The Fifth Circuit recently issued an opinion addressing an important issue with respect to the preservation of a debtor's causes of action in a Chapter 11 plan of reorganization. The Fifth Circuit held that a reorganized debtor lacked standing to pursue certain common-law claims that were based on the pre-confirmation management of the bankruptcy estate's assets. Specifically, the Fifth Circuit held that a blanket reservation in the debtor's Chapter 11 plan of "any and all claims" arising under the Bankruptcy Code and a specific reservation of other types of claims under various Bankruptcy Code provisions did not preserve the reorganized debtor's right to pursue the common-law claims post-confirmation.
In United Operating, LLC1 case, Dynasty Oil and Gas owned several out-of-production oil and gas properties at the time of its Chapter 11 filing. Citizens Bank, Dynasty's largest single creditor, moved the court to appoint an operator to bring Dynasty's properties back into production. The bankruptcy court appointed Wildcat Energy, LLC and Wildcat's manager and principal, Roger Becker, to operate Dynasty's oil and gas wells. Wildcat was responsible for the debtor's operations for approximately seven months, from April 2004 until the confirmation of a Chapter 11 plan in November 2004.
Under the plan, Dynasty was to survive as a shell corporation after all of its operating assets were liquidated through a sale to Saber Resources, LLC. The plan provided unsecured creditors a recovery of cents on the dollar and allocated nothing to Dynasty's equity holders. With respect to certain causes of action, the plan provided that Dynasty and the Official Unsecured Creditors' Committee retained limited powers to pursue some claims on behalf of the estate.
After plan confirmation, Dynasty filed an action in Texas state court, naming as defendants Citizens, a loan officer at Citizens, Wildcat, and its principal Roger Becker. Dynasty asserted certain common-law claims against the defendants, including fraud, breach of fiduciary duty, and negligence arising out of defendants' alleged failure to complete necessary work on some wells and completing unnecessary work on other wells. Without objection the defendants removed the action to the District Court, and the District Court referred the matter to the Bankruptcy Court. The Bankruptcy Court concluded that Dynasty's claims in the action were barred by the resolution of a previous suit brought by the Committee that was ultimately dismissed. Therefore, the Bankruptcy Court granted summary judgment to the defendants on the basis of res judicata and collateral estoppel. The District Court affirmed the Bankruptcy Court's decision on both grounds, and Dynasty appealed.
On appeal, the Fifth Circuit determined that it was unnecessary to reach the questions of res judicata and collateral estoppel because the case turned on the more fundamental question of Dynasty's standing. The question before the court was whether Dynasty, a reorganized debtor, had standing to pursue claims based on the defendants' pre-confirmation management of the bankruptcy estate's assets. The Fifth Circuit held that Dynasty did not have standing because the plan, by preserving rights to pursue claims based on the Bankruptcy Code, did not adequately reserve the right to pursue common-law claims. In so holding, the court stated:
Dynasty did not preserve its right to pursue these claims post-confirmation. Neither the Plan's blanket reservation of "any and all claims" arising under the Code, nor its specific reservation of other types of claims 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. Nor can the bankruptcy court's retention of jurisdiction over a given type of claim preserve a debtor's standing to pursue it. If Dynasty had wanted to bring a post-confirmation action for maladministration of the estate's property during the bankruptcy, it was required to state as much clearly in the Plan. Had that been the case, the creditors could have reviewed the possible impact of future litigation on their claims and liabilities before voting to confirm the Plan. As it happened, Dynasty did not preserve those claims. The Plan has been confirmed and substantially consummated; the estate no longer exists. Dynasty is without standing to assert these claims.
For these reasons, the Fifth Circuit upheld the District Court's affirmance of the bankruptcy court's judgment in favor of the defendants. The case highlights the importance of drafting plans of reorganization carefully to preserve assets and claims for the benefit of stakeholders in the debtor's reorganization effort. Had the drafters of Dynasty's plan of reorganization expressly provided for the reorganized debtor's retention of any and all claims held by the estate as of the confirmation of the plan, and not just bankruptcy-related claims, Dynasty's creditors may have fared much better.