On July 22, 2011, Bankruptcy Judge Craig A. Gargotta of the United States Bankruptcy Court for the Western District of Texas, held that the reasonable expectations of a creditor should determine whether a plan of reorganization effectively preserves claims post-confirmation. While the post-confirmation preservation of claims can be a critical component of a confirmed plan, preserving these claims is not always as straightforward as one might think. The effectiveness and implementation of this decision is currently stayed pending appeal to the United States District Court for the Western District of Texas, however, Judge Gargotta's analysis does shed some light on how a court might interpret a plan's language seeking to preserve certain claims. Even so - and especially until the District Court hears the appeal - the precise standard remains unclear. As a result, debtors must ensure that such language is stated as clearly and as specifically as possible, while also bearing in mind that the practical purpose of the retention language is to put a creditor on notice of the plan's intentions and the possibility of the pursuit of certain claims postpetition.
Prior to their chapter 11 bankruptcy filing in June of 2009, Crescent Resources, LLC and its affiliated debtors were a real estate development and management organization. On September 3, 2010, the Crescent Resources Litigation Trust filed an adversary complaint against Duke Energy Corporation, Crescent's parent company, alleging that the 2006 transaction that created Crescent Resources, LLC rendered the Debtors insolvent. On September 16, 2010, the Trust filed a motion to compel turnover of client files held by Crescent's former counsel, Robinson Bradshaw & Hinston, P.A's. ("RBH"), that related to work done on behalf of the Debtors. RBH expressed concerns over Duke's confidentiality rights in the files, and months of status conferences and proceedings delayed resolution of the issue. While this dispute was pending, on December 20, 2010, the Bankruptcy Court confirmed the Debtors' revised second amended joint plan of reorganization.
On February 17, 2011, the Bankruptcy Court considered whether Duke had any right to assert privilege with respect to the files held by RBH. While the Court pondered this issue, Duke filed an expedited Motion to Dismiss the turnover proceedings for lack of jurisdiction on May 9, 2011, to which the Trust filed an opposition. After another round of replies by each party, the Court heard oral arguments on the Motion to Dismiss and Judge Gargotta's decision followed.
Judge Gargotta provided a thorough examination of the elements necessary to preserve post-confirmation claims against third parties in the Fifth Circuit while discussing (i) the jurisdictional requirement of standing, (ii) how causes of action are transferred pursuant to a plan, (iii) similar decisions from the Fifth Circuit and the various standards used to determine whether a plan effectively preserves certain causes of action, and (iv) an analysis of the Crescent facts in relation to the standard ultimately found to be most reasonable.
Did Duke Have Standing?
As a threshold matter, the Court considered how a plan of reorganization can retain jurisdiction in order for certain parties to have standing to bring claims post-confirmation. In Crescent, the Trust argued in its opposition to the Motion to Dismiss that Duke lacked standing to challenge the Turnover Proceedings. Specifically, the Trust argued that Duke had no standing because the motion for turnover involved RBH, not Duke. Further, the Trust argued that Duke's right to challenge the Turnover Proceedings had been waived, and that Duke's challenge was irrelevant because the Bankruptcy Court could compel production of the documents on other grounds.
Duke responded that challenges to standing and jurisdiction are not waivable. The Bankruptcy Court agreed and rejected the Trust's argument, holding that standing is a jurisdictional requirement and a court is obligated to ensure that it has jurisdiction to hear a matter, regardless of whether the parties address the issue.1
Narrower Jurisdiction Post-Confirmation
The Court next held that jurisdiction to bring claims post-confirmation is considerably more narrow due to the requirement that a confirmed plan expressly preserve a party's right to bring certain actions. Upon confirmation of a plan, the debtor loses its power to pursue claims as if it were a trustee.
After first confirming that the Plan transferred ownership of the client files from the Debtor to the Trust, the Bankruptcy Court turned to the question of whether the Plan language expressly retained the Debtor's right to bring the turnover action post-confirmation.
Section 1123(b)(3) states that a plan may:
(3) provide for -
(A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate;
(B) 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.2
The parties debated whether United Operating, a significant Fifth Circuit decision addressing the requirements of section 1123(b)(3), applied to the facts at hand. The Fifth Circuit held in United Operating that for a plan of reorganization to effectively preserve causes of action, the plan must "expressly retain the right to pursue such actions," and the language retaining the causes of action must be "specific and unequivocal."3 The Trust, arguing that United Operating dealt only with the preservation of claims, maintained that Duke was attempting to expand the holding of United Operating beyond "claims" to include the entirety of a trustee's rights, interests and powers. The Trust referred to the Bankruptcy Code's definition of "claim" as a "right to payment"4 and argued that Duke was not asserting a right to payment in the Turnover Proceedings, but a right under section 542(a) and (e) of the Bankruptcy Code to the disputed files. Accordingly, the Trust submitted that the turnover powers granted by section 542(a) and (e) are tools to be used by a debtor, but not a "claim."5
The Bankruptcy Court disagreed with the Trust's interpretation of United Operating, noting that the Fifth Circuit interpreted a debtor's powers under section 1123(b)(3) of the Bankruptcy Code as enabling a debtor to "preserve its standing to bring such a claim (e.g., for fraud or breach of fiduciary duty, or to avoid a preferential transfer) but only if the plan of reorganization expressly provides for the claim's 'retention and enforcement by the debtor.'"6 Accordingly, the Bankruptcy Court did not agree that the Fifth Circuit in United Operating intended to draw a distinction between "claims" and "interests" for purposes of section 1123(b)(3).
Was the Plan Language Specific and Unequivocal
As discussed above, section 1123(b)(3) allows a reorganized debtor to bring an action post-confirmation provided that the plan "expressly retain the right to pursue such actions," and the language retaining the causes of action is "specific and unequivocal."7 This begs the question of what language actually qualifies as "specific and unequivocal."
In United Operating, the Fifth Circuit addressed whether the reorganized debtor had standing to pursue certain common law claims.8 Analyzing the language in the plan, the Fifth Circuit held that "[n]either the Plan's blanket reservation of 'any and all claims' arising under the Code, nor its specific reservation under various Code provisions are sufficient to preserve the common-law claims Dynasty now brings for, inter alia, fraud, breach of fiduciary duty, and negligence."9 The court held that a blanket reservation and specific references to Bankruptcy Code provisions was not a "specific" and "unequivocal" reservation of a common law claim.10
The United Operating court noted, and the Crescent court agreed, that this rationale is appropriate given that one of the fundamental purposes of bankruptcy is to ensure the "prompt, effective administration and settlement of all debtor's assets and liabilities within a limited time."11 For a creditor to have sufficient information during its assessment of whether or not to vote for a plan of reorganization, a creditor must have proper notice of whether a proposed plan effectively resolves a matter. The purpose of the requisite "specific and unequivocal" retention language is to ensure that creditors are on notice of what post-confirmation litigation the debtors plan to pursue that would benefit the reorganized debtor but not its creditors.12
The Crescent court looked at other recent Fifth Circuit cases interpreting this same issue. In Paramount Plastics, Inc. v. Polymorland, Inc. (In re Paramount Plastics, Inc.),13 the Fifth Circuit determined that language retaining jurisdiction related to the "allowance or disallowance of claims and interests" did not encompass avoidance actions and was not sufficient to retain them.14 In In re Ice Cream Liquidation,15 the plan authorized the debtor to "'compromise or settle' any 'Chapter 5 litigation."16 While the plan also specifically referenced sections 542, 547, 548 and 550, the plan did not mention section 542 of the Bankruptcy Code.17 Despite the apparent "catch-all" phrase, the Ice Cream court concluded that the undefined term "Chapter 5 litigation" may have simply been a reference to the specific Chapter 5 sections listed in the plan and was too amorphous to definitively include the section 542(b) claims the debtor sought to pursue post-confirmation. As a result, the court concluded that while the debtor did not retain standing to pursue its 542(b) actions, the debtor did retain standing to pursue its preference claims. In doing so, the court rejected the argument that specific references to certain sections of the Bankruptcy Code was not sufficiently specific to preserve certain causes of action, stating that this "gave notice of the Debtor's intention to commence post-confirmation preference actions."18
Similarly, in Moglia v. Keith (In re Manchester, Inc.),19 the plan of reorganization transferred "Causes of Action" defined as "any and all claims, rights, defenses, third-party claims, [etc.]" and "Avoidance Actions" to a liquidation trust. The court in Manchester concluded that the plan language was sufficient to retain avoidance actions because the defined term "Avoidance Actions" specifically listed each of the sections of the Bankruptcy Code under which an avoidance action could be brought. On the other hand, the court also determined that certain non-avoidance state and common law claims were not retained pursuant to the plan because the language transferring "any and all actions, claims, [etc.]" to the liquidation trust was not specific enough and did not identify the specific cause of action (i.e., breach of fiduciary duty).20
Another case from the Fifth Circuit that addressed this issue, Spicer v. Laguna Madre Oil & Gas II, LLC (In re Texas Wyoming Drilling, Inc.),21 stressed the importance of creditors' legitimate expectations of recovery from supposedly retained causes of action, and established a test based on United Operating that "turns on whether the language in the [p]lan was sufficient to put creditors on notice that [the debtor] anticipated pursuing the [c]laims after confirmation."22 Although one of the two plans in this case employed a blanket reservation similar to the reservation that was found to be insufficient in United Operating, the court looked to documents beyond the plan and concluded that creditors would have interpreted the disclosure statement as an indication that the reorganized debtor could be expected to pursue certain claims. Accordingly, the test espoused by Texas Wyoming Drilling 23stresses the notice provided to creditors and their reasonable expectations based on their interpretation of the plan documents.
Finally, the court in Crescent noted an outlier case in the Fifth Circuit, In re MPF Holding U.S. LLC.24 The MPF Holding court found that the Fifth Circuit requires that any defendant that a reorganized debtor hopes to sue post-confirmation must be individually identified in the plan in connection with a specific cause of action25 - further, the mere recitation of Code provisions will do nothing to retain a cause of action.26 The Crescent Court declined to adopt the holding of this decision, reasoning that United Operating represented better law.27
Although the Fifth Circuit has yet to provide an authoritative definition of "specific and unequivocal," the Crescent court chose to rely on the test promulgated by Texas Wyoming Drilling, which sought to determine whether the language in the plan was sufficient to put a creditor on notice that the debtor anticipated to pursue a cause of action post-confirmation.28 The relevant language in the Plan stated:
The Litigation trust Assets shall include, but are not limited to, those Causes of Action arising under Chapter 5 of the Bankruptcy Code including those actions which could be brought by the Debtors under §§ 544, 547, 548, 549, 550, and 551 against any Person or Entity other than the Litigation Trust Excluded Parties.29
This language is a combination of the "any and all claims" language from United Operating, the reference to "Chapter 5 litigation" in Ice Cream, and the enumeration of specific sections of the Bankruptcy Code that was present in several cases. Although the Crescent court observed that the "Chapter 5 litigation" catch-all phrase in Ice Cream was found to be insufficient when in isolation, it also noted that the Plan referenced Chapter 5 in connection with six specific code sections. Using the Texas Wyoming Drilling test, the Crescent Court concluded that while it may not have been contemplated that the Debtor would pursue a turnover action against RBH under section 542, and although the Plan language was more generic than similar language considered in other cases, the Plan language was sufficient to put a creditor on notice of the possibility that the Debtor would pursue a turnover action under section 542 of the Bankruptcy Code.
While the Crescent decision sheds some light on the varying tests employed by the Fifth Circuit to determine whether certain causes of action are retained post-confirmation, it is still not clear which standard a court will choose to use in each determination. Further, while the Texas Wyoming Drilling test appropriately looks to a creditor's expectations of whether or not a cause of action will be retained, this subjective test may lead to further uncertainty in the future. Thus, it is important for any party wishing to retain the right to bring an avoidance action post-confirmation to ensure that the plan explicitly reserves the relevant litigation by naming specific Bankruptcy Code provisions, legal theories, and possibly even specific causes of action.