Two recent Federal appeals court decisions — one issued by the Fifth, the other by the Second Circuit — illustrate the dangers of careless drafting of bankruptcy and reorganization plans. In the Fifth Circuit decision, a drafting error prevented a company reorganized under Chapter 11 from suing the administrators of its property during its bankruptcy for fraud, breach of fiduciary duty and negligence, thereby potentially depriving its creditors of bankruptcy assets.
In the Second Circuit decision, the drafting error gave plaintiffs leverage to negotiate and settle their US securities fraud class action lawsuits against an Italian company that was newly-formed when its bankrupt predecessor restructured and transferred all its assets to the new company. Without the drafting error, the newly-formed company would probably have had no potential liability and no reason to settle the case.
Here are the details of the two decisions and the drafting errors that caused these unfavorable results.