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Home News DOJ Disputes “Opt-Out” Consent In The Container Store Bankruptcy, Sparks Legal Debate

DOJ Disputes “Opt-Out” Consent In The Container Store Bankruptcy, Sparks Legal Debate

by Celia
DOJ

The Department of Justice (DOJ) watchdog is challenging a common practice in Texas bankruptcy courts, which grants legal protections to company directors, officers, and other non-debtors. The DOJ argues that creditors who do not “opt out” of a deal should not be assumed to have consented to the release of potential legal claims.

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In the case of The Container Store’s bankruptcy, filed under Chapter 11, the DOJ’s Office of the U.S. Trustee filed an objection to the retailer’s plan. The government agency argues that Texas law does not support the company’s claim that creditors waived their legal rights simply by failing to return an “opt out” form during the bankruptcy process.

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The U.S. Trustee has suggested that federal bankruptcy law does not define “consent.” Therefore, the Texas contract law should apply to the case, rather than using an “opt-out” approach. The U.S. Trustee claims that similar bankruptcy cases in the Houston court have incorrectly allowed creditors to release claims without affirmative consent.

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The Container Store has declined to comment on the matter.

The dispute over the meaning of “consent” has become a significant issue in U.S. bankruptcy courts, particularly after the U.S. Supreme Court’s 2023 decision in the Purdue Pharma bankruptcy case. That case blocked the OxyContin maker from using non-consensual releases to protect the Sackler family from lawsuits tied to the opioid epidemic. However, the Supreme Court did not define “consent.”

Following that decision, bankruptcy courts across the country have faced challenges in determining whether creditors must actively agree to settlements that release their legal claims. In contrast to the Houston court’s stance, which allows “opt-out” provisions if creditors are properly informed, other judges have ruled that creditors must explicitly consent to such deals.

The Container Store filed for bankruptcy protection on December 23, 2024, aiming to cut $45 million in debt after sales dropped amid inflation and reduced consumer spending.

The company’s debt restructuring plan would provide legal protections to various third parties, including its lenders and both current and former directors, officers, and equity holders. The U.S. Trustee’s objection suggests that these non-debtors should not be granted such protections without clear consent from creditors.

A court hearing is scheduled for January 24, 2025, where U.S. Bankruptcy Judge Alfredo Perez will review the proposed debt restructuring.

The case is listed under In re: The Container Store Group Inc., U.S. Bankruptcy Court for the Southern District of Texas, No. 24-90627. For the U.S. Trustee, Ha Nguyen of the Office of the U.S. Trustee represents the government. The Container Store’s legal team includes Tad Davidson and Ashley Harper from Hunton Andrews Kurth, and George Davis, Hugh Murtagh, and Ted Dillman from Latham & Watkins.

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