In 2008, the Fifth Circuit Court of Appeals decided the case of Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351 (5th Cir. 2008), wherein the court considered whether a chapter 11 plan had reserved the right of the debtor to pursue claims and causes of action against the defendants after confirmation of the plan. The Fifth Circuit held that to properly retain claims and causes of action, the plan must be “specific and unequivocal” in retaining the right to pursue claims post-confirmation. Id. at 355. The court of appeals rejected the argument that the general language contained in the plan reserving the right to pursue “any and all claims” was sufficiently “specific and unequivocal” to reserve the debtor’s right to pursue claims arising under state law against the defendants. Id. at 356. While announcing a new standard for determining whether a party would have standing to pursue claims post-confirmation, the Fifth Circuit did not establish a definitive application for the standard that could be used by lower courts. Effectively, lower courts were given a phrase “specific and unequivocal” with little substance or meaning.
After the issuance of the Fifth Circuit’s decision in United Operating, several lower courts attempted to reconcile the phrase “specific and unequivocal” with a practical application of what language would be required in a plan to preserve claims for prosecution after confirmation of a Chapter 11 plan. Several lower courts found that a general reservation of claims and causes of action under Chapter 5 of the Bankruptcy Code was sufficient to reserve preferential transfer and other avoidance actions. Spicer v. Laguna Madre Oil & Gas, LLC (In re Tex. Wyo. Drilling Inc.), 422 B.R. 612 (Bankr. N.D. Tex. 2010), In re Crescent Res., LLC, 455 B.R. 115 (Bankr. W.D. Tex. 2011). While lower courts were able to develop some parameters for applying the language, they still struggled with the issue of whether a plan must list the name of each defendant in order to meet the “specific and unequivocal” requirement. Compare Moglia v. Keith (In re Manchester, Inc.), Adv. No. 09-3027, 2009 Bankr. LEXIS 2003 (Bankr. N.D. Tex. July 16, 2009) (plan language was “specific and equivocal” despite not listing the name of each putative defendant) with In re MPF Holding US LLC, 443 B.R. 736 (Bankr. S.D. Tex. 2011) (concluding that “specific and unequivocal” standard requires that all parties must be individually identified in the plan in order to retain standing).
This last decision, In re MPF Holding, was recently considered by the Fifth Circuit Court of Appeals, giving the Fifth Circuit another opportunity to address what language in a Chapter 11 plan will meet the “specific and unequivocal” standard. As a brief factual background, after filing for bankruptcy protection, the debtors filed a plan that provided for the retention and transfer of preferential transfer claims to a liquidating trust. The plan language provided that, except for any cause of action released under the plan, any claim that may exist under Chapter 5 of the Bankruptcy Code against the parties listed on Exhibit 3(b) and 3(c) of the debtors’ statement of financial affairs would be retained and transferred to the liquidating trust. The bankruptcy court confirmed the plan and shortly thereafter, the liquidating trustee filed lawsuits seeking to recover preferential transfers. After certain defendants filed motions to dismiss the lawsuits, the bankruptcy court considered whether the plan language satisfied the “specific and unequivocal” standard. The bankruptcy court decided that for plan language to be “specific,” the plan must set forth the name of each individual defendant and the legal basis for the lawsuit. The bankruptcy court confirmed that the plan language was “specific,” as the plan had identified each defendant on Exhibit 3(A) or 3(B). In consideration of the “unequivocal” standard, the bankruptcy court declared that a plan must state that following confirmation, the defendants will be sued. In granting the motions to dismiss, the bankruptcy court held that the plan language was equivocal, because the plan provided that the liquidating trustee may pursue claims against the defendants and that the exception for released claims created an ambiguity as to who could be sued. The bankruptcy court certified the opinion for direct appeal to the Fifth Circuit.
On appeal, the Fifth Circuit addressed three issues that were raised in the bankruptcy court’s opinion: (1) whether parties must be individually identified in the plan, (2) whether a plan must state that the defendants will be sued, and (3) whether any ambiguity in the plan language causes such language to be equivocal. In re MPF Holdings US LLC, 701 F.3d 449, 455 (5th Cir. 2012). In addressing the first two issues, the court of appeals relied on its recent decision in Spicer v. Laguna Madre Oil & Gas II, LLC (In re Tex. Wyo. Drilling, Inc.), 647 F.3d 547 (5th Cir. 2011). In that case, the Fifth Circuit held that a plan did not need to identify each individual defendant for the plan to be “specific and unequivocal.” Id. at 552. Furthermore, the court found that the demonstration of an intent to pursue claims was sufficient to meet the “specific and unequivocal” standard, such that a specific statement indicating that a lawsuit will be filed was not required. Id. at 549, 552.
In addressing the final issue raised by the bankruptcy court—whether ambiguous language in the plan causes the plan to be equivocal—the Fifth Circuit needed to review another of its previous opinions dealing with the issue of “specific and unequivocal,” The Nat’l Benevolent Ass’n of the Christian Church (Disciples of Christ) v. Weil, Gotshal & Manges, LLP (In re Nat’l Benevolent Ass’n of the Christian Church (Disciples of Christ)), No. 08-50677, 2009 U.S. App. LEXIS 12614 (5th Cir. June 11, 2009). In the Nat’l Benevolent Ass’n case, the Fifth Circuit had held that the plan language relied upon by the debtor to demonstrate that certain pre-petition claims and causes of action had been preserved was ambiguous and subject to varying interpretations, so the language did not set forth a claim in a “specific and unequivocal” manner, such that the claims being asserted were not preserved by the plan. The bankruptcy court in In re MPF Holdings had adopted this rationale in determining that the language used to exclude claims that were otherwise released under the plan was ambiguous, which the bankruptcy court found to be equivocal. The Fifth Circuit reexamined its decision in Nat’l Benevolent Ass’n and ascertained that while the opinion had acknowledged the ambiguity, it was not clear that the court had created a rule that any ambiguity in the reservation language always fails the “specific and unequivocal” test. In re MPF Holdings, 701 F.3d at 456. The court went on to find that the plan language was not actually ambiguous, but instead defined those potential claims that were not preserved under the plan. Id. at 456–57. In vacating and remanding the decision to the bankruptcy court, the Fifth Circuit held that the plan language was sufficiently “specific and unequivocal.” Id. at 457.
While there remain issues regarding what plan language will meet the “specific and unequivocal” standard, the Fifth Circuit’s decision in MPF Holdings clarifies some of the misconceptions. Hopefully this decision will assist practitioners and lower courts in drafting plan language that properly preserves claims and causes of action for prosecution after confirmation of the plan. Otherwise, the Fifth Circuit may be required to revisit the “specific and unequivocal” standard in order to provide lower courts with additional guidance on this important issue.
Keywords: bankruptcy, litigation, third party, costs, fee shifting, Federal Rule of Civil Procedure 45, expense, discovery, attorney fees
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