
“cautiously
whether
court

such

to

and

infrequently.”

circumstances

consider

the

six

Id.

exist,

we

at

712.

directed

substantive

factors

To
the

determine
bankruptcy

enumerated

in

Class Five Nevada Claimants v. Dow Corning Corp. (In re Dow
Corning Corp.), 280 F.3d 648 (6th Cir. 2002).

These include

whether:

Exculpation Provision.
The bankruptcy court upheld the
Exculpation Provision, see In re Nat’l Heritage Found., Inc.,
478 B.R. 216, 234 (Bankr. E.D. Va. 2012), a decision that
neither party challenged.
It also approved the Injunction
Provision, but only to the extent that it enforced the
Exculpation Provision and not the Release Provision.
See id.
Based
on
our
holding
that
the
Release
Provision
is
unenforceable, we find no error in that judgment.

4

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 5 of 17

(1) There is an identity of interests between the
debtor and the third party . . . ; (2) The non-debtor
has
contributed
substantial
assets
to
the
reorganization; (3) The injunction is essential to
reorganization . . . ; (4) The impacted class, or
classes, has overwhelmingly voted to accept the plan;
(5) The plan provides a mechanism to pay for all, or
substantially all, of the class or classes affected by
the injunction; [and] (6) The plan provides an
opportunity for those claimants who choose not to
settle to recover in full.
Id. at 658.

On remand, we instructed the bankruptcy court--“if

the record permits it--to set forth specific factual findings
supporting its conclusions” that the Release Provision in NHF’s
Plan was valid.

NHF I, 663 F.3d at 713.

A different bankruptcy court judge considered the case on
remand.

That court gave the parties the option of reopening the

record to present more evidence, but they declined to do so.
Reviewing the then-existing record, the bankruptcy court made
factual

findings

factors.

It

with

concluded

respect
that

to

only

each
one

of

the

factor--an

Dow

Corning

identity

of

interests between NHF and the Released Parties--clearly weighed
in

favor

of

unenforceable.

NHF,

and

it

declared

the

Release

Provision

See In re Nat’l Heritage Found., Inc., 478 B.R.

216, 232 (Bankr. E.D. Va. 2012).
the bankruptcy court’s ruling.

The district court affirmed

See Nat’l Heritage Found., Inc.

v. Behrmann, No. 1:12-cv-1329, 2013 WL 1390822, at *9 (E.D. Va.
Apr. 3, 2013).

NHF timely appealed.

5

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 6 of 17

II.
We review the legal conclusions of the bankruptcy court and
district court de novo.

Gold v. First Tenn. Bank Nat’l Ass’n

(In re Taneja), 743 F.3d 423, 429 (4th Cir. 2014).

Like the

district court below, we review the bankruptcy court’s factual
Id. 3

findings for clear error.

A.
Based on the record before us, we conclude that NHF has
failed

to

carry

its

burden

of

proving

that

the

facts

circumstances of this case justify the Release Provision.

and
Like

the courts below, we consider the evidence with respect to each
Dow Corning factor in turn.

3

Relying on Henry A. Knott, Co. v. Chesapeake & Potomac
Telephone Co. of West Virginia, 772 F.2d 78 (4th Cir. 1985), NHF
argues that the district court should have reviewed the
bankruptcy court’s factual findings on remand de novo. In Henry
A. Knott, we held that a de novo hearing may be required before
a successor judge “if the case requires the trier of fact to
make credibility determinations concerning the testimony of
witnesses.”
Id. at 85.
Here, however, there was only one
witness, Janet Ridgely, and her credibility was not in dispute.
Rather, both courts simply found her testimony insufficient to
support the Release Provision even if fully credited.
Given
this, we see no reason why the district court was required to
depart from the general rule that the bankruptcy court’s
“[f]indings of fact, whether based on oral or documentary
evidence, shall not be set aside unless clearly erroneous.”
Fed. R. Bankr. P. 8013.

6

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 7 of 17

1.
Under the first Dow Corning factor, a court must consider
whether there is an identity of interests--usually an indemnity
obligation--between the debtor and the released parties.

A non-

debtor release may be appropriate in such circumstances because
a suit against the non-debtor may, “in essence, [be] a suit
against the debtor” that risks “deplet[ing] the assets of the
estate.”

NHF I, 663 F.3d at 711 (quoting In re Dow Corning, 280

F.3d at 658).
We

conclude

that

NHF

has

demonstrated

an

identity

interests between itself and the Released Parties.
terms

of

its

bylaws,

NHF

must

advance

legal

of

Under the

expenses

and

indemnify its officers and directors for “any action . . . in
which such person may be involved by reason of his being or
having

been

a

director

or

officer

of”

NHF.

J.A.

868.

No

security is required to ensure the covered parties repay NHF for
any advanced expenses.
478

B.R.

at

indemnification
obligation

is

See also In re Nat’l Heritage Found.,

227-28

(describing

provisions).
sufficient

to

Such
satisfy

the
an
the

scope

of

expansive
first

Dow

NHF’s

indemnity
Corning

factor.
2.
The second Dow Corning factor required NHF to demonstrate
that the Released Parties made a substantial contribution of
7

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 8 of 17

assets to its reorganization.

NHF I, 663 F.3d at 711.

In

effect, this factor ensures that in order for a Released Party
to achieve that status, it must have provided a cognizable and
valid

contribution

to

the

debtor

as

part

of

the

debtor’s

reorganization.
None

of

the

Released

Parties

in

this

case

made

any

financial contribution to the reorganization.

NHF nonetheless

argues

satisfied

that

its

officers

and

directors

this

requirement by promising to continue serving NHF.
As an initial matter, there is no evidence in the record to
support NHF’s assertion that its officers and directors actually
promised to continue serving NHF. 4

Even if such a promise had

been made, we find no error in the district court’s conclusion
that

it

assets

would

in

this

not

constitute

case.

As

a

the

substantial

bankruptcy

contribution

court

found,

of

NHF’s

“officers and directors, all of whom are insiders, performed
their duties either because they were paid to do so (in the case
of the officers), or because they had a fiduciary obligation to
do so (in the case of the directors).”
Found.,

478

B.R.

at

229.

Under

In re Nat’l Heritage

these

circumstances,

the

Released Parties did not provide meaningful consideration for

4

The departure of Dr. John T. Houk, NHF’s former CEO, seems
to belie such a claim.

8

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

their release from liability.
428

B.R.

799,

804

(Bankr.

Pg: 9 of 17

Cf. In re SL Liquidating, Inc.,
S.D.

Ohio

2010)

(concluding

that

directors and officers did not make a substantial contribution
when their “described efforts . . . [were] consistent with their
preexisting fiduciary duties and job responsibilities”).
absence

of

such

consideration

weighs

against

NHF’s

The

Release

Provision.
3.
The
Release

third

Dow

Corning

Provision.

To

factor

satisfy

also

this

counsels

factor,

a

against
debtor

the
must

demonstrate that the non-debtor release is “essential” to its
reorganization,

such

that

“the

reorganization

hinges

on

the

debtor being free from indirect suits against parties who would
have indemnity or contribution claims against the debtor.”

NHF

I, 663 F.3d at 711-12 (quoting In re Dow Corning, 280 F.3d at
658).
NHF primarily contends that the risk of litigation from its
donors, whose numbers run in the thousands, renders the Release
Provision essential, as NHF would likely have to indemnify its
officers

and

directors

for

their

legal

expenses

should

such

suits arise.
Although

we

are

sympathetic

to

NHF’s

concern

about

the

possibility of donor suits, the evidence does not suggest that
its reorganization is doomed without the Release Provision.
9

NHF

Appeal: 13-1608

has

Doc: 69

provided

likely

Filed: 07/25/2014

little

donor

claims,

potential merit.

to

no

the

Pg: 10 of 17

evidence
nature

of

regarding
such

the

claims,

number
or

of

their

NHF’s vice president, Janet Ridgely, stated

that NHF insiders are concerned about donors bringing suit, but
that is simply too vague to substantiate the risk of litigation.
Cf. In re Dow Corning Corp., 287 B.R. 396, 411 (E.D. Mich. 2002)
(finding a release provision essential when more than 14,000
lawsuits had already been filed against a non-debtor). 5
Nor does the fact that a prior judgment against NHF was, by
itself, sufficient to trigger bankruptcy establish that donor
litigation,

should

reorganization.

it

materialize,

would

imperil

NHF’s

Based on the dearth of evidence in the record,

we can only speculate as to the potential impact of any donor
suits on NHF’s financial bottom line.
NHF also argues that the Release Provision is essential
because its current officers and directors may refuse to serve
without such a release.

In support, it points to Ridgely’s

5

We recognize that the Behrmanns, the appellees in this
case, filed a fraud action against NHF and its officers and
directors, notwithstanding a stay leaving the Release Provision
in effect. But the mere fact that a single donor suit has been
filed does not establish that NHF will face a flood of
litigation without the Release Provision. We also note that the
district court ordered the dismissal of the Behrmanns’ action
and required them to pay attorney’s fees to NHF.
See In re
Nat’l Heritage Found., Inc., ___ B.R. __, 2014 WL 1783943, at
*9-*10, *18-*19 (E.D. Va. May 5, 2014).

10

Appeal: 13-1608

Doc: 69

testimony

Filed: 07/25/2014

that

the

continued

Pg: 11 of 17

service

of

NHF’s

officers

and

directors is critical to the reorganization, and that a fear of
third-party

suits

“might

render

[them]

unwilling

to

serve.”

J.A. 949.
We find no error in the bankruptcy court’s finding that the
risk of officer-and-director flight in this case is minimal.
Although

not

conclusive

irrelevant,

evidence

leave without

the

that

Ridgely’s

NHF’s

Release

statement

officers

Provision.

and

And

is

directors

as

the

hardly
would

bankruptcy

court noted, the risk of NHF’s insiders “abandon[ing] ship” is
particularly

low,

single family.

given

that

most

of

them

are

members

of

a

In re Nat’l Heritage Found., 478 B.R. at 229.

The bankruptcy court also correctly found that the Release
Provision

itself

provides

individuals to stay.
to

whatever

little

inducement

for

these

NHF’s insiders have already been exposed

liability

they

may

have

for

their

pre-petition

conduct, and the release does not shield them from liability
going forward.

And even if NHF’s officers and directors do

leave,

not

NHF

has

suggested

recruiting new personnel.

that

it

would

face

difficulty

See id. at 230-31.

If this failure of proof were not enough, the severability
clause contained in NHF’s Reorganization Plan cements our view
that

the

provides

Release
that

the

Provision
Plan

is

would

not

remain
11

essential.
in

effect

That

clause

“[s]hould

any

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 12 of 17

provision in this Plan be determined to be unenforceable.”

J.A.

643

such

(emphasis

added).

As

we

have

already

concluded,

language “suggests that the plan would remain viable absent the
Release Provision[].”
Under

these

NHF I, 663 F.3d at 714.

circumstances,

we

do

not

believe

NHF

has

carried its burden of demonstrating that the Release Provision
is

essential

to

its

reorganization.

This

failure

weighs

strongly against the validity of the Release Provision.
4.
To satisfy the fourth Dow Corning factor, NHF was required
to

prove

that

the

class

or

classes

affected

by

the

Release

Provision overwhelmingly voted in favor of the Plan. 6

Id. at

712.
In this case, the Release Provision most directly impacted
the class

of

individuals

who

made

Advised Funds (the “donor class”).
rules,

the

donor

class’s

support

donations

to

NHF’s

Donor-

Under applicable bankruptcy
for

the

Plan

was

presumed

without a formal vote because, under its terms, donor claims
were eligible for full payment with interest.

NHF maintains

that the donor class’s presumed support for the plan weighs in

6

Appellees argue that NHF has waived argument with respect
to the last three Dow Corning factors because it did not address
them below.
As NHF would not prevail on the merits anyway, we
need not resolve this question.

12

Appeal: 13-1608

favor

Doc: 69

of

the

Filed: 07/25/2014

Release

Pg: 13 of 17

Provision,

and

that,

regardless,

the

class’s support for the Plan is irrelevant because its donors
are not actually creditors.
We

recognize

whether

an

that

there

unimpaired

is

some

class’s

uncertainty

presumed

regarding

support

for

a

reorganization plan is sufficient to satisfy this Dow Corning
factor.

As a legal matter, the bankruptcy court was entitled to

presume

the

unimpaired.

donor

class’s

support

because

their

claims

were

See 11 U.S.C. § 1126(f) (“[A] class that is not

impaired under a plan, and each holder of a claim or interest of
such class, are conclusively presumed to have accepted the plan,
and solicitation of acceptances with respect to such class . . .
is

not

required.”).

But

the

power

to

authorize

non-debtor

releases is rooted in a bankruptcy court’s equitable authority.
See Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880 F.2d
694, 701 (4th Cir. 1989).

Here, the equities weigh against NHF,

as the class most affected by the Release Provision was not
given the opportunity to accept or reject the plan.
Specialty

Equip.

Cos.,

3

F.3d

1043,

1047

(7th

Cf. In re
Cir.

1993)

(finding releases consensual and valid when “each creditor could
choose to grant, or not to grant, the release irrespective of
the vote of the class of creditors or interest holders of which
he or she is a member,” meaning that “a creditor who . . .

13

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 14 of 17

abstains from voting may still pursue any claims against thirdparty nondebtors”).
In

any

event,

we

need

not

resolve

this

question

today.

Even if NHF is correct, this factor only marginally weighs in
its favor, and it would not alter our ultimate conclusion that
NHF has failed to demonstrate that the circumstances warrant the
Release Provision.

Creditor support does not make up for the

fact that most of the other Dow Corning factors weigh against
enforcing the Release Provision.
5.
Under the fifth Dow Corning factor, we consider whether the
debtor’s reorganization plan provides a mechanism to consider
and

pay

all

or

substantially

all

affected by the non-debtor release.

of

the

class

or

classes

See NHF I, 663 F.3d at 712.

As the district court noted, “[t]his consideration has typically
been used to justify release provisions where the reorganization
plan includes a mechanism such as a dedicated settlement fund to
pay

the

claims

. . .

of

those

affected

by

an

injunction.”

Behrmann, 2013 WL 1390822, at *8; see also In re Metromedia
Fiber Network, Inc., 416 F.3d 136, 142 (2d Cir. 2005) (“Courts
have approved nondebtor releases when . . . the enjoined claims
were ‘channeled’ to a settlement fund rather than extinguished
. . . .”).

14

Appeal: 13-1608

Doc: 69

For

Filed: 07/25/2014

example,

we

have

Pg: 15 of 17

upheld

a

release

provision

in

a

reorganization plan when the debtor created a separate fund to
settle,

among

other

things,

untimely

claims

or

those

otherwise failed to comply with applicable procedures.
Robins Co., 880 F.2d at 700-02.

that

See A.H.

Although there is no per se

requirement that a debtor “channel” claims, the absence of such
a

mechanism

can

weigh

against

the

validity

of

a

non-debtor

release, especially when the result is that the impacted class’s
claims are extinguished entirely.
The absence of such a mechanism here weighs against the
Release Provision.

Any donor claims not filed or allowed during

the bankruptcy proceedings have simply been extinguished.

Thus,

NHF’s plan lacks an important element of the plan endorsed in
A.H.

Robins--“a

recover.”

second

chance

for

even

late

claimants

to

Id. at 702.

To be sure, NHF provided notice and opportunity for donors
to file claims against it during the bankruptcy proceedings.
But

NHF

has

provided

no

evidence--in

the

form

of

expert

testimony or otherwise--that this process adequately protected
the donors’ interests.

NHF certainly did not encourage donors

to participate in the bankruptcy process.

See, e.g., J.A. 503

(informing donors in the disclosure statement that NHF would
object

to

any

donor-filed

claims

and

that

“Donors

are

not

creditors of the Debtor and will have no rights to vote or
15

Appeal: 13-1608

Doc: 69

reject

the

Plan”).

Filed: 07/25/2014

Debtor’s

Plan

or

Pg: 16 of 17

receive

Distributions

under

the

This hardly strikes us as a bona fide effort to ensure

the consideration of nearly all of the donor class’s claims, and
we agree with the district court’s conclusion that this factor
weighs against the Release Provision.
6.
The final substantive Dow Corning factor is whether the
plan provides an opportunity for those who chose not to settle
to recover in full.
Our

analysis

preceding factor.
NHF’s

failure

to

NHF I, 663 F.3d at 712.
of

this

factor

largely

overlaps

with

the

To that effect, we reiterate the import of
provide

any

mechanism

outside of the bankruptcy proceedings.

to

pay

donor

claims

As the bankruptcy court

found, “the very purpose of the Release Provision[] is to . . .
preclud[e] any recovery from third party sources outside of the
Plan.”

In re Nat’l Heritage Found., 478 B.R. at 232.
B.

Our

review

of

the

record

shows

that

one

factor--the

possibility that NHF will have to indemnify its officers and
directors for litigation expenses--weighs clearly in favor of
the Release Provision.

But NHF has failed to provide sufficient

evidence that it faces a strong possibility of suits that would
trigger

its

indemnity

obligation,

would threaten its reorganization.
16

much

less

that

such

suits

And an indemnity obligation

Appeal: 13-1608

Doc: 69

Filed: 07/25/2014

Pg: 17 of 17

is not, by itself, sufficient to justify a non-debtor release.
If it were, “third party releases would be the norm, not the
exception,

in

Chapter

11

cases.”

Id.

at

232.

Given

the

extraordinary breadth of this particular release, we are also
troubled by NHF’s failure to provide a mechanism outside of the
bankruptcy process to satisfy donor claims.
In

sum,

we

agree

with

the

district

court

that

NHF

has

failed to demonstrate that it faces exceptional circumstances
justifying

the

enforcement

of

the

Release

Provision

in

its

Reorganization Plan.
We

emphasize

that

our

decision

is

ultimately

rooted

NHF’s failure of proof rather than circumstance alone.

in

A debtor

need not demonstrate that every Dow Corning factor weighs in its
favor to obtain approval of a non-debtor release.

But, as we

noted in NHF I, a debtor must provide adequate factual support
to show that the circumstances warrant such exceptional relief,
and NHF has failed to do so here.

III.
For these reasons, we affirm the district court’s judgment.

AFFIRMED

17