Elk Horn Coal Co. v. Conveyor Manufacturing & Supply, Inc. (In Re Pen Holdings, Inc.)Elk Horn Coal Co. v. Conveyor Manufacturing & Supply, Inc. (In Re Pen Holdings, Inc.)
MEMORANDUM
The issue in these consolidated adversary proceedings on motions to dismiss and for summary judgment is whether the confirmed Chapter 11 plan preserved preference actions from the res judicata effect of confirmation. Provisions in the Joint Plan that reserved avoidance actions under 11 U.S.C. § 547 are minimally sufficient for purposes of 11 U.S.C. § 1123(b)(3).
Facts
Pen Holdings, Inc. and five related entities
1
(“Pen”) filed Chapter 11 petitions on January 24, 2002. Pen controlled the
On February 25, 2002, the Debtors filed Schedules of Assets and Liabilities and Statements of Financial Affairs. Questions 3A of the Statements listed over 700 payments aggregating more than $160,000,000, 2 made by the Debtors during the 90-days preceding bankruptcy.
After a contentious year and one-half in Chapter 11, on August 12, 2003, a Joint Plan of Reorganization was filed by the Debtors, the Official Committee of Unsecured Creditors and the Secured Lending Group. On September 30, 2003, an amended Joint Plan was filed by the Co-Proponents. A Disclosure Statement was approved and on October 1, 2003, the Joint Plan, as amended, was confirmed. On November 25, 2003, the court entered an Agreed Order to Clarify Plan that resolved an ambiguity with respect to the name of the Reorganized Debtor, The Elk Horn Coal Company, LLC. 3
The Joint Plan as confirmed defined “Avoidance Actions” at section 2.1.06:
[A]ctions and rights of action under Sections 510, 541, 544, 545 and 546 of the Bankruptcy Code, all preference claims pursuant to Section 547 ..., all fraudulent transfer claims pursuant to Section 544 or 548 ..., all claims recoverable under Sections 550 and 553 ..., all other claims under Chapter 5 of the Bankruptcy Code, and all claims (including claims arising in common law or in equity) against any person on account of any debt or other claim owed to or in favor of the Debtor.
Joint Plan at § 2.1.06.
Section 15.6 of the Joint Plan then provided:
15.6. Avoidance Claims and Rights of Action
From and after the Confirmation Date, to the extent not otherwise adjudicated or settled prior to or as part of the Plan, all rights and/or claims of the Post Confirmation Debtors relating to Avoidance Actions are hereby preserved, retained, and may be pursued by New Elk Horn. Any recovery realized by New Elk Horn on account of such Avoidance Actions shall be distributed in accordance with the terms of this Plan.
All causes of action, claims against officers and directors both current and former, and all other causes of action or rights of the Debtors shall vest in New Elk Horn on the Confirmation Date, and New Elk Horn shall have the right to pursue all such claims. Any recovery realized by New Elk Horn on account of such causes of actions, claims or rights shall be distributed in accordance with the terms of this Plan.
Joint Plan at § 15.6.
Separately, the Joint Plan made this provision for retention of jurisdiction:
The Court shall retain and have jurisdiction over all matters arising out of or relating to the Chapter 11 Cases, including, without limitation, the following matters, and the Debtors shall retain allrights and powers with regard to such matters:
* * * *
To the extent not otherwise adjudicated or provided for or waived under the Plan, to determine and to adjudicate (1) all actions or matters under Section 502 and (ii) all Avoidance Actions.
Joint Plan at § 16.1(j).
The Disclosure Statement accompanying the Joint Plan stated in a subsection listing “Other Assets”:
Although the real estate interests have been the subject of much of the attention during the bankruptcy proceedings, the Debtors own other assets. Those assets include certain accounts receivable, tax and other refunds, claims, personal property, and potential avoidance actions.
Disclosure Statement at ¶ III.B.(8).
The liquidation analysis attached to the Disclosure Statement did not list Avoidance Actions separately, but did include a line item for “other assets” valued at $924,000.
On January 23, 2004, the Reorganized Debtor filed 173 adversary proceedings to avoid preferential transfers under 11 U.S.C. § 547(a). After a consolidated pretrial conference on April 5, 2004, various defendants filed motions to dismiss or for summary judgment. The court ruled from the bench on all issues except the issue in this opinion. 4
Citing
Browning v. Levy,
Discussion
It is well recognized in this circuit that confirmation of a Chapter 11 plan has res judicata effect with respect to causes of action that became assets of the Chapter 11 estate.
As a general rule, the “[cjonfirmation of a plan of reorganization constitutes a final judgment in bankruptcy proceedings.” Sanders Confectionery Prods., Inc. v. Heller Fin., Inc.,973 F.2d 474 , 480 (6th Cir.1992). Such confirmation by a bankruptcy court “has the effect of judgment by the district court and res judicata principles bar relitigation of any issues raised or that could have been raised in the confirmation proceedings.” In re Chattanooga Wholesale Antiques, Inc.,930 F.2d 458 , 463 (6th Cir.1991).
Browning,
For purposes of the res judicata effect of confirmation of a Chapter 11 plan, preference actions under § 547 are causes of action that “could have been raised” before confirmation. A trustee in bankruptcy has discretion to avoid and recover preferential transfers. See 11 U.S.C. §§ 547(b) & 550(a). Debtors in possession in Chapter 11 cases assume the same authority to recover preferential transfers. See 11 U.S.C. §§ 1101(1) & 1107(a). When a trustee or debtor in possession in a Chapter 11 case does not prosecute preference actions before confirmation, there is the potential that confirmation will preclude recovery of preferences.
Because it is often not practical or even possible to litigate all preference actions before confirmation of a plan, it has
provide for — (A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or (B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest!)]
11 U.S.C. § 1123(b)(3).
The statute is (obviously) silent with respect to the words necessary or sufficient to preserve causes of action like the preferences in these adversary proceedings. Legislative history is helpful as it reveals the purpose behind this statute.
Although there is little legislative history to § 1123(b)(3) itself, 5 the provision has deep roots. Section 1123(b)(3) of the 1978 Bankruptcy Code was preceded by § 216(13) of the Bankruptcy Act that provided:
A plan of reorganization under this chapter—
(13) may include provisions for the settlement or adjustment of claims belonging to the debtor or to the estate; and shall provide, as to such claims not settled or adjusted in the plan, for their retention and enforcement by the trustee or, if the debtor has been continued in possession, by an examiner appointed for that purpose[.]
11 U.S.C. § 616(13) (repealed).
Section 216(13) was added to the bankruptcy laws in 1938 by The Chandler Act. Bankruptcy Act of 1898 Amendments, Pub.L. No. 75-696, 52 Stat. 840, 895-96 (1938); S.Rep. No. 75-1916 at 7 (9138); H.R.Rep. No. 75-1409 at 42 (1938). Section 216(13) was intended to fill omissions in and to clarify § 77B of the Bankruptcy Act of 1898. See 6A CollieR ON BANKRUPTCY § 10.22 (14th ed.1977). Section 216(13) was in keeping with the general theme of Chapter X to broaden the protection given to creditors and their rights to participate in corporate reorganization proceedings. See generally Rostow & Cutler, Competing Systems of Corporate Reorganization: Chapters X and XI of the Bankruptcy Act, 48 Yale L.J. 1334 (1938); Gerdes, John, Corporate Reorganizations: Changes Effected by Chapter X of the Bankruptcy Act, 52 Habv. L.Rev. 1, 30 & n. 176 & n. 177 (1938-1939) (Section 216(13) resolved any doubt that causes of action could be retained for post confirmation suit for the benefit of the creditors.).
The legislative history of § 216(13) “made clear that its aim was to make possible the formulation and consummation of a plan before completion of the investigation and prosecution of causes of action such as those for previous insider misconduct and mismanagement of the debtor. Thus the statute was in furtherance of the purpose of preserving all assets of the estate while facilitating confirmation of plan.”
DuVoisin v. East Tennessee Equity, Ltd. (In re Southern Indus. Banking Corp.),
Any causes of action brought to light by such an investigation [by a trustee appointed by the court] should be taken into account in the plan of reorganization and might well have an important bearing upon the fairness of the pending plan if in fact it does not adequately preserve them and provide for their prosecution.... It is equally plain that it would not be fair to the individual creditors of a debtor for the court, before the preliminary report ... of the trustee or examiner ..., had been made, to permit the submission to them of a plan of reorganization which did not adequately preserve and provide for the prosecution of causes of action which might exist if such allegations of mismanagement and fraud were true.
See also Brown v. Gerdes,
When the 1978 Bankruptcy Code was drafted, what became § 1123(b)(3) was reworded to include the debtor or a “representative ... appointed for such purpose” as proper parties to bring retained actions and to expansively describe “any such claim or interest” as appropriate for reservation. These changes reflect a clear “legislative intent to liberalize, rather than to constrict, the scope of the provision.”
Southern Indus. Banking Corp.,
This review of legislative history illuminates the question at hand. Defendants would characterize § 1123(b)(3) as a “notice” provision of an altogether different sort: Notice to individuals that they are, or may be, a potential defendant in an action that the reorganized debtor will retain. Conceived in this way — contrary to its legislative history— § 1123(b)(3) would be appropriately interpreted to require language in a plan specific to the identity of the entities that are potential defendants in post confirmation actions. As the history of § 1123(b)(3) plainly shows, however, the notice at issue in § 1123(b)(3) is
The silence in § 1123(b)(3) with respect to the language necessary or sufficient to preserve a particular claim or cause of action has generated considerable disagreement in reported cases. 6 Even with respect to ubiquitous causes of action like preference avoidance, the courts are divided on the specifics required to comply with § 1123(b)(3). 7
The Sixth Circuit has waded into this debate at least twice, though not in the
In accordance with section 1123(b) of the Bankruptcy Code, the Company shall retain and may enforce any claims, rights, and causes of action that the Debtor or its bankruptcy estate may hold against any person or entity, including, without limitation, claims and causes of action arising under sections 542, 543, 544, 547, 548, 550 or 553 of the Bankruptcy Code.
Browning,
The Sixth Circuit explained in
Browning
that “[r]es judicata does not apply where a claim is expressly reserved by the litigant by the early bankruptcy proceeding.... But a general reservation of rights does not suffice to avoid res judicata.”
Browning,
[The] blanket reservation was of little value to the bankruptcy court and the other parties to the bankruptcy proceeding because it did not enable the value of [the] claims to be taken into account in the disposition of the debtor’s estate. Significantly, it neither names SSD nor states the factual basis for the reserved claims.... [The] blanket reservation does not defeat application of res judica-ta to its claims against SSD.
Browning,
Micro-Time,
the unpublished Sixth Circuit opinion discussed in
Browning,
sheds no additional light on the degree of specificity sufficient to preserve a preference action under § 1123(b)(3). Like
Browning, Micro-Time
involved a malpractice action against attorneys' — in
Micro-Time,
the defendants were the attorneys for the Chapter 11 trustee. The preservation language in the
Micro-Time
plan was at least as general as the language rejected in
Browning:
“all causes of action which the debtor may choose to institute shall be vested with the debtor.”
Micro-Time,
Nine years later in Browning, the Sixth Circuit found the “blanket reservation of rights that was deemed insufficiently specific” in Micro-Time was “essentially the same” as the generic reservation of causes of action in Browning. Perhaps the rule to draw from Browning and Micro-Time is that a general reservation of “causes of action” is not specific enough in the Sixth Circuit to avoid the res judicata effect of confirmation with respect to a malpractice action against counsel to the debtor or to the trustee.
In
D & K Properties
— the other case relied upon by the Sixth Circuit in
Broum-ing
— the Seventh Circuit cited the Sixth Circuit’s unpublished decision in
Micro-Time
to support its conclusion that a pre-petition breach of contract action against a bank was not preserved by a plan that stated “the disbursing agent ... shall enforce all causes of action existing in favor of the debtor.”
D & K Properties,
The problem in Micro-Time, as in this case, was not that the reservation was not in writing, but that the claim sought to be reserved was not identified in the reservation. The identification must not only be express, but also the claim must be specific. A blanket reservation that seeks to reserve all causes of action reserves nothing.
D & K Properties,
A year after
D & K Properties,
the Seventh Circuit revisited the specificity required to preserve causes of action from the
res judicata
effect of confirmation in the precise context of preference litigation. In
P.A. Bergner & Co. v. Bank One, Milwaukee, N.A.,
The language of § 1123(b)(3)(B) is broad enough to encompass both those situations where a debtor is trying to preserve a potential future claim aboutwhich the affected party had no notice and the subset of claims that have already been filed (and are thus a matter of public record) but that remain unresolved. ... While there might be some logic in requiring “specific and unequivocal” language to preserve claims belonging to the estate that have never been raised, the statute itself contains no such requirement. The courts that have spoken of the need for “specific” and “unequivocal” language have focused on the requirement that plans unequivocally retain claims of a given type, not on any rule that individual claims must be listed specifically.
Bergner,
Browning does not establish a general rule that naming each defendant or stating the factual basis for each cause of action are the only ways to preserve a cause of action at confirmation of a Chapter 11 plan. Read in the context of its history, § 1123(b)(3) protects the estate from loss of potential assets. It is not designed to protect defendants from unexpected lawsuits. The words sufficient to satisfy § 1123(b)(3) must be measured in the context of each case and the particular claims at issue: Did the reservation allow creditors to identify and evaluate the assets potentially available for distribution?
This is a close case. The Joint Plan is not silent about the preference actions. It defines Avoidance Actions to include “all preference claims under Section 547.” The Joint Plan expressly includes Avoidance Actions as retained causes of action that may be pursued by the Reorganized Debtor. The Disclosure Statement includes Avoidance Actions in the description of “Other Assets.” The liquidation analysis annexed to the Joint Plan does not include a line item for preference actions. The Statements of Financial Affairs included a list of payments made within the preference period totaling $160,000,000. An estimate of what the Debtors realistically believed might be recoverable as preferences should have been included in the liquidation analysis. The Joint Plan is more specific than the disclosure statement in Browning but hardly a model for § 1123(b) analysis. Better language could have been drafted, but as written the Joint Plan preserved preference actions under § 547.
This outcome is influenced by the fact that preference litigation is fundamentally different than the legal malpractice and breach of duty claims in Browning. The universe of causes of action that become assets of Chapter 11 estates and that might be the objects of preservation at confirmation under § 1123(b)(3) is immense. But almost every debtor that comes into Chapter 11 has made payments to creditors during the 90 days or one year (insiders) before bankruptcy. Potential preference actions are often numerous (for example, $6 billion in Kmart) and require extensive accounting and prefiling preparation by the debtor or trustee. Preference litigation is not often initiated, and more rarely completed, before confirmation of a plan in Chapter 11 cases.
It is not practicable, especially in larger cases, for the debtor to identify by name in the plan or disclosure statement every entity that may have received a preferential payment. There is no common practice in
Conclusion
The Joint Plan adequately described preference actions as causes of action preserved for suit by the Reorganized Debtor after confirmation. An appropriate order will be entered.
ORDER
For the reasons stated in the Memorandum filed contemporaneously herewith, IT IS ORDERED, ADJUDGED and DECREED that the motions to dismiss are denied with respect to the § 1123(b)(3) issue remaining after this court’s order of August 3, 2004.
IT IS SO ORDERED.
Notes
. Pen Coal Corporation, The Elk Horn Coal Corporation, River Marine Terminals, Inc., Pen Land Company, and Marine Terminals, Inc.
. This total includes over $120,000,000 paid to secured lenders, plus payroll and tax payments.
. Multiple versions of the Joint Plan, Disclosure Statement and supporting documents and exhibits used inconsistent names for the Reorganized Debtor. The Agreed Order clarified that the correct identity of the Reorganized Debtor was The Elk Horn Coal Company, LLC. As explained from the bench at the hearing on the Motions to Dismiss, the Agreed Order simply clarified what was little more than typographical confusion. .
. One Defendant has moved for leave to appeal the denial of all other grounds for dismissal. That motion is pending before the district court.
. See S.Rep. No. 95-989 at 119 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5905 (noting generally that the provisions of subsection (b) of § 1123 were derived substantially from § 216 of Chapter X of the Bankruptcy Act).
.
See
(some discussed below)
Browning v. Levy,
.
See
(some discussed below)
P.A. Bergner & Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner & Co.),