Contributed by Danielle Donovan
The chapter 11 cases of Gawker Media, LLC and its debtor affiliates have given the bankruptcy vultures everything they could ever hope for in one docket– celebrity, scandal, a cameo by the First Amendment, and releases. Releases! Just before Christmas, Judge Bernstein of the United States Bankruptcy Court for the Southern District of New York gave his blessing to Gawker’s chapter 11 liquidation plan.
Some would say that the heart of the plan is Gawker’s settlement with Terry Bollea. If you don’t know who that is, here’s a hint: Hulkamania is runnin’ wild, Brother (and it did, all over Gawker and its chapter 11 cases)! Terry Bollea = Hulk Hogan. That’s your celebrity. We’ll just call him Hogan here. Back in 2012, Gawker published a video starring Hogan. The easiest way to describe the video is “#NSFW” (not safe for work/Weil). That’s your scandal. Hogan sued Gawker and several of its employees and affiliates for publishing the video, alleging, among other things, invasion of privacy by intrusion upon seclusion, violation of publicity rights, and intentional and negligent infliction of emotional distress. In March 2016, a jury found Gawker liable and awarded Hogan $115 million in compensatory damages and $25 million in punitive damages. The judgment forced both Gawker and its founder into bankruptcy. Gawker and Hogan ultimately reached a settlement, which was incorporated into the plan, pursuant to which Gawker agreed to pay Hogan $31 million plus a portion of the proceeds from any future sale of the Gawker.com domain to fully and finally resolve Hogan’s lawsuit.
The plan also provides for settlements of other defamation lawsuits against Gawker, including a $500,000 settlement with journalist Ashley Terrill, a $750,000 settlement with self-proclaimed inventor of e-mail Shiva Ayyadurai, a $125,000 settlement with former Major League Baseball player Mitch Williams, and a $100,000 settlement with attorney Meanith Huon.
As entertaining as the celebrity-scandal duo is, that’s not even the most noteworthy component of Gawker’s liquidation plan.
In bankruptcy court, releases are more controversial than a sex tape. That’s why Gawker’s plan is a treasure trove for us and, no doubt, many bankruptcy scholars and commentators to come. The plan provides for releases of Gawker’s current and former employees and independent contractors who (i) voted to accept the plan, and (ii) waived and released all claims and causes of action against Gawker for indemnification obligations, except for amounts due and owing as of the effective date of the plan. The released claims and causes of action are held by holders of claims against or equity interests in Gawker who received distributions under the plan (i.e., not the debtors). The released claims and causes of action are limited to those arising out of or relating to the released employees’ and independent contractors’ work performed or content provided on behalf of Gawker. Those are your releases – third-party releases!
The only thing more controversial than a third-party release is a non-consensual third-party release. The releasing parties in Gawker’s plan include all parties who receive or are deemed to receive distributions under the plan. This includes parties who were unimpaired under and, thus, not entitled to vote on the plan pursuant to Bankruptcy Code section 1126(f). Some courts have found that a plan provision that binds parties to releases where such parties were not entitled to vote on the plan is, in effect, a “non-consensual” third-party release. The reasoning is that simply classifying a party as “unimpaired” should not automatically deem such party as having consented to a release. Nevertheless, a number of courts have approved releases under those same circumstances based on the logic that holders of unimpaired claims are deemed to accept the plan. Other courts have gone the opposite direction, however, and questioned whether a creditor may be classified as “unimpaired” at all if the creditor must release a third party under the plan. In short, the issue is far from settled.
Now, even if a third-party release is non-consensual under any of the various interpretations of that term in the chapter 11 context, courts following the Second Circuit’s lead may still approve the release if it satisfies the standard set forth in Deutsche Bank AG v. Metromedia Fiber Network, Inc.In Metromedia, the Second Circuit identified the following as factors that could tilt the scales in favor of approving a third-party release: (i) whether the estate received substantial consideration from the released parties; (ii) where the enjoined claims were channeled to a settlement fund rather than extinguished; (iii) where the enjoined claims would indirectly impact the debtor’s reorganization by way of indemnity or contribution; and (iv) where the plan otherwise provided for the full payment of the enjoined claims. No single factor is determinative, and courts often have held that a release only is warranted where the release itself is important to the debtor’s plan and the circumstances of a case may be characterized as “rare” or “unique.”
In its confirmation brief, Gawker argued that its bankruptcy cases present the type of unique circumstances that necessitate third-party releases, as the releases are essential to the plan and serve the important policy of freedom of the press. That, folks, is your First Amendment cameo. Gawker itself actually didn’t give the First Amendment argument much playing time in its confirmation brief. Instead, Gawker noted that more comprehensive arguments on that topic would be reserved for the confirmation hearing. The Society of Professional Journalists, the Reporters Committee for Freedom of the Press, and 19 other media organizations, as amici curiae, however, filed a very compelling and well-written amicus brief in support of the releases. It was so well-written, in fact, that we won’t even try to paraphrase it. Here is an excerpt from the preliminary statement:
Amici write to underscore that the third-party release and injunction provisions at issue here require more than a robotic application of the Metromedia test. In evaluating them, this Court should remain sensitive to the First Amendment and other policy values that they serve. An overwhelming body of First Amendment jurisprudence makes clear that the law strikes a balance in favor of providing “breathing space” for journalists to do their jobs, even when that may, at times, compromise potential claims against some journalists. The release and injunction here are crucial to preserve that breathing space. To eliminate them from the Plan would not just harm the well-being of Gawker’s former employees; it also would send a chilling message to journalists everywhere that, in the event of a media company’s bankruptcy, what had heretofore been their employer’s liabilities could suddenly become their own.
That’s good stuff! The amici underscore that journalists commonly agree to indemnification arrangements with their employers to alleviate the chilling effect potential personal liability can have on the newsgathering process and the free flow of information to the public. Failure to obtain third-party releases could give rise to significant indemnification obligations of Gawker, which obligations ultimately could affect its ability to make distributions in accordance with the plan. As noted, Gawker sought approval of the releases to compensate employees for their agreement to waive their indemnification claims against Gawker, and thereby eliminate a potentially massive contingent liability from Gawker’s estate.
The circumstances of Gawker’s cases present the level of exoticism the Second Circuit envisioned in Metromedia. The third-party releases are integral to Gawker’s plan. The enjoined claims, if asserted, almost certainly would impact Gawker’s liquidation by way of indemnity. Gawker’s cases present a particularly unique situation in which third-party releases arguably are necessary to safeguard the critically important public policy and constitutional principle of freedom of the press. The releases protect the agents of that freedom – the journalists and other members of the media who are particularly vulnerable to crippling personal liability in the absence of buffers like indemnification arrangements when their employers go belly-up.
We’d be remiss not to point out that Judge Bernstein said on the record that he was not prepared to find that the First Amendment required the release of non-debtor writers and reporters in chapter 11 cases of media companies. Congress has not spoken on this issue. The circumstances of Gawker’s cases, and that there were no objections to the releases, however, were sufficient to justify approving the releases.
Admittedly, it’s unclear whether approval of the releases in Gawker’s chapter 11 plan will have any material effect on courts’ interpretation of what constitutes a “consensual” versus “non-consensual” third-party release. At a minimum, Gawker’s bankruptcy will be another citation in support of approving “consensual” releases of claims of creditors who are deemed to accept a chapter 11 plan (and, for now, where some sort of unusual circumstances are present). Confirmation of Gawker’s plan likely will go down in history, in part, as an unexpected, yet very thought-provoking, intersection of First Amendment jurisprudence and bankruptcy law. Although it’s very possible that the impact of Gawker’s third-party releases will be limited to the universe of media company bankruptcy cases, that universe may expand rapidly in years to come. As the ways in which we consume and deliver news transform, so must the companies that comprise the media industry. If the evolution of the retail industry is in any way indicative of what may be in store for media, we certainly can expect a significant number of companies to need chapter 11’s protection.
Gawker, as we know it (which is not necessarily for its ground-breaking contributions to legal scholarship), has broken news one last time—news we actually care about. And, we suppose we have Hulkamania to thank for that, Brother!
In re Media, LLC, et al, Case No. 16-11700 (SMB)
416 F.3d 136 (2d Cir. 2005).