The chronology in many successful Chapter 11 cases is for the debtor to confirm its plan of reorganization, and then turn its attention to recovering preferential transfers of money or property made in the 90 days (or 1 year for insiders of the debtor) before the bankruptcy filing. This article explores the duty to provide information in the plan about possible preference actions, and the level of disclosure necessary to preserve them.

Section 1123(b)(3) and Browning v. Levy

Section 1123 of the Bankruptcy Code governs the contents of a Chapter 11 plan of reorganization. Of particular interest to preference defendants is §1123(b)(3), which states that a plan may provide for the retention or enforcement of any claim or interest belonging to the debtor or the estate. Section 547 preference actions fall under the purview of §1123(b)(3). While §1123(b)(3) clearly allows preference actions to be retained, the question becomes - how does the plan proponent retain such actions. This question of “how” has been the subject of recent opinions in various courts across the country, and specifically has been addressed by the 6th Circuit and the Bankruptcy Court for the Middle District of Tennessee.

At the heart of the debate is Browning v. Levy, 283 F. 3d 761 (6th Cir. 2002). Browning generally discusses the res judicata effect of confirming a plan of reorganization. It addresses the issue of whether a general or blanket reservation of rights in a plan suffices to preserve certain causes of action. The cause of action at issue in Browning was not a preference action, but the court's reasoning arguably applies to preference actions and other causes of action.

For purposes of this article, the relevant portions of Browning are: (1) confirmation of a plan has res judicata effect on issues that were raised or that could have been raised during the confirmation proceedings; and (2) if the debtor employs only a general reservation of rights, res judicata may preclude the debtor, trustee, or other party authorized by the plan, from pursuing an action following confirmation. Thus, if a cause of action is not properly preserved in the plan, then it is lost and cannot be pursued by the debtor or any other designee after confirmation.

Following Browning, many plan proponents, liquidating trustees, and preference defendants were left asking the question “if not a blanket reservation, then what plan language is necessary to preserve post-confirmation preference actions?”

The Argument for More Disclosure

A review of cases addressing this issue reveals that defendants in post-confirmation causes of action often rely on similar arguments in support of their motions to dismiss for failure to adequately disclose the cause of action in the plan. These arguments include:

  • The type of claim at issue was not specifically preserved;
  • The specific defendant or defendants were not identified in the plan;
  • The non-creditor defendants (who would not generally be served with a copy of the plan) were not served with the plan and had no notice that they might be potential defendants;
  • The cause of action was not listed as an asset in the plan; and
  • Failure to include any potential recovery from the cause of action in the liquidation analysis caused a reasonable reader of the plan to conclude that no such causes of action existed.

The arguments focus on how specific must the notice be, and to whom must the notice be given. In addition, defendants in post-confirmation actions may argue that it would be unfair to allow the debtor or plan proponent to omit reference to the potential cause of action in the plan (since the failure to disclose the cause of action as an asset could arguably have benefited the plan proponent for purposes of confirmation), and still allow the debtor or plan proponent to pursue the causes of action following confirmation.

Such arguments have found limited success in some courts, and in connection with some causes of action. But, based the legislative intent behind §1123(b)(3) as a mechanism for preservation of actions, and the administrative burdens that full disclosure to each potential defendant could create, the standard for disclosure is often found to be less stringent than some defendants would prefer. The standard may also be different for different types of actions. A review of cases citing Browning demonstrates that this issue is actively being litigated and discussed in courts across the nation.

While the duty to disclose causes of action may arguably be less onerous in connection with preference actions, certain rulings have made it clear that plan proponents should be careful to err on the side of more disclosure rather than not enough.

Middle District of Tennessee Rulings and the Balancing Act

The disclosure issue has been raised in connection with several volume preference filings in the Middle District of Tennessee. In the In re Pen Holdings, Inc. preference cases, Judge Keith M. Lundin issued an opinion which has been relied on in other local cases and continues to be cited with approval by courts in other jurisdictions. In re Pen Holdings, Inc., 316 B.R. 495 (Bankr. M.D. Tenn. 2004) cited with approval in Morris v. Zelch (In re Regional Diagnostics, LLC), 372 B.R. 3 (Bankr. N.D. Ohio 2007), In re Meridian, 372 B.R. 710 (Bankr. D. Del. 2007), CLC Creditors' Grantor Trust v. Sonnenschein Nath & Rosenthal LLP, et al. (In re Commercial Loan Corp.), 363 B.R. 559 (Bankr. N.D. Ill. 2007), In re Simplot, 2007 WL 2479664 (Bankr. D. Idaho Aug. 28, 2007), and Schulte, Roth & Zabel, LLP v. Hyman, 2006 WL 1643329 (M.D. Fla. June 7, 2006).

These are the main points from the Pen Holdings decision:

  • Section 1123(b)(3) was intended by the drafters of the Code to be a mechanism for preservation of causes of action, not a mechanism for providing notice to potential defendants;
  • Disclosures regarding potential causes of action must be evaluated on a case-by-case basis;
  • Causes of action are an asset of the estate and disclosure should be sufficiently detailed to inform creditors regarding the estimated value of that asset;
  • A general reservation of rights is not sufficient, but a general statement identifying a specific type of cause of action as an asset of the estate might be;
  • The standard for disclosure of preference actions may arguably be different from that which is required to adequately disclose certain other causes of action in light of the fact that preferences occur in almost every Chapter 11 case, often involve multiple potential defendants, and the preference evaluation may require more resources and time than the debtor has available prior to filing and confirmation of the plan.

In Pen Holdings, Judge Lundin described the disclosure issue as a “close case.” In general, based on Pen Holdings and the majority of opinions from other jurisdictions, a plan proponent intending to preserve preference actions for litigation after confirmation should generally take care to meet certain minimum requirements.

First, in the plan, the plan proponent should expressly reserve the right to pursue preference actions post-confirmation. The plan should also clearly state who will have the power to prosecute such actions – the debtor, a liquidating trustee, or some other third party, and should be careful to give the necessary authority to that person or entity. Furthermore, a plan proponent would be wise to refer to the parties listed in the debtor’s statement of financial affairs as having received a potentially avoidable transfer. If it is not too onerous, the plan proponent may actually choose to attach a copy of the relevant portion of the statement of financial affairs to the plan as an exhibit.

The liquidation analysis and other asset lists included in the plan should also mention the potential recovery from the preference actions. An estimate should suffice, but some acknowledgement that the potential actions may be an asset of the debtor should be included to ensure that the plan clears the disclosure hurdle.

As part of the reservation of the right to pursue preference actions, the plan proponent may choose to insert a conspicuous general notice to all parties that may have received a transfer during the applicable preference period advising all such transferees that each transferee should consider the potential preference liability in making its determination as to whether to vote in favor of or against the plan.

Finally, and perhaps most importantly, the debtor or plan proponent’s actual knowledge regarding potential preference cases may dictate the amount of disclosure that is required. If a full preference review has been performed pre-confirmation, then the court may very possibly hold the plan proponent to a higher standard in terms of the adequacy of the disclosure in the plan and the notice to the potential preference defendants.


Plan proponents should carefully consider how much disclosure is enough to preserve causes of action for post-confirmation litigation. At present, there is no safe-harbor. Rather, disclosure will be analyzed on a case-by-case basis. A plan proponent must take into account the number of possible preference actions, the likely recovery from such actions, the time and resources available to devote to a pre-confirmation preference review, and the possible ways that such information can reasonably be disclosed in the plan and disclosure statement.

As was recently pointed out by the District Court for the Middle District of Tennessee, Browning continues to be the governing authority in the 6th circuit. Kaye v. Carlisle Tire & Wheel Company (In re Murray), 2008 WL 821521 (M.D. Tenn. March 27, 2008). Until the disclosure issue as it pertains to preference cases is clarified at the appellate level, plan proponents in the 6th Circuit should stay on top of the expanding body of case law, and think critically about whether the level of disclosure will ultimately meet the court’s approval if challenged.