United States: Fifth Circuit Expands Documents Applicable To Determining Claim Preservation

This article originally appeared in The Legal Intelligencer and is republished with permission from law.com

In a matter of apparent first impression, in Spicer v. Laguna Madre Oil & Gas II LLC (In re Texas Wyoming Drilling Inc.), the 5th U.S. Circuit Court of Appeals held in an opinion dated July 21 that it was permissible to consider both a plan of reorganization and its accompanying disclosure statement when determining whether a debtor had sufficiently preserved certain causes of action pursuant to § 1123 of the Bankruptcy Code.

In Spicer, a dispute arose concerning whether Texas Wyoming Drilling Inc. (the debtor) had standing to prosecute certain claims against Laguna Madre Oil & Gas II LLC. Following approval of the debtor's disclosure statement and a few months after confirmation of the debtor's plan, the debtor commenced suits against various former shareholders, including Laguna, seeking to avoid and recover as constructively fraudulent transfers certain dividend payments pursuant to §§ 544, 548, 550 of the Bankruptcy Code, and to various provisions of the Texas Business and Commerce Code (the avoidance actions). In response, Laguna filed a motion for summary judgment arguing that the debtor, through its plan, had failed to preserve the avoidance actions pursuant to § 1123(b)(3)(B) of the Bankruptcy Code, which provides that "a plan may ... provide for ... the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest."

A day before the hearing to consider Laguna's motion for summary judgment, the bankruptcy court, sua sponte, converted the debtor's case to one under Chapter 7 because the debtor had materially defaulted under its plan. As the trustee automatically succeeded the debtor as plaintiff, the bankruptcy court heard argument from Laguna and the trustee on Laguna's motion for summary judgment. The bankruptcy court denied Laguna's motion, finding that Laguna's defenses were meritless and, in any event, the court's conversion of the case allowed the trustee to pursue the claims even though the debtor may not have been able to do so. At Laguna's request, the bankruptcy court certified its order for direct appeal to the 5th Circuit.

In addressing this appeal, the court of appeals first articulated the standard under § 1123 of the Bankruptcy Code. In so doing, the court recognized that a debtor's ability to enforce a claim once held by the estate was limited to those claims and/or causes of action that were retained in the debtor's plan of reorganization (citing the 2008 5th Circuit opinion in Dynasty Oil & Gas LLC v. Citizens Bank (In re United Operating LLC)). In addition, the court stated that a plan must "expressly retain" a claim or cause of action and the reservation must be "specific and unequivocal." Having set forth the relevant standard for preserving a cause of action pursuant to § 1123 of the Bankruptcy Code, the court turned to Laguna's arguments.

Laguna's first argument turned on whether the bankruptcy court erred in considering not only the debtor's plan, but the accompanying disclosure statement as well, in determining whether the debtor had sufficiently retained the claims against Laguna as required by § 1123 of the Bankruptcy Code. Acknowledging that no other court of appeals had addressed the matter, the court pointed to § 1123(b)(3)(B) and the fact that this section contained no language addressing whether a debtor might preserve claims through language contained in a disclosure statement.

The court then noted that disclosure statements are routinely consulted in determining whether res judicata and/or judicial estoppel applies. Recognizing that at least one court had held that the language in a disclosure statement was insufficient for purposes of § 1123 of the Bankruptcy Code, the court observed that a disclosure statement serves as the primary notice mechanism in a bankruptcy case through which a debtor (or plan proponent) provides information of a nature that sufficiently allows creditors to make an informed decision whether to vote for or against a plan. The court then held that it was proper to consult a disclosure statement for purposes of § 1123, opining that such consultation was appropriate considering: (a) the role served by a disclosure statement; (b) the purpose behind the rule in United Operating; and (c) that courts in similar contexts often consult the debtor's disclosure statement.

Having held that a court could consider a disclosure statement for purposes of § 1123 of the Bankruptcy Code, the court turned to Laguna's second argument, which turned on the specific language contained in the debtor's disclosure statement and plan. Specifically, Laguna argued that the language in the plan and disclosure statement failed to retain the right to bring the avoidance actions because the language did not specifically identify potential defendants. Considering the plan, the court noted that, under a section titled "Retention of Causes of Action," the plan stated that "the reorganized debtor shall retain all rights, claims, defenses, and causes of action, including, but not limited to, the estate actions, and shall have sole authority to prosecute and/or settle such actions." In addition, the language in the disclosure statement provided that "the debtor reserves all rights to pursue, at its sole discretion, any estate actions not limited to but including any preference to the full extent allowed under the Bankruptcy Code and applicable state laws. The debtor may also pursue other actions including but not limited to actions under sections 542 and 549 of the Bankruptcy Code."

Moreover, both the plan and the disclosure statement defined "estate actions" to include Chapter 5 claims (claims, such as the one brought against Laguna, involving recovery of certain transfers made by a debtor before bankruptcy). In addition to the language contained in the plan, the debtor's disclosure statement included a chart summarizing certain claims and/or causes of action that the debtor might pursue on behalf of its estate. This chart identified, among the potential defendants, "various pre-petition shareholders of the debtor" who might be sued for "fraudulent transfer and recovery of dividends paid to shareholders."

Based upon the court's consideration of the language contained in both the debtor's plan and disclosure statement, the court rejected Laguna's argument, concluding that defendants need not be identified by name in order for the debtor to adequately preserve claims against them. Moreover, the court noted that in its prior decision in United Operating, it had opined that categorical reservations of causes of action were sufficient (i.e., in the case of preferences, a plan need not itemize individual transfers that may be avoidable and recoverable). In addition, the court stated that, even if categorical reservations were not appropriate, in this case, the plan and disclosure statement did identify the prospective defendants (including Laguna) as "various pre-petition shareholders of the debtor" who might be sued for "fraudulent transfer and recovery of dividends paid to shareholders." Accordingly, the court found that the debtor had "specifically and unequivocally" retained the claims in the plan and disclosure statement. Therefore, once the case converted to a Chapter 7 bankruptcy, the trustee had standing to pursue the action against Laguna.

Having rejected Laguna's primary two arguments, the court summarily disposed of Laguna's remaining two arguments: (i) that the trustee was judicially estopped from pursuing the avoidance actions; and (ii) that the avoidance actions were barred by res judicata. With regard to the judicial estoppel argument, the court found that the debtor had never taken two clearly inconsistent positions and, therefore, judicial estoppel was wholly inapplicable. With regard to res judicata, the court stated that Laguna had failed to point to any prior final judgment on the merits of the avoidance actions and, further, that the bankruptcy court had properly stated that "where, as here, an intent to pursue a claim post-confirmation has been manifested in both the confirmed plan and its associated disclosure statement, the res judicata effect of confirmation would not ... preclude pursuit of those claims."

Based upon all of the foregoing, the 5th Circuit affirmed the decision of the bankruptcy court denying Laguna's motion for summary judgment based upon, among other things, consideration of both the plan and disclosure statement for purposes of § 1123 of the Bankruptcy Code. Following this decision, creditors and other parties-in-interest would be well advised to review, as a whole, all of the information contained in a debtor's disclosure statement and plan of reorganization when: (i) considering whether to vote for or against such a plan; and (ii) evaluating potential Chapter 5 exposure in a particular bankruptcy case.

Rudolph J. Di Massa, Jr.., a partner at Duane Morris, is chairman of the Business Reorganization and Financial Restructuring Practice Group. He concentrates his practice in the areas of commercial litigation and creditors' rights. He is a member of the American Bankruptcy Institute, the American Bar Association and its business law section, the Commercial Law League of America, the Pennsylvania Bar Association and the business law section of the Philadelphia Bar Association.

Blake D. Roth is a 2009 graduate of the Earle Mack School of Law at Drexel University and an associate in the business reorganization and financial restructuring practice group at Duane Morris.

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. Duane Morris LLP, a full-service law firm with more than 700 attorneys in 24 offices in the United States and internationally, offers innovative solutions to the legal and business challenges presented by today's evolving global markets. The Duane Morris Institute provides training workshops for HR professionals, in-house counsel, benefits administrators and senior managers.

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