Sometimes we blog about cases with unusual fact patterns. The cases don’t stand for any overriding legal principle. They might not have application beyond the parties to them. But they can make for good reading, giving insight into how judges analyze and rule on the issues at stake.

A recent decision in the District of Delaware is such a case. In re Mabvax Therapeutics Holdings, Inc., No. 19-10603, 2023 Bankr. LEXIS 1557 (Bankr. D. Del. June 15, 2023).

The debtor had filed for chapter 11, confirmed a plan, and set up a post-confirmation trust. The plan extinguished equity interests because equity was to receive no recovery. But several years after confirmation, through settlement payments described below, unsecured creditors were paid in full. The next dollars in would go to subordinated claims, intercompany claims, and equity.[i]

The Plan Administrator appointed to do the post-confirmation work was the debtor’s sole director. And he was also a holder of common shares. As part of his duties, he brought a lawsuit against preferred shareholders. Some preferred shareholders settled, bringing in $12 million. This recovery and others enabled unsecured creditors to receive full payment on their claims.

The fact that the Plan Administrator would now receive a distribution as a common shareholder troubled his adversaries in the lawsuit, the preferred shareholders. This prompted two preferred shareholders to file a motion in the bankruptcy court to have the Plan Administrator disqualified. They asserted that he had a conflict of interest and should be replaced.[ii] The conflict, they argued, was based on the fact that the Plan Administrator held common shares, and thus he had an “inherent conflict of interest” with preferred shareholders. 2023 Bankr. LEXIS 1557, at *8.

In opposing the motion, the Plan Administrator argued that he was protected by an exculpation clause in the debtor’s plan of reorganization. The clause exculpated him from liability in discharging his duties. But the motion brought by the preferred shareholders didn’t seek to hold him liable for anything. The movants sought to remove and replace him based on an alleged conflict of interest. Therefore, the court ruled, this argument failed.

Next, the Plan Administrator argued that the motion to have him replaced should be denied based on res judicata. Objections to his appointment at confirmation had been denied, and now his appointment was being challenged again. But, the bankruptcy judge said, res judicata did not apply to the removal motion because the relief being sought was different from the relief sought in the confirmation objections. Thus, this argument failed too.

The movants argued that the Plan Administrator wasn’t disinterested and his appointment had run afoul of Bankruptcy Code sections 324, 327, and 328. But, the court noted, post-confirmation plan administrators are not appointed pursuant to those sections. Instead, such appointments are based on Bankruptcy Code 1123, and a plan administrator serves as “representative of the estate.”

The movants also asserted that when the Plan Administrator was appointed, he had failed to disclose his holdings of common shares, also in violation of Code sections 327 and 328. At that time, however, equity was not expected to receive a recovery. And even when equity got a distribution, the Plan Administrator was not doing anything contrary to the interests of preferred shareholders. His pursuit of the lawsuit was to benefit creditors and shareholders alike. Thus, at most, the court observed, he held a “potential conflict.” But that was “not enough” to disqualify him from serving as Plan Administrator. 2023 Bankr. LEXIS 1557, at *11.

Next, the movants argued that the Plan Administrator had breached his fiduciary duty of loyalty. They said he could have ended the litigation and received proceeds to pay preferred shareholders, but that he continued the litigation with hopes of recovering more money that would benefit common shareholders.

The court said this argument “makes no sense.” Id. at *14. The movants had not alleged (i) that the lawsuit “was not beneficial to creditors as a whole,” (ii) that the Plan Administrator had made “any decisions in the California litigation that would benefit him that was distinct from what would benefit all shareholders,” or (iii) that “any benefit to him would be material.” Id. at 13-14.

Instead, the Plan Administrator owed fiduciary duties to all creditors, and the lawsuit was in all of their respective interests. If the suit harmed certain equity holders, “it is only because they are defendants in that action.” Id.

Finally, the movants said the Plan Administrator had failed to comply with the debtor’s confirmed plan. Since unsecured creditors had been paid in full, the plan required the Plan Administrator to file a motion to set up procedures for an equity distribution. The Plan Administrator had not done that yet. The court noted, however, that the plan set no deadline for the Plan Administrator to file the motion. He had discretion on the timing, and his exercise of that discretion didn’t evidence any failure to comply with the provisions of the plan.

In short, all of the movants’ arguments to have the Plan Administrator removed were rejected by the court. The Plan Administrator had been properly appointed and, even though he was a holder of common shares, he was allowed to pursue the litigation against the preferred shareholders.