After the case was dismissed by the Bankruptcy Court, the debtors appealed only that part of the decision relating to the pre-petition causes of action. While pending appeal to the Fifth Circuit, the bankruptcy counsel filed a motion to dismiss based on the debtors’ failure to preserve the pre-petition causes of action in the plan. The Fifth Circuit began by discussing In re Intelogic Trace, Inc., which the debtors had asserted as authority for the court’s retention of jurisdiction. The Fifth Circuit rejected this argument; instead, the court of appeals found that the applicable case law was United Operating. The appellate court noted that United Operating required that a plan must specifically and unequivocally reserve the right to preserve the pre-petition malpractice claims. The court of appeals examined the language in the plan and found that there could be at least two different interpretations in regard to the reservation of claims against professionals. The court of appeals did not decide how the language should be interpreted; instead, it concluded that, based on these various interpretations of the plan’s language, the plan’s provisions did not specifically and unequivocally reserve the right of the debtor to pursue post-confirmation claims against the bankruptcy counsel based on the alleged pre-petition malpractice conduct.
While the Fifth Circuit opinion in National Benevolent mentions the words “specific and unequivocal” from the standard set forth in United Operating, the court of appeals does not address how its decision in National Benevolent relates to the policy of providing sufficient notice to creditors for the purpose of voting on the plan. In fact, since the creditors in National Benevolent were entitled to receive payment of their claims from the sale proceeds, it is unclear why a creditor would need to be concerned about any potential lawsuit against the bankruptcy counsel. The application of the United Operating standard in the National Benevolent case either means that the notice provision is not meant solely for creditors but is also intended to provide notice to defendants, which is counter to the Ice Cream Liquidation case, or the appellate court adopted a hypothetical creditor test when considering whether a plan contains sufficient notice to creditors. Under either application, it is unclear how the plan’s language did not meet the goals set forth in United Operating.
Since these Fifth Circuit opinions were issued, several lower courts have struggled to apply the specific and unequivocal language that was adopted in United Operating. One of the first courts to discuss United Operating was the Honorable Barbara J. Houser in the Bankruptcy Court for the Northern District of Texas in Moglia v. Keith (In re Manchester)[PDF]. In that case, the plan provided for the general retention of all causes of action held by the debtor, including avoidance actions that were specifically defined in the plan. The plan, however, did not reserve the right to pursue causes of action for common-law claims. After confirmation of the plan, a lawsuit was brought by the post-confirmation litigation trustee, who was seeking to recover funds for unpaid creditors. The claims asserted in the lawsuit included avoidance actions, common-law claims for breach of fiduciary duty, payment of illegal dividends, and negligent misrepresentation. After the opinion in United Operating was issued, the defendants filed a motion to dismiss asserting that the plan did not contain specific and unequivocal language reserving the right to pursue post-confirmation causes of action. In examining the claims, the Bankruptcy Court began by holding that the plan’s language relating to the avoidance action claims fell within the categorical reservation of claims that the Fifth Circuit found to be specific and unequivocal in citing to the Ice Cream Liquidation case. In addressing the common-law claims, the court found that the plan’s language did not identify such claims specifically and unequivocally. Thus, the court reluctantly held that the plan did not preserve the right to pursue the common-law claims after confirmation.
Judge Houser’s reluctance in granting the motion to dismiss as to the common-law claims is quite apparent from the opinion, as it includes a two-page footnote regarding the Fifth Circuit’s decision in United Operating. In fact, Judge Houser notes that, in her opinion, the language in the debtor’s plan met the policy concerns set forth in United Operating that creditors be given sufficient information to vote on the plan; however, despite the fact that creditors had sufficient information relating to the plan, the causes of action were not reserved in a specific and unequivocal manner. The court even raised a concern that the standard may needlessly prejudice the recovery to creditors while benefiting the parties that may have harmed the debtor. The court ultimately requested that the Fifth Circuit reconsider its ruling in United Operating.
The next court to consider United Operating was the Honorable Nancy F. Atlas in the District Court for the Southern District of Texas in Floyd v. CIBC World Markets. In that case, the debtor confirmed a plan that provided the debtor shall have the power to prosecute all claims and causes of action that the Chapter 11 trustee could have previously asserted. The disclosure statement further asserted that the reorganized debtor would retain all litigation claims. The definition of litigation claims in the disclosure statement included breach of fiduciary duty, alter ego, single-business enterprise, self-dealing, usurpation of corporate opportunity, and similar types of claims. The disclosure statement also specifically discussed that the estate was considering filing causes of action against certain specifically listed creditors. Following confirmation, the reorganized debtor brought suit against those same creditors for, inter alia, breach of fiduciary duty. The defendants filed a motion to dismiss, asserting that the plan’s language alone was insufficient to confer post-confirmation jurisdiction. In rejecting those arguments, Judge Atlas found that courts should also consider the disclosure statement as supplementing the plan. The district court found that between the plan and the disclosure statement, creditors had sufficient information to “satisfy the underlying purpose behind United Operating’s requirements.” The district court’s opinion in Floyd focused on whether the language in the plan and disclosure statement satisfied the underlying policy set forth in United Operating without dwelling on the buzzwords “specific” and “unequivocal.”
One of the most recent cases to consider the Fifth Circuit’s decision is In re Texas Wyoming Drilling [PDF]. In this opinion, the Honorable D. Michael Lynn in the Bankruptcy Court for the Northern District of Texas considered two separate Chapter 11 cases, using the opinion to contrast how United Operating can be applied. In one of the cases, the debtor Texas Wyoming Drilling provided language in the confirmed plan that all estate actions would be reserved, including all causes of action under Chapter 5 of the Bankruptcy Code. After confirmation of the plan, certain lawsuits were filed to recover potentially avoidable transfers. The defendants filed a motion to dismiss alleging that the plan failed to contain specific and unequivocal language to preserve causes of action after confirmation. The Bankruptcy Court began by analyzing the purpose behind the policy of providing creditors sufficient information to negotiate and vote on the plan. In this discussion, the Bankruptcy Court stated:
This is especially relevant when creditors are led to accept less than 100 percent of amounts owed to them. Where assets such as potential lawsuits are omitted from a plan, creditors, on the assumption that available assets to pay debt are less than they are, are more likely to approve a plan under which they will receive less than the full amount of what their claims would entitle them to outside of bankruptcy.
After this discussion, the court then set forth the requirement that, to determine if the plan’s language was specific and unequivocal, the court must determine whether that plan provided the debtor’s creditors sufficient information to vote on approval of that debtor’s plan. The court rejected the defendants’ arguments that, to be specific and unequivocal, the plan must state specific claims against specific defendants. The court held in connection with the Texas Wyoming Drilling plan that the categorical language contained in the plan to preserve avoidance actions was specific and unequivocal.
In the second case considered by Judge Lynn, the debtor Lori Lyn Ranzino-Renda filed a plan that provided for the vesting of all causes of action including avoidance actions in the reorganized debtor. Additionally, the disclosure statement provided that specific claims, including, inter alia, negligence, breach of contract, and fraud, against specific attorneys were intended to be retained under the plan. After confirmation of the plan, the debtor filed a lawsuit against the specific defendants that were listed in the disclosure statement, as well as additional attorneys that had represented the debtor pre-petition. All of the defendants filed motions to dismiss asserting that the plan’s language did not preserve the right to assert the claims after confirmation.
In addressing these motions, Judge Lynn rejected the argument that the plan alone must be considered to find the debtor reserved the causes of actions against those parties specifically listed in the disclosure statement. Instead, the court found that consideration of the plan and disclosure statement together provided sufficient information to creditors to negotiate and vote on the plan. As to those attorneys that had not been specifically listed, Judge Lynn found that the language in the plan and disclosure statement was insufficient under the specific and unequivocal standard set forth in United Operating. The court did not discuss, however, why the plan and disclosure statement did not provide sufficient information to creditors to vote on confirmation of the plan. Judge Lynn also joined in Judge Houser’s plea to the Fifth Circuit that the United Operating decision be reconsidered.
As these recent cases demonstrate, the Fifth Circuit’s decision to use the buzzwords “specific” and “unequivocal” in the United Operating case has created a dilemma for debtors in the Fifth Circuit seeking to retain causes of action after confirmation. Plan language is often an exercise in artful drafting, where the debtor attempts to reserve as much as possible to be prosecuted after confirmation often for the benefit of creditors, who otherwise may receive no distribution. Since the United Operating decision, the lower courts have been unable to determine whether a plan and disclosure statement must set forth specific and unequivocal language to retain post-confirmation jurisdiction or whether plan language qualifies as specific and unequivocal simply because the creditors in that particular case were given sufficient information related to their potential recovery under the plan to vote on it. Some courts have even held that while the plan’s language may be sufficient to provide creditors with the information necessary to vote on it, such language does not qualify as specific and unequivocal. This interpretation of United Operating was supported by the Fifth Circuit’s decision in National Benevolent, where the court of appeals did not even discuss the rationale. Furthermore, debtors may err by including language that is too specific, as Judge Lynn found in the Ranzino-Renda case.
Ultimately, defendants can now wait until after confirmation to challenge the debtor’s standing to pursue post-confirmation causes of action, and the debtor must hope that the court confirming its plan finds that the plan’s language is specific and unequivocal as to that cause of action. To avoid the potential for loss of litigation rights, debtors may need to delay confirming a plan pending due diligence related to causes of action.
In addition to the dilemma of whether the policy or the language comes first, courts may also need to address how the debtor reserves causes of action in a specific and unequivocal manner when the defendants and/or claims may not yet be known by the debtor. For instance, in the event a third-party steals the debtor’s proprietary information either prior to or during the bankruptcy case and the theft is not discovered until after confirmation, how does the debtor draft specific and unequivocal language that retains such claims, other than through a blanket reservation of all claims?
Debtors in the Fifth Circuit are now tasked with drafting language in a plan and disclosure statement that will provide for the specific and unequivocal retention of claims and causes of action after confirmation. For some claims, such as avoidance actions, a categorical reservation of such claims may be sufficient to preserve such rights. In connection with other claims, such as common-law claims or claims under state law, a more specific listing of such claims may be required, including potentially listing specific claims against specific defendants. But debtor beware! If the plan and disclosure statement are too specific and unequivocal, certain claims and causes of action may not be covered by the plan’s language used for retention of causes of action after confirmation.
Keywords: litigation, bankruptcy, Chapter 11, Fifth Circuit, plan of reorganization, post-confirmation claims