Postconfirmation liquidation and litigation trusts have become an important mechanism in a chapter 11 bankruptcy estate's arsenal, allowing for the resolution of claims and interests without needlessly delaying confirmation in the interim. The specter of postconfirmation litigation may seem unremarkable. Section 1123(b)(3)(B) of the Bankruptcy Code states that a plan may provide for retention or enforcement by the reorganized debtor, the trustee, or a representative of the estate of any claim or interest belonging to the estate. However, the provision does not specify the manner in which the retention of any such claims or interests should be drafted and disclosed to other parties - leaving to the courts the question of the level of specificity and detail required. A recent decision handed down by a Texas bankruptcy court, In re MPF Holdings US LLC, 443 B.R. 736 (Bankr. S.D. Tex. 2011), suggested that in that district at least, the level of specificity and detail required is high. However, in In re Matter of Texas Wyoming Drilling, Inc., 647 F.3d 547 (5th Cir. 2011), the Fifth Circuit issued an opinion clarifying that debtors in that circuit, which includes the Southern District of Texas, are not straitjacketed in this regard after all.
Background: The Three Approaches
Decisions on this issue have been varied, with some courts
requiring only broad, categorical language; others adopting a more
nuanced, middle-of-the-road approach; and still others mandating a
precise reservation provision. The first group of courts,
exemplified by the Seventh Circuit's ruling in P.A. Bergner
& Co. v. Bank One (In re P.A. Bergner & Co.), 140 F.3d 1111
(7th Cir. 1998), and, more recently, the court's decision in In
re Kimball Hill, Inc., 449 B.R. 767 (Bankr. N.D. Ill. 2011),
requires only broad, categorical language. The second group,
attempting to find a middle ground, focuses on the particular plan
language and the history of the case itself. See, e.g., Elk Horn
Coal Co., LLC v. Conveyor Mfg. & Supply, Inc. (In re Pen
Holdings, Inc.), 316 B.R. 495 (Bankr. M.D. Tenn. 1994). In Dynasty
Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC),
540 F.3d 351 (5th Cir. 2008), the Fifth Circuit placed itself in
the third camp, requiring that the plan "expressly retain the
right to pursue such causes of action" and that the language
doing so be "specific and unequivocal."
Relaxation of the Fifth Circuit Standard?
Since the United Operating ruling was handed down, bankruptcy
courts in the Northern District of Texas have criticized the Fifth
Circuit's bright-line test and concluded that seemingly broad
reservation provisions were permissible under the "specific
and unequivocal" standard. For example, in Moglia v. Keith (In
re Manchester, Inc.), 2009 Bankr. Lexis 2003 (Bankr. N.D. Tex.
2009), the court was confronted with a confirmed plan stating that
"all Causes of Action shall be transferred to the Litigation
Trustee" and that the trustee shall "have the exclusive
right to prosecute and enforce any rights to payment of claims or
other rights that the Debtors or the Estates may hold against any
Person (including Avoidance Actions)." The court determined
that United Operating did not mandate the identification of
specific individuals or entities which would be sued and that the
categorical reservation of avoidance claims was sufficient.
Accordingly, the court upheld the litigation trustee's standing
to pursue certain preference actions after confirmation.
Likewise, in Spicer v. Laguna Madre Oil & Gas, LLC (In re Tex.
Wyo. Drilling, Inc.), 422 B.R. 612 (Bankr. N.D. Tex. 2010), the
bankruptcy court upheld standing to sue under similar plan
provisions on the ground that United Operating does not require the
"specific and unequivocal" language to include
identification of specific claims and defendants. The clear import
of these cases, therefore, was that debtors providing a generic
reservation of the right to pursue preference or other avoidance
claims could satisfy the bright-line test set forth in United
Operating.
The "Straitjacket" of MPF Holdings
In MPF Holdings, by contrast, a bankruptcy court in the Southern District of Texas adopted a different approach. Applying the standard set forth in United Operating, the court concluded that the phrase "specific and unequivocal" requires the plan's reservation provision expressly to state: (1) the name of the putative defendant; (2) the basis on which the putative defendant will be sued; and (3) that the putative defendant will definitely be sued after confirmation. According to the court, "the language must be so Shermanesque that anyone who reads the proposed plan knows that if the plan is confirmed, the putative defendant will unquestionably be sued post-confirmation under a particular legal theory or statute."
Specific
In considering whether the plan was sufficiently specific, the court reviewed the retention language of the plan itself. The court began its analysis by noting that the plan expressly identified putative defendants by reference to certain exhibits, which contained the names, addresses, and amounts paid to those putative defendants within 90 days of the petition date. Accordingly, the court judged the plan to be sufficiently specific.
Unequivocal
However, the plan failed in the court's estimation to
satisfy the "unequivocal" prong of the test. The plan
stated that the trustee would have the right to prosecute "all
causes of action, including but not limited to, (i) any Avoidance
Action that may exist." The inclusion of the word
"may," the court reasoned, introduced ambiguity as to
what causes of action were in fact reserved. The court also found
ambiguity insofar as the plan provisions relied upon to establish
"specificity" suggested that the basis of litigation was
definitely preferential payments (based on the identified
payments), but the plan's language suggested that those
preference actions only might exist- leaving creditors unable to
establish with certainty whether and on what grounds they would be
sued.
The court also identified the plan language "excluding any
Cause of Action released in connection with or under the Plan or by
prior order of the Court" as a basis for concluding that the
reservation provision was unclear and prevented creditors from
discerning precisely who could and would be sued and the impact on
future claims and liabilities. Finally, the court examined the
disclosure statement filed in support of the plan. There, the court
found further support for its conclusion that the causes of action
were not "unequivocally preserved" because the disclosure
statement provided that "neither the Debtors nor other parties
have identified or fully investigated any potential Avoidance
Actions." As a whole, therefore, the court determined that the
reservation provisions could not be said to be
"unequivocal," as the Fifth Circuit standard
requires.
The Fifth Circuit Weighs In (Again)
Recently, however, the Fifth Circuit laid much of this debate to rest, affirming the ruling below in Texas Wyoming and distancing itself from the MPF Holdings "hard line" approach. At the outset of its opinion, the Fifth Circuit noted that the intent behind the specific and unequivocal requirement is to ensure that creditors are on notice, with all information necessary to cast an intelligent vote. Notice is not the end in itself, however - it is a means to the end of securing a prompt, effective administration of a debtor's estate. With that in mind, the court explored the implications of the "specific and unequivocal" standard that it previously articulated in United Operating.
Specific and Unequivocal
The Fifth Circuit noted that, consistent with United Operating, a debtor's chapter 11 plan and disclosure statement must preserve claims to be litigated postconfirmation. To meet this burden, the court explained, the plan and disclosure statement must identify the types of claims- not simply reserve "any and all." Language identifying the types of claims (e.g., avoidance actions), the possible amount of recovery, and the basis for the claims as well as the fact that the reorganized debtor or its representative intends to pursue these actions is sufficient. Individual defendants, however, need not be named. Because the putative defendants in Texas Wyoming were identified by class ("certain prepetition shareholders"), the Fifth Circuit did not reach the issue of whether a plan that provides no identification would pass scrutiny.
Policy Concerns
According to the Manchester and Texas Wyoming bankruptcy courts,
the larger policy behind many of the Bankruptcy Code's
provisions- maximization of creditor recoveries- could hardly be
served by imposing onerous claim-reservation requirements on
debtors, particularly where the consequence may well be to bring
recovery on these claims down to zero. Those courts, therefore,
sought to dilute the United Operating standard to ensure that
creditors would not suffer adverse consequences from strict
application of section 1123(b)(3)(B), the terms of which are
arguably quite general.
By contrast, the MPH Holdings court determined that the relevant
policy judgment had already been made- by the Fifth Circuit in
United Operating. Rather than emphasizing the preservation of
claims for the benefit of the estate, the court in MPH Holdings
reasoned that the Fifth Circuit in United Operating elected to
focus on the need for complete, full disclosure to give voting
creditors sufficient information to know whether they would- or
would not- be sued. Suggesting that the lack of such disclosure
comes at the expense of those creditors, the bankruptcy court
concluded that the Fifth Circuit determined that it is appropriate
to require debtors, rather than postconfirmation litigation
trustees, to devote the time and resources necessary to investigate
potential claims and identify the ones that will be pursued
postbankruptcy.
The Fifth Circuit has clarified in Texas Wyoming the level of
disclosure that is required. With this latest ruling, the Fifth
Circuit has chosen to adopt a balanced, pragmatic approach that
takes into account the interests of the bankruptcy estate and
individual voting creditors.
Conclusion
The Fifth Circuit's decision in Texas Wyoming partially
bridges the sharp divide between the competing views on the degree
of specificity in a chapter 11 plan necessary to preserve
postconfirmation litigation claims. Although debtors in the Fifth
Circuit would do well to remember that the claim-reservation
language in a chapter 11 plan and disclosure statement must be
"specific and unequivocal," the threat of a strict
straitjacket no longer looms large.
Interestingly, yet another Texas bankruptcy court addressed this
issue in a ruling handed down the day after the Fifth Circuit
issued its opinion in Texas Wyoming. In In re Crescent Resources,
2011 WL 3022567 (Bankr. W.D. Tex. July 22, 2011), the court held
that the requirement for a plan to contain "specific and
unequivocal" language reserving claims to be pursued
postconfirmation allows the use of the "categorical
approach," in which claims are described by category rather
than by the specific defendants to be sued.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.