Chapter 11 Retention and Prosecution of Claims
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Chapter 11 Retention and Prosecution of Claims
This chapter provides an introduction to the key concepts necessary to retain the debtor's claims under a chapter 11 plan. It outlines some of the critical court decisions in the area, and identifies some of the critical drafting principles to be followed in preparing the plan and disclosure statement to ensure that all existing and potential claims of the debtor and the estate are retained and transferred to the trust.
This chapter outlines some of the key issues that need to be resolved in order to retain the debtor's claims under a chapter 11 plan. It is critical that the language of the plan and the language of the disclosure statement are drafted carefully to ensure that all existing and potential claims of the debtor and the estate are retained and transferred to the trust.
A. Need to Investigate and Analyze Potential Claims
In formulating a plan and disclosure statement, the plan proponents should thoroughly investigate and analyze all potential claims of the debtor and the estate. They should also carefully consider and analyze whether there are any potential claims that have not been asserted and might be cut off by the confirmation order if they were not asserted prior to confirmation or expressly reserved under the plan and disclosure statement.
B. Exhaustion of Remedies and Subject-Matter Jurisdiction
Plan proponents should address whether any requirements must be satisfied before the bankruptcy court, or another court, can exercise post-confirmation subject-matter jurisdiction over a claim that the liquidation trustee may bring. For example, in United States v. Bond,136 the Second Circuit held that a bankruptcy court lacked jurisdiction to adjudicate a liquidation trustee's tax refund claim because § 505(a)(2)(B) of the Bankruptcy Code permits a tax refund suit to be filed in bankruptcy court only after a refund claim is first filed with the Internal Revenue Service by the trustee in bankruptcy or a debtor in possession. Although the bankruptcy court had statutory authority to assign the tax refund claim to the liquidation trust and appoint the liquidation trustee, unless and until a bankruptcy trustee (or the debtor in possession) files a refund claim with the IRS, the bankruptcy court lacks jurisdiction to adjudicate the refund claim.
C. Retention of Claims Under a Chapter 11 Plan
A chapter 11 plan of reorganization may provide for the retention of claims of the debtor and the estate and the appointment of a representative of the estate to enforce the claims.137 It is very common for a liquidating chapter 11 plan to provide for the transfer and assignment of claims of the debtor and the estate (including avoidance claims arising under chapter 5 of the Bankruptcy Code) to a liquidation trust and appointment of a liquidation trustee or plan administrator to prosecute or settle such claims. It is important that the language of the plan be drafted carefully to ensure that all of the existing or potential claims of the debtor and the estate are effectively retained and transferred to the trust.
D. Standing of Liquidation Trustee to Assert Claims
1. Bankruptcy Code Provisions
The Bankruptcy Code provides that the trustee represents the estate, and therefore has the capability to sue and be sued.138 The Code also provides that a debtor in possession shall have all the rights and, except as otherwise specified, shall perform all the functions and duties of a chapter 11 trustee.139
The Code states that a chapter 11 plan may provide for the "retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any ... claim or interest [belonging to the debtor or the estate] ."140
2. Retention of Claims Under Plan Documents
In order for the estate representative to have standing, the plan (possibly together with the disclosure statement) must adequately "retain" the claims.141 Section 1123(b)(3) of the Bankruptcy Code on its face seems to require that the plan have language retaining the claims, but the courts frequently look not only at the language of the plan but also at the language of the disclosure statement and confirmation order. For example, in Browning v. Levy (discussed infra), the claim-reservation language analyzed by the Sixth Circuit was contained in the disclosure statement, not the plan. Drafters of plan documents should query whether, in view of the plain language of the Code, § 1123(b) (3) is satisfied if the plan does not contain adequate claim-retention language.
E. Standing of Liquidation Trustee vs. Standing of Individual Creditors
If (1) the plan properly retains and assigns the claims of the debtor and the estate to the liquidation trust, (2) the liquidation trustee or other estate representative is duly appointed, and (3) the liquidation trust plan documents grant the estate representative the authority to pursue the claims for the benefit of the trust estate, then the estate representative should have standing to pursue the claims.142 However, the estate representative will not have standing to assert claims that do not belong to the debtor or the estate; rather, the representative will only have standing to assert claims that belong to an individual creditor or group of creditors.143 "The test for determining whether a cause of action belongs to the estate requires the court to 'look to the injury for which relief is sought and consider whether it is peculiar and personal to the claimant or general and common to the corporation and creditors.'"144
F. Res Judicata and Judicial Estoppel
1. General
Two major issues to be considered regarding the retention and enforcement of claims by a liquidation trustee are principles of res judicata (or claim preclusion) and the doctrine of judicial estoppel. These doctrines are applied frequently to the retention of claims in bankruptcy cases.145
2. Res Judicata (Claim Preclusion)
Res judicata and judicial estoppel serve different policies. Res judicata arises out of the law of judgments. It fosters inality and judicial economy.146 It prevents a party from litigating a claim that the party raised or could have raised in a prior proceeding in which the party raised another claim based "on the same cause of action" or "essentially the same factual underpinnings."147 Res judicata bars not only the actual parties to an earlier bankruptcy case from later bringing suits that should have been brought in the context of the case, but also those in privity with the parties.148 Therefore, subject to the discussion below regarding the effect of the debtor's concealment of claims on the trustee's standing, the liquidation trustee, plan administrator or other legal successor to the trustee or debtor in possession as the representative of the estate under the plan will generally be bound by the acts and omissions of its legal predecessors (i.e., the trustee, the debtor in possession and the pre-petition debtor).149
3. Judicial Estoppel
The doctrine of judicial estoppel preserves "the integrity of the courts by preventing a party from abusing the judicial process through cynical gainsmanship."150 In the bankruptcy context, another policy fostered by the doctrine helps ensure that adequate disclosure is made to the court, creditors and other parties-in-interest regarding the assets of the estate.151
4. Elements of Res Judicata and Judicial Estoppel: Browning v. Levy
The Sixth Circuit's decision in Browning v. Levy152 presents a good analysis of the issues. In Browning v. Levy, a dispute arose between an employee stock ownership plan (ESOP) and a shareholder who owned a majority of the shares of the corporation (the debtor). The dispute involved a difference of opinion over what steps should be taken to remedy the serious financial difficulties that confronted the debtor in 1991 and 1992. The dispute ultimately resulted in litigation in a state court involving the debtor, the shareholder and the ESOP. In that litigation, the shareholder was represented by a law firm. On April 16, 1992, the debtor, the ESOP, the shareholder and other affected parties entered into a settlement agreement and release. The state court entered a final judgment approving the settlement on May 27, 1992. On Aug. 18, 1995, the debtor filed for chapter 11. Thereafter, certain employees of the debtor who were also participants in the ESOP brought suit against the shareholder (the "post-petition action") alleging that the settlement was procured fraudulently and seeking to have the settlement set aside.
After filing for chapter 11, the debtor operated as a debtor in possession. During the first month of the bankruptcy case, the law firm served as general bankruptcy counsel to the debtor, but on Sept. 26, 1995, the law irm was replaced as general bankruptcy counsel by another firm. The firm continued to represent the debtor as special counsel, however.
The debtor filed a liquidating chapter 11 plan and disclosure statement. Neither the disclosure statement nor the plan speciically reserved any claims against the law irm, but the disclosure statement did contain the following "omnibus reservation of rights":
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.153
The bankruptcy court approved the debtor's disclosure statement on Dec. 12, 1995, and the bankruptcy court confirmed the debtor's chapter 11 plan of reorganization on Feb. 16, 1996. The plan was apparently accepted by all voting classes of creditors, and the ESOP voted to accept the plan. Under the plan, the debtor, under a new name, continued to function as the representative of the estate and to administer the liquidation...
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