Restructuring

Contributed by Kyle J. Ortiz
Ben Franklin once said, “you may delay, but the Eleventh Circuit will not,” or it might have been, “you may delay, but time will not.”  Whatever the quote was, two creditors in Winn-Dixie’s recent chapter 11 proceedings, IRT Partners and Equity One, won’t soon forget the lesson following the Eleventh Circuit’s decision in In re Winn-Dixie Stores, Inc., Case No. 09-12237 (11th Cir. April 29, 2011) that they had waited too long to amend their claims.  The court held that creditors are barred by the doctrine of res judicata (claim preclusion in layman’s terms) from amending claims after the entry of an order confirming a debtor’s chapter 11 plan of reorganization.
On September 8, 2005, shortly after filing for bankruptcy, Winn-Dixie rejected leases it held with both IRT Partners and Equity One.  On the bar date for filing rejection claims, both IRT and Equity One filed a motion to extend the rejection claims bar date by two weeks, but did not seek a hearing on their motion and the bankruptcy never ruled on the requested extension.  Nonetheless, after the rejection bar date had passed, both IRT and Equity One filed proofs of claims for what they termed “rejection damages.”  Nearly a year later, in October of 2006, Winn-Dixie objected to these claims on the basis that they were overstated.  Neither Equity One nor IRT filed a response to Winn-Dixie’s objection, and as a consequence, the bankruptcy court ruled in Winn-Dixie’s favor and reduced the claims of IRT and Equity One.
Meanwhile, on November 9, 2006, after notice to all interested parties, and without objection by either IRT or Equity One, the bankruptcy court entered an order confirming Winn-Dixie’s plan of reorganization.  Under the plan, both IRT’s and Equity One’s claims were classified as unsecured claims, which were to be paid through the distribution of common stock in the reorganized debtor.  Shortly after confirmation of the plan, both IRT and Equity One accepted equity shares of the reorganized debtor.  Nonetheless, in January 2007, both IRT and Equity One filed amended proofs of claim, seeking not only the original amount reduced under the plan, but also additional rejection damages.  Winn-Dixie objected, and the bankruptcy court disallowed the proofs of claim amendments relying on the doctrine of res judicata.
On appeal, IRT and Equity One argued that res judicata was not the proper standard to consider the question, but, instead, that the standard for when a claim may be amended in the Eleventh Circuit is the five-pronged test developed by the court in In re International Horizons, Inc., 751 F.2d 1213 (11th Cir. 1985).  Under the International Horizons test, courts in the Eleventh Circuit will consider five factors when deciding whether to allow an amended claim: (1) whether the debtor and creditors relied on the earlier proof of claim or had reason to know that a subsequent proof of claim would be filed; (2) whether other creditors would receive a windfall if the court refused to allow amendment; (3) whether the claimant intentionally or negligently delayed in filing the amendment; (4) the justification for the failure to file for an extension to the bar date; and (5) whether other equitable considerations exist which compel amendment.
Not persuaded by the arguments advanced by IRT and Equity One, the Eleventh Circuit held that the question in the case was not under what circumstance a claim may be amended, but whether a confirmed plan precludes a subsequent effort to amend a claim post confirmation.  The court did note that amendments made prior to confirmation that pass the International Horizons test would be freely granted, but that International Horizons did not contemplate post-confirmation amendments.  In holding that a plan can preclude post-confirmation amendments to proofs of claim, the Eleventh Circuit adopted the Seventh Circuit’s reasoning in Holstein v. Brill, 987 F.2d 1268 (7th Cir. 1993), where the Seventh Circuit held that plan confirmation “is equivalent to a final judgment in an ordinary civil action which substitutes a judgment for the claim and defines the new obligations of the parties.”  Both the Eleventh Circuit in Winn-Dixie and the Seventh Circuit in Holstien held, however, that plans are not per-se final orders making them entitled to res judicata, but, instead, the language of the plan itself determines whether res judicata should be afforded.  Following Holstein, the Winn-Dixie court held that “res judicata should preclude post confirmation amendments absent [a] ‘compelling reason.’ ”
Essentially, if the plan calls for distributions to be in full satisfaction of existing claims, than the plan should be afforded final judgment.  The Winn-Dixie court found that Winn-Dixie’s plan of reorganization contained sufficient language to be afforded final judgment, citing the specific provision of Winn-Dixie’s plan that provided that distributions of its reorganized common stock were intended to be “in full satisfaction, settlement, release, and discharge of and in exchange of” allowed claims (emphasis added by the court).
The Winn-Dixie court found the language of the plan unambiguous and noted that IRT and Equity One had not provided any compelling reason for why their amended claims should be allowed.  As a result, the Eleventh Circuit affirmed the lower court’s decision sustaining Winn-Dixie’s objection to the proof of claim amendments.  Thankfully, the court went to the trouble of giving an example of a case where circumstances were compelling enough to allow a post-confirmation amendment.  In that case, In re Telephone Co., 308 B.R. 579 (Bankr. M.D. Fla. 2004), the court permitted the IRS to make a post-confirmation amendment because the IRS had provided adequate notice to the court that the claim amount was still pending and because the delay was caused by a lack of cooperation on the part of the debtor.  Thus, without notice and an uncooperative debtor, the Eleventh Circuit has made clear that creditors must file or amend claims prior to plan confirmation or they will be precluded.
With this in mind, following Winn-Dixie, creditors in the Eleventh Circuit must be sure not to delay amending their claims, or they will risk finding themselves with no recourse when time moves on without them.
Finally, Winn-Dixie is a timely reminder, that although the focus of much commentary in the days to come may be on Stern v. Marshall and its effect on a bankruptcy court’s ability to enter final judgments on non-core proceedings, as Winn-Dixie shows, bankruptcy courts still have the power to enter final judgments on core proceedings.