255 F. Supp. 3d 534
D. Del.2017Background
- AGIF, a Canadian income trust with units trading OTC in the U.S., confirmed a CCAA plan (the Plan) that set a single, detailed procedure for distributions and included broad releases protecting the debtors, officers, monitor, and others; the Canadian Sanction Order and U.S. Recognition Order implemented and gave U.S. effect to the Plan.
- The Plan required the Monitor to declare a unitholder distribution record date (at least 21 days before distribution) and to have the Transfer Agent pay registered unitholders as of that record date; the Sanction Order gave the Monitor exclusive authority to administer and distribute funds without interference.
- Plaintiffs purchased OTC units between December 16, 2014 and January 22, 2015. The Monitor set a record date of December 18, 2014 and paid distributions on January 22, 2015 to holders of record (i.e., sellers), consistent with the Plan; FINRA was not notified and therefore did not set an ex-dividend date.
- Plaintiffs alleged defendants violated U.S. securities rules (FINRA/UPC and Rule 10b-17) and common-law duties because plaintiffs, as purchasers during the December 16–January 22 period, claim they were entitled to the distribution under FINRA rules for a large dividend and thus lost ~75% of value; they sued for negligence, breach of fiduciary duty, negligent misrepresentation, FINRA rule violation, and fraud.
- The bankruptcy court dismissed the adversary complaint, holding (1) the confirmed Plan and Recognition Order preclude plaintiffs’ claims under res judicata because the Plan provides the exclusive distribution scheme, and (2) the Plan and Orders’ releases bar the claims; this appeal followed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether res judicata from the confirmed Plan bars plaintiffs’ claims that defendants violated FINRA/SEC rules by distributing to selling unitholders | Zardinovsky: Plan did not displace defendants’ concurrent obligations under U.S. securities law; plaintiffs’ claims arise from post-confirmation acts and thus are not precluded | Defendants: Confirmed Plan is final and sets an exclusive distribution procedure; any conflicting obligations (FINRA Rules) are superseded | Court: Affirmed — Plan is a final adjudication; res judicata bars relitigation and Plan controls where it conflicts with FINRA rules |
| Whether the Plan and FINRA rules can be harmonized (e.g., by tranche payments or double payments) | Zardinovsky: Payments could have been structured in tranches or paid twice to satisfy FINRA without violating Plan | Defendants: Plan’s distribution procedure is comprehensive and does not permit tranches or additional payments; Sanction Order prohibits interfering with Monitor’s exclusive distribution authority | Court: Affirmed — harmonization not feasible here; tranches or double payments would conflict with the Plan and Sanction Order |
| Whether broad releases in the Plan, Sanction Order, and Recognition Order bar plaintiffs’ claims | Zardinovsky: Plaintiffs bought after confirmation and were not represented; releases cannot defeat post-confirmation claims or claims of persons not bound by the confirmation process; enforcement would violate due process | Defendants: Releases are broad, effective as of the implementation date, and expressly bar claims arising out of distributions; purchasers are successors/assigns bound by the Plan | Court: Affirmed — releases are sufficiently broad, cover the relevant conduct and persons, and bind purchasers as successors/assigns; no due-process defect shown |
| Whether plaintiffs are bound as successors/assigns of selling unitholders (i.e., whether their claims survive transfer) | Zardinovsky: Sale of units is not an assignment that transfers plan-related obligations or releases; selling unitholders retained some rights, so plaintiffs should not be bound | Defendants: Purchasers step into the shoes of sellers; post-confirmation transfers carry the same rights/obligations; finality of plan requires successors be bound | Court: Affirmed — purchasers succeeded to the rights/obligations of selling unitholders; transfers do not avoid Plan’s binding effect |
Key Cases Cited
- Bd. of Trs. of Trucking Emps. of N.J. Welfare Fund, Inc. v. Centra, 983 F.2d 495 (3d Cir. 1992) (res judicata principles for prior judgments)
- In re Szostek, 886 F.2d 1405 (3d Cir. 1989) (confirmed plan has res judicata effect as to issues decided or that could have been raised at confirmation)
- E. Minerals & Chem. Co. v. Mahan, 225 F.3d 330 (3d Cir. 2000) (plan confirmation treated as final adjudication)
- Donaldson v. Bernstein, 104 F.3d 547 (3d Cir. 1997) (post-confirmation acts may give rise to claims not barred when they constitute breaches of the plan itself)
- Karathansis v. THCR/LP Corp., [citation="298 F. App'x 120"] (3d Cir. 2008) (plan controls distributions where plan and UPC conflict; court must attempt harmony but plan prevails)
- In re Howe, 913 F.2d 1138 (5th Cir. 1990) (confirmed plan is binding on parties)
- In re KB Toys, 736 F.3d 247 (3d Cir. 2013) (disabilities or conditions attached to claims travel with the claim; purchasers of claims are subject to same plan-based defenses)
- Jones v. Chemetron Corp., 212 F.3d 199 (3d Cir. 2000) (due process can invalidate discharge/release when claimants received no notice and had no representation)