Restructuring

Texas bankruptcy courts have recently issued conflicting decisions interpreting Fifth Circuit case law on the amount of disclosure required to preserve post-confirmation claims in a plan of reorganization under Bankruptcy Code section 1123(b)(3)(B).  Bankruptcy Code section 1123(b)(3)(B) states that a plan may provide for the retention or enforcement of any claim or interest belonging to the estate.  The leading Fifth Circuit Court of Appeals case addressing preservation of claims is Dynasty Oil & Gas, L.L.C. v. Citizens Bank (In re United Operating, L.L.C.), 540 F.3d 351 (5th Cir. 2008).  United Operating held that for a debtor to preserve claims or interests in a plan of reorganization, “the reservation must be specific and unequivocal.”  Texas courts have disagreed on the meaning of “specific and unequivocal.”
For example, in our March 4, 2011 post, we discussed In re MPF Holdings US, LLC, 443 B.R. 736 (Bankr. S.D. Tex. 2011).  As noted in our post, MPF Holdings held that language preserving a claim in a plan “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.”  By contrast, In re Texas Wyoming, Inc. 422 B.R. 612 (Bankr. N.D. Tex. 2010), held that a plan may preserve claims by stating a category of potential claims a post-confirmation debtor or trustee may pursue against third-parties and did not require the plan to specifically identify potential defendants.  The MPF Holdings and Texas Wyoming decisions were each appealed directly to the Fifth Circuit Court of Appeals.  The Fifth Circuit recently issued an opinion on the Texas Wyoming case, Spicer v. Laguna Madre Oil & Gas II, LLC et al. ( In re Texas Wyoming Drilling, Inc.), 2011 WL 2899383 (5th Cir. July 21, 2011).  This decision provides important guidance on preserving post-confirmation claims and states that, in addition to a plan, courts may even consider language in a disclosure statement to assess whether a claim has been preserved.
In Texas Wyoming, the bankruptcy court approved a disclosure statement and confirmed a plan describing causes of action the debtor, Texas Wyoming, sought to preserve under section 1123(b)(3)(B).  The plan included a section entitled “Retention of Causes of Action” stating “The Reorganized Debtor shall retain all rights, claims, defenses, and causes of action including, but not limited to, the Estate Actions….”  The definition for “Estate Actions” included claims under chapter 5 of the Bankruptcy Code.  Separately, the disclosure statement provided that “[t]he Debtor reserves all rights to pursue, at its sole discretion, any Estate Actions….”  The disclosure statement also included a chart listing various claims and causes of action that Texas Wyoming, as a reorganized debtor, might pursue against third parties.  This chart included an entry for “[v]arious pre-petition shareholders of the Debtor” who might be sued for “fraudulent transfer and recovery of dividends paid to shareholders.”
Texas Wyoming, as a reorganized debtor, commenced actions under Bankruptcy Code sections 544 and 548 against thirty-two of its former shareholders to avoid alleged fraudulently transferred dividend payments.  Several of these shareholders, referred to as the Laguna defendants, filed a motion for summary judgment asserting that Texas Wyoming had no standing to pursue the fraudulent transfer actions because, among other things, the plan did not properly retain such causes of action pursuant to section 1123(b)(3)(B).  The court subsequently denied the Laguna defendants’ summary judgment motion, but certified its order for direct appeal to the Fifth Circuit.  Prior to the appeal, the court also converted Texas Wyoming’s chapter 11 case to a chapter 7 case and appointed a chapter 7 trustee who succeeded Texas Wyoming as the plaintiff in the fraudulent transfer actions.
On appeal to the Fifth Circuit, the Laguna defendants argued, among other things, that (i) a court may not consider a disclosure statement to determine whether the trustee had standing to pursue the fraudulent transfer actions; (ii) the language in Texas Wyoming’s plan did not satisfy the “specific and unequivocal” test set forth in United Operating; and (iii) the disclosure statement and the plan did not specifically name the shareholders that could be subject to suit.  The court rejected the Laguna defendants’ arguments and held that, because the plan and disclosure statement sufficiently reserved the right to pursue actions against prepetition shareholders, the plan “specifically and unequivocally” retained such claims in accordance with United Operating.
The court acknowledged that no other circuit court of appeals has addressed whether a court may consider disclosure statement language to determine post-confirmation standing.  The court also recognized that at least one court outside of the Fifth Circuit, has held that a debtor may only preserve claims under section 1123(b)(3)(B) with specific language in a plan and not in a disclosure statement.  The Fifth Circuit concluded, however, that section 1123(b)(3)(B) does not explicitly or implicitly address whether a disclosure statement may also preserve claims.  As such, relying on the notion that a disclosure statement is the primary notice mechanism informing a creditor’s vote for or against a plan, the court held that it is appropriate to consider language in a disclosure statement in assessing post-confirmation standing.  The court stated that its holding was consistent with the intent of the United Operating decision: placing creditors on notice of claims a post-confirmation debtor intends to pursue.
The Fifth Circuit also distinguished the Texas Wyoming plan language from the plan language in United Operating.  The court recounted that the United Operating plan contained a blanket reservation of “any and all claims” arising under the Bankruptcy Code and certain other specific claims under the Bankruptcy Code.  The plan, however, failed to mention the debtor’s intent to preserve certain common law causes of action at issue in that case.  Unlike the United Operating plan, the court found that the Texas Wyoming plan and disclosure statement revealed the existence of potential avoidance actions, the possible amount of recovery to which they would lead, the basis for the actions, and that the reorganized debtor intended to pursue these claims.  The court also rejected the argument that Texas Wyoming did not satisfy the “specific and unequivocal” test because its plan and disclosure statement did not specifically name the potential shareholder defendants.  The court noted that the United Operating decision cited to In re Ice Cream Liquidation favorably for the proposition that a categorical reservation of a specific claim in a plan (in that case preference actions) was sufficient; without needing to itemize in the plan individual transfers that may be preferential.  The court, however, did not decide whether a debtor whose plan or disclosure statement fails to identify any prospective defendants has standing to pursue post-confirmation claims against subsequently-named defendants because, in this case, the disclosure statement did identify the prospective defendants as “[v]arious pre-petition shareholders of Texas Wyoming” who might be sued for “fraudulent transfer and recovery of dividends paid to shareholders.”
The Texas Wyoming decision provides helpful guidance on the level of specificity required for debtors to preserve post-confirmation standing to pursue causes of action in a plan.  It appears that a plan and disclosure statement should, at a minimum, specifically reference categories of claims that a reorganized debtor or trustee may pursue and attempt to identify potential third parties who could be subject to such post-confirmation claims.  In addition, because courts may now expressly consider language in a disclosure statement in assessing post-confirmation standing, interested parties should carefully review all plan-related documents, and not simply the plan.