Preservation of Claims under Section 1123(b)(3)(B)
A plan of reorganization may provide for the retention of claims to be brought post-confirmation as long as the retention language is sufficient. Figuring out the level of specificity needed to retain claims in a plan has proven to be a challenging endeavor for the circuit courts, bankruptcy courts, and bankruptcy practitioners. In general, when a bankruptcy court confirms a Chapter 11 plan and the plan becomes effective, a debtor loses its debtor-in-possession status and, with it, standing to pursue the estate’s claims. Section 1123(b)(3)(B) of the Bankruptcy Code provides that the plan may provide for “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.” A debtor-in-possession or a trustee may preserve standing to bring claims post-confirmation only if the plan expressly provides for the “retention and enforcement [of claims]” and “the [p]lan expressly retains the right to pursue such actions.” Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351, 355 (5th Cir. 2008)).
Circuit courts have interpreted the requirement of express retention of claims in the plan with varying levels of specificity. The retention language in the plan has to be “specific and unequivocal.” Id.; Harstad v. First Am. Bank, 39 F.3d 898, 902–3 (8th Cir. 1994); see also P.A. Bergner & Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner & Co.), 140 F.3d 1111, 1117 (7th Cir. 1998). If the plan contains no preserving language, the post-confirmation fiduciary will not be able to pursue the claims post-confirmation. Harstad, 39 F.3d at 902–3. In addition, a blanket reservation of “any and all claims arising under the Bankruptcy Code” is not sufficient. United Operating, 540 F.3d at 356. Conversely, a general reservation indicating the type or category of claims to be preserved is held to be sufficiently specific. Fleet Nat’l Bank v. Gray (In re Bankvest Capital Corp.), 375 F.3d 51, 59 (1st Cir. 2004) (collecting cases); United Operating, 540 F.3d at 355. Moreover, there is no need to itemize the parties against whom the claims might be brought. United Operating, 540 F.3d at 355; Alary Corp. v. Sims (In re Associated Vintage Grp., Inc.), 283 B.R. 549, 563 (B.A.P. 9th Cir. 2002). Only preservation of a specific type or category of claim is necessary. United Operating, 375 F.3d at 355. In addition, the blanket reservation in the plan along with identification of specific claims in a disclosure statement might also be sufficient to preserve standing as long as claims are identified in a disclosure statement. Katz v. I.A. All. Corp. (In re I. Appel Corp.), 300 B.R. 564, 570 (S.D.N.Y. 2003), aff’d, Katz v. I.A. All. Corp. (In re I. Appel Corp.), 104 F. App’x 199, 2004 WL 1496858, at *1 (2d Cir. 2004). Both the Fifth Circuit and the Second Circuit have held that courts may consult the disclosure statement in addition to the plan to determine whether a post-confirmation debtor has standing. Spree v. Laguna Madre Oil & Gas, L.L.C. (In re Tex. Wyo. Drilling, Inc.), 647 F.3d 547, 552 (5th Cir. 2011).
Even though section 1123(b)(3)(B) of the Bankruptcy Code does not require that the retention language be “specific and unequivocal,” there is “some logic” to the requirement. Bergner, 140 F.3d at 1117. The Fifth Circuit has held that “absent ‘specific and unequivocal’ retention language in the plan, creditors lack sufficient information regarding their benefits and potential liabilities to cast an intelligent vote.” United Operating, 540 F.3d at 355. In Texas Wyoming Drilling, the Fifth Circuit held that “the purpose of the rule is to put creditors on notice of any claim [the debtor] wishes to pursue after confirmation and enable creditors to determine whether the proposed [p]lan resolves matters satisfactorily before they vote to approve it.” Tex. Wyo. Drilling, 647 F.3d at 550. The rule allows timely and comprehensive resolution of the estate and effective administration and settlement of all of the debtor’s assets and liabilities within a limited time. United Operating, 540 F.3d at 355.
An ambiguity in the plan’s preservation language can also be fatal to the debtor’s or trustee’s standing to bring claims post-confirmation. Ambiguity in the language may result when the plan’s language is not clear as to who the potential defendants are and which claims are preserved. Not all circuits, however, have ruled on whether the ambiguity in the preservation language can be fatal to the litigant’s standing. Only the Fifth Circuit has found sufficient standing where the reservation language was ambiguous. Compton v. Anderson (In re MPF Holdings U.S., LLC), 701 F. 3d 449, 456 (5th Cir. 2012) (citing In re Tex. Gen. Petroleum Corp., 52 F.3d 1330, 1336 (5th Cir. 1995)). Using traditional tools of contract interpretation,the Fifth Circuit has held that the ambiguity as to which parties or claims were preserved does not create an inference that no claims are preserved. See Nat’l Benevolent Ass’n of the Christian Church v. Weil, Gotshal & Manges, LLP (In re Nat’l Benevolent Ass’n of the Christian Church), 333 F. App’x 822, 828 (5th Cir. 2009). The ambiguity only creates an inference that only those parties or claims not covered in the plan’s ambiguous language are to be released. Id.
A type or category of claim preserved in the plan and the claim subsequently brought post-confirmation is also critical. A litigant has no standing to pursue types of claims different from those types preserved in the plan. Tex. Wyo. Drilling, 647 F.3d at 550. For example, in United Operating, the plan preserved only the types of claims arising under the Bankruptcy Code. United Operating, 375 F.3d at 355.Post-confirmation, the plaintiff tried to bring common-law tort-based claims. Id. The court held that neither the plan’s blanket reservation of “any and all claims” arising under the Bankruptcy Code nor its specific reservation of other types of claims under various Bankruptcy Code provisions were sufficient to preserve the common-law claims. Id.
Moreover, in at least one case, a debtor argued that it had standing to pursue claims post-confirmation, even though there was no preserving language in the plan, by arguing that section 1141(b) of the Bankruptcy Code preserves the claims to be brought post-confirmation. Harstad, 39 F.3d at 902. Section 1141(b) of the Bankruptcy Code provides that “[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.” 11 U.S.C. § 1141(b). The debtor argued that because preference claims were not preserved in the plan, they became the property of the debtor, and, therefore, the debtor could bring those actions. Harstad, F.3d at 902. The court did not agree. The court reasoned that if it were to agree with the debtor’s argument, section 1123(b)(3) of the Bankruptcy Code would be rendered a nullity. Id. The court reasoned that there is no automatic preservation of claims to be brought post-confirmation under section 1141(b) of the Bankruptcy Code. Id. at 903.
Defenses to Post-Confirmation Claims
A trustee or debtor-in-possession should also note that, even though a litigant may have standing to pursue the claims post-confirmation, there are at least four defenses that may prohibit litigation of such claims. A defendant can raise all of the following defenses:
(1) res judicata, Browning v. Levy, 283 F.3d 761, 772 (6th Cir. 2002); Kelley, 199 B.R. at 703; Sure-Snap Corp. v. State St. Bank & Tr. Co., 948 F.2d 869, 876 (2d Cir. 1991); Associated Vintage Grp., 283 B.R. at 558–60;
(2) judicial estoppel, Browning, 283 F.3d at 775; Associated Vintage Grp., 283 B.R. at 566;
(3) equitable estoppel, Associated Vintage Grp., 283 B.R. at 567; and
(4) laches (statute of limitations), Bankvest Capital, 375 F.3d at 61.
Res judicata will bar a subsequent action if the litigant bringing the claim had the knowledge and ability to bring such claim in the prior proceeding. Bankvest Capital, 375 F.3d at 61.
The doctrine of judicial estoppel bars a party from (1) asserting a position that is contrary to one that the party has asserted under oath in prior proceedings, where (2) the prior court adopted the contrary position “either as a preliminary matter or as part of a final disposition.” Browning, 283 F.3d at 775; Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218 (6th Cir. 1990).
There are four basic elements to the defense of equitable estoppel: (1) The party to be estopped must know the facts; (2) the party to be estopped must either intend that its conduct will be acted upon or act in a manner that the party asserting estoppel has a right to believe it is so intended; (3) the party asserting estoppel must be ignorant of the true facts; and (4) the party asserting estoppel must rely on the conduct to its injury. Associated Vintage Grp., 283 B.R. at 567.
Finally, in determining whether laches applies, courts ask whether the plaintiff’s delay in bringing suit was unreasonable and whether the defendant was prejudiced by the delay. Puerto Rican-American Ins. Co. v. Benjamin Shipping Co., Ltd., 829 F.2d 281, 283 (1st Cir. 1987). The analogous statute of limitations defense determines where the burden of proof falls; if a plaintiff files a complaint within the analogous statutory period, the burden of proving unreasonable delay and prejudice falls on the defendant. Bankvest Capital, 375 F.3d at 61.
These defenses would not apply, however, if in an earlier proceeding, the defendant fraudulently concealed or prevented the litigant from asserting or preserving claims. Browning, 283 F.3d at 770.
Section 1123(b)(3)(B) of the Bankruptcy Code is intended to give notice to the debtor’s creditors and other interested parties of all potential claims that can be brought against them post-confirmation. A proper understanding of how specific the retention language needs to be is crucial because in the absence of a “proper” language in the plan, the debtor risks losing an important interest of the bankruptcy estate.
Keywords: bankruptcy and insolvency litigation, section 1123(b)(3)(B), post-confirmation, standing