901 F.3d 162
3rd Cir.2018Background
- Arctic Glacier, a Canadian income trust operating in Canada and the U.S., confirmed a Canadian reorganization plan (recognized under Chapter 15 in the U.S.) that sold assets, repaid creditors, and provided for distributions to unitholders (shareholders).
- The Plan contained broad releases insulating the debtor and officers from claims “in any way related to, or arising out of or in connection with” the bankruptcy, except for enforcement of the Plan, gross negligence/willful misconduct, or other claims not permissible under applicable law.
- Arctic Glacier announced a Unitholder Record Date (Dec. 18, 2014) and published notices of an upcoming distribution, but did not specify payable/ex-dividend dates or notify FINRA; the Plan did not reference FINRA rules.
- Between Dec. 16 and Jan. 22, appellants the Brodskis bought over 12.6 million shares on the OTC market; the Monitor later announced a dividend of ~15.5557 cents/share and regulators froze trading, after which the share price plunged.
- The Brodskis sued alleging negligence, fiduciary duty breach, negligent disclosure, securities fraud, and related claims for failing to pay them the dividend; bankruptcy and district courts dismissed based on the Plan’s releases and res judicata.
Issues
| Issue | Brodskis' Argument | Arctic Glacier/Defendants' Argument | Held |
|---|---|---|---|
| Whether a confirmed bankruptcy plan can release liability for post-confirmation acts implementing the plan | Holywell prevents a plan from binding creditors with respect to post-confirmation claims | Confirmed plans are final judgments and can bar claims related to implementing the plan | Plan releases can cover post-confirmation acts that implement a confirmed plan; Holywell does not broadly bar that effect |
| Whether the Plan required paying the Brodskis (incorporation/interaction with FINRA rules) | FINRA’s ex-date rules would have entitled the Brodskis to the dividend; Plan should be harmonized with FINRA | The Plan did not incorporate FINRA and did not impose obligations to follow FINRA; FINRA obligations, if any, did not arise from the Plan | The Plan did not require paying the Brodskis; FINRA rules were not incorporated or preserved in the Plan |
| Whether the Plan’s releases bind purchasers of shares who bought after confirmation (transferee status) | Buyers are not transferees of the releases and thus are not bound | Purchasers are transferees and take shares with the Plan’s benefits and burdens, including releases | Buyers are transferees and are bound by the Plan’s releases that accompanied the shares |
| Whether applying the Plan’s releases to the Brodskis violates Due Process | Applying releases to the Brodskis (who were not original claimants) violates due process | Brodskis had notice of the Plan and bought shares from represented sellers, so they had process and representation | No due-process violation: notice by publication and representation of sellers satisfied process; Brodskis bound by Plan |
Key Cases Cited
- Holywell Corp. v. Smith, 503 U.S. 47 (1992) (limits of plan discharges for liabilities arising after confirmation examined; does not broadly preclude plan releases for implementation acts)
- Donaldson v. Bernstein, 104 F.3d 547 (3d Cir.) (1997) (confirmation orders are res judicata for issues decided or that could have been decided at confirmation)
- Travelers Indem. Co. v. Bailey, 557 U.S. 137 (2009) (confirmation orders operate as final judgments with preclusive effects)
- In re KB Toys Inc., 736 F.3d 247 (3d Cir.) (2013) (transferred claims assume limitations of transferor; transferee cannot revive disallowed claims)
- Jones v. Chemetron Corp., 212 F.3d 199 (3d Cir.) (2000) (due process requires notice or representation before discharge of claims in bankruptcy)
- Limbaugh v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 732 F.2d 859 (11th Cir.) (1984) (distinguishes record date, ex-dividend date, and payable date for dividend entitlements)