You Got To Show It If You Don’t Want To Blow It

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The filing of a bankruptcy petition creates a bankruptcy estate that includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” Highland Capital Mgmt. LP v. Chesapeake Energy Corp. (In re Seven Seas Petroleum, Inc.), 522 F.3d 575, 584 (5th Cir. 2008) (quoting 11 U.S.C. § 541(a)(1)).  This includes “rights of action such as claims based on state or federal law.”  Id.

During a chapter 11 bankruptcy, the debtor acts as a debtor-in-possession and has essentially the same powers as a bankruptcy trustee.  In re United Operating, LLC, 540 F.3d 351, 355 (5th Cir. 2008).  One of those powers is the right to pursue the debtor’s prepetition causes of action (as well as post-petition, but pre-confirmation, claims) for the benefit of the bankruptcy estate.  Id. (citing 11 U.S.C. § 1107(a)).

After confirmation of the debtor’s plan of reorganization, however, the debtor is no longer the debtor-in-possession.  Id.; see also In re Good, 428 B.R. 235, 243 (Bkr. E.D. Tex. 2010) (“‘Confirmation of the plan marks the beginning of the reorganized debtor’s new financial life.  New legal relationships are established and old ones are modified or terminated.’”) (quoting In re Valley Park Group, Inc., 96 B.R. 16, 24 (Bankr. N.D.N.Y 1989)).  As such, the debtor loses its standing to pursue prepetition claims previously owned by the bankruptcy estate  – unless the debtor specifically retains those claims in the debtor’s plan of reorganization pursuant to 11 U.S.C § 1123(b)(3).  Id.

Section 1123(b)(3) states: “[A plan of reorganization 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 [claim or interest belonging to the debtor or to the estate] . . . .”  11 U.S.C. § 1123(b)(3).

1. The United Operating decision.

In United Operating, the Fifth Circuit held that for a debtor to properly retain a claim owned by the bankruptcy estate pursuant to § 1123(b)(3) the debtor’s plan of reorganization “must expressly retain the right to pursue such actions” and the “reservation must be specific and unequivocal.”  In re United Operating, 540 F.3d at 355 (emphasis added).  If a debtor fails to make an effective reservation, it loses standing to pursue the claim post-confirmation.  Id.

With respect to the debtor’s reservation in United Operating, the plan of reorganization retained “any and all claims” arising under the bankruptcy code as well as various types of claims arising under specific bankruptcy code provisions.   Id. at 356.  The Fifth Circuit held such language was insufficient to preserve the debtor’s right to pursue common law claims for fraud, breach of fiduciary duty, and negligence relating to the defendants’ pre-confirmation management of estate assets.   Id.  The Fifth Circuit stated, “If [the debtor] 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.”  Id. (emphasis added).

United Operating, therefore, instructs that for a debtor to make an effective reservation of a given claim, the debtor must, at a minimum, expressly identify and reserve the claim by category or legal basis.  This conclusion is further reinforced by the Fifth Circuit’s citation to In re Paramount Plastics, Inc., 172 B.R. 331, 335 (Bankr. W.D. Wash. 1994) for the proposition that a debtor had “no standing to pursue preference actions where preference actions were not preserved in the plan,” and to In re Ice Cream Liquidation, Inc., 319 B.R. 324, 333, 337-38 (Bankr. D. Conn. 2005) for the proposition that a debtor had “no standing to pursue turnover actions because the plan ‘made no mention’ of them,” but the “plan’s categorical reservation of ‘preference’ claims was sufficiently specific.” See id. at 355-56 (emphasis added).   Moreover, the Fifth Circuit noted in its most recent case on post-confirmation standing, “the core holding of United Operating” is that the “reorganization plan set forth the legal basis for the reserved claims.”  Compton v. Anderson (In re MPF Holdings US LLC), 701 F.3d 449, 455 n.4 (5th Cir. Tex. 2012) (emphasis added).[1]

2. The Texas Wyoming decision.

 The Fifth Circuit expounded on the requirements of post-confirmation standing in Spicer v. Laguna Madre Oil & Gas II, LLC (In re Texas Wyoming Drilling, Inc.), 647 F.3d 547 (5th Cir. 2011), wherein it held that a debtor’s disclosure statement may also be consulted to determine if there is sufficient retention language in a plan.   Id. at 551.   In Texas Wyoming, the plan of reorganization provided the debtor “shall retain all rights, claims, defenses and causes of action, including but not limited to, the Estate Actions” after confirmation of the plan.   Id. at 549.    The plan defined “Estate Actions” as claims under chapter 5 of the bankruptcy code.  Id.  The disclosure statement further defined “Estate Actions” to include “various potential avoidable transfers that can be recovered under Chapter 5” and included a chart of causes of action the debtor might pursue after confirmation which included “[v]arious pre-petition shareholders of the Debtor” who might be sued for “fraudulent transfer and recovery of dividends paid to shareholders,” valuing the claims at approximately $4 million.  Id.

In Texas Wyoming, looking at both the plan and disclosure statement, the Fifth Circuit found the language of both adequately retained the debtor’s cause of action against its former shareholders for pre-petition dividend payments that constituted fraudulent transfers under Chapter 5 of the bankruptcy code.   Id.   The court contrasted the language with the insufficient retention language used in United Operating:

Unlike the plan in In re United Operating, which contained only a blanket reservation of “any and all claims,” [debtor’s] plan and disclosure statement revealed the existence of the Avoidance Actions, the possible amount of recovery to which they would lead, the basis for the actions (namely, pre-petition dividends  and transfers to equity interest holders), and that the reorganized debtor intended to pursue the claims.

Id. at 551.  The court summarized its holding as follows:  “We hold that where the plan and disclosure statement reserved the right to pursue [the claims], the reorganized debtor specifically and unequivocally retained these claims under In re United Operating.”  Id. at 552 (emphasis added).

3. The MPF Holdings decision.

 In the Fifth Circuit’s most recent case on post-confirmation standing, Compton v. Anderson (In re MPF Holdings US LLC), 701 F.3d 449 (5th Cir. Tex. 2012), the court held that a debtor’s plan of reorganization adequately retained avoidance actions.  The plan expressly reserved “all Causes of Action, including but not limited to, (i) any Avoidance Action that may exist against any party identified on Exhibits 3(b) and (c) of the Debtors’ statements of financial affairs.”   Id. at 452.  The plan defined “Avoidance Actions” as “any and all actual or potential claims or Causes of Action to avoid a transfer of property or an obligation incurred by the Debtors pursuant to any applicable section of the Bankruptcy Code, including §§ 542, 543, 544, 545, 547, 548, 549, 550, 551, 553, and 542(a).”   Id.  Regarding this language, the Fifth Circuit stated:

[A]s in Texas Wyoming, the terms of the Reorganization Plan here ‘are far more specific than those in In re United Operating.’ Indeed, the Reorganization Plan in this case provided more specificity than the plan at issue in Texas Wyoming. In addition to stating the basis of recovery, the Exhibits referenced in the Reorganization Plan identified each defendant by name.

Id. at 457 (quoting In re Texas Wyoming, 647 F. 3d at 551) (emphasis added).


[1] See also In re United Operating, 540 F.3d at 356 (“A debtor may preserve its standing to bring  such a claim (e.g., for fraud or breach of fiduciary duty, or to avoid a preferential transfer) but only if the plan of reorganization expressly provides for the claim’s ‘retention and enforcement by the debtor.’”)  (quoting § 1123(b)(3)(B)) (internal footnotes omitted);  Adler v. Walker, 2012 U.S. Dist. LEXIS 28249 (E.D. La. Mar. 5, 2012) (“Most courts in the Fifth Circuit addressing the issue have found that the debtor’s reorganization plan must reference specific claims but not necessarily specific defendants.”) (emphasis added); Blue Water Endeavors, LLC v. AC & Sons, Inc. (In re Blue Water Endeavors, LLC), No. 10–1015, 2011 WL 52525, *6 (Bkrtcy. E.D.Tex. Jan. 6, 2011) (Under United Operating, “categorical reservations can be sufficient for purposes of retention so long as the category itself is specifically described (e.g., fraudulent transfers, preferences, etc.).”) (emphasis added).

 

Topics:  Commercial Bankruptcy, Debt Collection, Reorganizations

Published In: Bankruptcy Updates, Civil Procedure Updates, General Business Updates, Constitutional Law Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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