“Any and All” Doesn’t Preserve Any and All Estate Claims Post-Confirmation

by Robins Kaplan LLP
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The Bankruptcy Code permits Chapter 11 plans to provide for the reservation of any claims or interests that that belong to the debtor or the estate, allowing the plans to be confirmed prior to the final resolution of any and all such claims. Specifically, Sections 1123(b)(3)(A) and (B) of the Code allow plans to provide for: “the settlement or adjustment of any claim or interest belonging to the debtor or to the estate;” or “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.” This broad grant of power does not, however, explain how to effect such a reservation. Consequently, the matter is left to the courts’ discretion on a case-by-case basis. Too specific, and the estate may fail to include claims that it would otherwise want to assert. Too broad, on the other hand, and the estate runs a risk of losing all claims for failure to sufficiently describe the nature of the claims to be reserved. One recent decision illustrates the challenges inherent in determining just how specific such reservation language must be.

In In Re: Hart Oil & Gas Inc., an ad hoc committee of creditors proposed, and successfully obtained confirmation of, a Chapter 11 plan that tasked a liquidating trustee with asserting the estate’s causes of action. The plan included the following language reserving estate causes of action:

This Chapter 11 Liquidation Plan reserves any and all claims and rights against any and all third parties … including, without limitation, any and all Causes of Action, Rights of Action and/or claims for relief that Debtor may have against any former director, officer, insider, creditor or lender of Debtor. 

In turn, “Cause of Action” was defined to include:

[A]ny Claim or cause of action, legal or equitable … whether arising under contract, tort or federal or state law, including but not limited to Avoidance Actions or claims brought in the same proceeding as a claims objection…

Post-confirmation, the liquidating trustee asserted various state law claims against the debtor’s primary prepetition secured lender and against John Ehrman, an individual defendant, arguing that he had fraudulently entered into a contract to purchase the debtor’s assets, and conspired with the lender to force a sale of the debtor’s assets at a discount. Importantly, Ehrman had not been involved in the debtor’s bankruptcy case and had not asserted claims against the estate.

Ehrman then filed a motion to dismiss, arguing that the claims were not adequately reserved. The bankruptcy court agreed, concluding that the reservation of claims contemplated in Section 1123(b)(3) is designed to serve two functions: namely, to (i) require plan proponents to identify any claims that may be asserted post-confirmation, and (ii) provide adequate notice to creditors (for example, of what types of claims they can expect the estate to assert post-confirmation, or whether they can expect to be sued post-confirmation, both of which may inform creditors’ decisions in voting on the plan). Even though courts generally require any such reservation to be “specific[] and unequivocal[],” the court acknowledged that the full extent of that standard has not yet been established.

Unfortunately for plan proponents, that standard is decided on a case by case basis. Sometimes, generalized language is sufficient. For example, generalized language reserving “all” avoidance actions by reference to sections of the Bankruptcy Code may be sufficient; a reference to “all § 547 claims” has been deemed to sufficient to preserve any and all preference actions.

For state law claims not limited by the contours of the Bankruptcy Code, such reservation can be more complicated. A key determinant turns on whether the reservation language puts voting creditors on notice of the potential asset. Perhaps this is because defendants in avoidance actions are necessarily limited and “known” – at least to some extent – given that they must have received payments or value from the debtor prior to commencement of the bankruptcy case. In Hart Oil & Gas, for example, the bankruptcy court observed that a generalized reservation of “all state law claims” or “all tort claims” failed to provide adequate notice of the types of claims that the liquidating trustee would (or might) seek to pursue.

In Hart Oil & Gas, the bankruptcy court recognized that the reservation language at issue was somewhat more detailed than “all actions,” but that it remained too generic and failed to identify the claims that might be brought. In particular, the court noted that the debtor and parties in interest in the bankruptcy case had been aware of the circumstances giving rise to the purported claims against Ehrman (and others), but still failed to identify the nature of such claims. The court even suggested that the Plan could have stated:

The Plan Proponents are aware of questionable pre-petition conduct by Debtor’s lender, Citizens Bank of Kilgore, and other parties. The conduct includes suspected sabotage of Debtor’s oil field and wells when Debtor was attempting to sell them, and the preparation of a forged sales document. The Plan Proponents intend to investigate the facts thoroughly and bring claims against any party, including the Bank, whose conduct damaged the Debtor. The Plan reserves all such claims.

Because the plan proponents could readily have provided materially more detail in describing these causes of action, the court concluded that the broad reservation language was insufficient to preserve those claims.

There are no “magic words” to reserve claims in a Chapter 11 plan. Without clear guidance in the Bankruptcy Code, plan proponents may be left groping for a balance between specific reservation language (which may exclude certain claims) and broad language (which may fail to accomplish any meaningful reservation). Perhaps the two can be combined, with a fairly broad reservation of all claims, followed by an enumeration of any known or potential claims and defendants.

But just what level of detail must be disclosed regarding the identities of potentially liable parties in connection with any such claims? What about situations where the debtor or the plan proponent is not yet aware of any potential claims (or circumstances that could give rise to claims)? To what extent must a plan proponent investigate the extent of the estate’s claims prior to proposing a Chapter 11 plan? Or, put differently, to what extent may a post-confirmation trustee explore causes of action not yet identified or enumerated by the plan proponents? The case law is extensive (and beyond the scope of our discussion here), but plan proponents and supporters would undoubtedly be well-advised to take reservation clauses seriously, and not as mere boilerplate.

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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