The Bottom Line:

It is common for litigation to be brought post-confirmation as part of a debtor’s reorganization or wind down.  It is also common for parties to dispute whether a post-confirmation debtor or its trustee retained standing to pursue claims under the plan or whether litigation claims have been barred because they were not expressly reserved in the plan.  The Fifth Circuit recently held that describing claims in the disclosure statement – without detailed elaboration in the plan itself – adequately preserves them. Spicer v. Laguna Madre Oil & Gas II, L.L.C. (In re Texas Wyoming Drilling, Inc.), Case No. 10-10717 (July 21, 2011). In affirming the bankruptcy court’s decision, the Fifth Circuit looked to the realities that the “disclosure statement is the primary notice mechanism informing a creditor’s vote for or against a plan.”  The Fifth Circuit determined that section 1123(b)(3)(B), which provides that a plan may “provide for the retention and enforcement . . . [of the estate’s] claim or interest” does not “explicitly or implicitly address whether claims may also be preserved in the disclosure statement.” 

What Happened:

In Texas Wyoming Drilling, the debtor filed a plan and disclosure statement, both of which had been approved by the bankruptcy court.  The plan and disclosure statement both disclosed that the plan retained “Estate Actions” that could be brought by the reorganized debtor.  These Estate Actions were defined in both the plan and disclosure statement as “various potential avoidable transfers that can be recovered under Chapter 5.” 

The disclosure statement included a chart of “various claims and causes of action the Debtor or the Reorganized Debtor may pursue on behalf of the Debtor’s estate.”  Potential defendants listed in the chart included “various prepetition shareholders of the Debtor” who might be sued for “fraudulent transfer and recovery of dividends paid to shareholders” and valued the potential claims at approximately $4 million.  The plan, however, did not contain the level of specificity about potential Estate Actions as was included in the disclosure statement.

A few months after plan confirmation, the debtor (“TWD”) sued thirty-two of its former shareholders for prepetition dividend payments alleged to be fraudulent transfers under sections 544, 548 and 550 of the Bankruptcy Code and the Texas Business and Commerce Code.  Laguna Madre Oil & Gas II, LLC (“Laguna”) filed a motion for summary judgment arguing that TWD lacked standing to sue because the plan did not adequately retain the avoidance actions under 11 U.S.C. § 1123 as required under the Fifth Circuit’s prior ruling in Dynasty Oil & Gas, L.L.C. v. Citizens Bank (In re United Operating, L.L.C.), 540 F.3d 351 (5th Cir. 2008).  In United Operating, the Fifth Circuit held that “after confirmation of a plan, the ability of the debtor to enforce a claim once held by the estate is limited to that which has been retained in the [bankruptcy] plan.”  United Operating at 355.

(The day before the hearing on Laguna’s motion, the bankruptcy court sua sponte converted TWD’s case to a chapter 7 bankruptcy, because the debtor had defaulted under the plan; the liquidating trustee automatically succeeded TWD as the plaintiff in the case.)  The bankruptcy court denied Laguna’s summary judgment motion and Laguna, along with other shareholders, appealed to the Fifth Circuit.

Laguna argued that the plan had not adequately preserved the estate’s ability to pursue the avoidance actions.  As such, the claims against it must be dismissed since the estate lacked standing to pursue the claims.  Laguna further argued that the court could not consider the disclosure statement in conjunction with the plan when determining standing.  A further argument was made that the plan and disclosure statement failed to preserve the actions against the shareholders since neither document had specifically named the potential defendants (but had explicitly named one former shareholder whom TWD released from any liability in the plan).

The Fifth Circuit rejected these arguments, finding that since the plan and disclosure statement, when read together, “reserved the right to pursue the Avoidance Actions against pre-petition shareholders of TWD, the reorganized debtor specifically and unequivocally retained these claims under In re United Operating.”  Texas Wyoming Drilling at *8.  The Fifth Circuit distinguished TWD’s plan and disclosure statement with those of United Operating.  In United Operating, the plan and disclosure statement only contained a “blanket reservation” preserving “any and all claims” – which the Fifth Circuit held to be “insufficient to retain a [common law] claim for maladministration of the estate.”  Id. at *7.  In contrast, TWD’s plan and disclosure statement “revealed the existence of the Avoidance Actions, the possible amount of recovery to which they would lead, the basis for the actions (namely, prepetition dividends and transfers to equity interest holders), and that the reorganized debtor intended to pursue the claims.”  Id. 

The Fifth Circuit rejected the argument that intended defendants needed to be specifically named in the plan or disclosure statement in order to preserve claims or standing. (The Fifth Circuit also rejected arguments that the trustee was barred by judicial estoppel or res judicata from pursuing the claims against the former shareholders.)

Why the Case is Interesting:

As the Fifth Circuit observed, “the purpose of the rule [requiring adequate disclosure of post-confirmation litigation] is to put ‘creditors on notice of any claim [the debtor] wishes to pursue after confirmation’ and enable ‘creditors to determine whether a proposed plan resolves matters satisfactorily before they vote to approve it.’” Id. at *5.  Post-confirmation claims can also be part of the recovery fund for creditors.  Preservation of claims (or the failure to do so) has been fertile ground for litigation on standing to pursue.  While lower courts have looked to disclosure statements in the past in addressing the retention of claims, no Court of Appeals has previously held that the disclosure statement may be consulted for purposes of standing.  This decision clearly does so, allowing bankruptcy courts to look at the totality of the plan and disclosure statement.  The decision recognizes the reality that the disclosure statement plays a key role in informing parties-in-interest to their potential rights after confirmation and authorizes bankruptcy courts to refer to the disclosure statement, and not just the plan, in interpreting plan provisions concerning the retention of causes of action.  Additionally, the Texas Wyoming Drilling decision provides guidelines for the level of detail required in a plan and disclosure statement to effectively preserve future causes of action, while disapproving of “blanket reservations” as inadequate.