A Challenging Endeavor Made Easy: The Level of Specificity Needed to Preserve Claims in a Plan of Reorganization Under Bankruptcy Code Section 1123(b)(3)(B)

Section 1123(b)(3)(B) of the Bankruptcy Code[1] is a very important provision within the Bankruptcy Code. Section 1123(b)(3)(B) of the Bankruptcy Code allows a debtor or a trustee to bring claims and causes of actions against a debtor’s creditors or other interested parties after a plan of reorganization has been confirmed. There are, however, varying degrees of interpretations as to the application of the section. This article highlights the decisions of the circuit courts and bankruptcy courts in interpreting the section 1123(b)(3)(B) of the Bankruptcy Code.

Preservation of claims under section 1123(b)(3)(B) of the Bankruptcy Code.

A plan of reorganization (the Plan) can provide for the retention of claims and interests to be brought post-confirmation as long as the retention language is sufficient. Figuring out the level of specificity needed to retain claims and interests in the Plan has proven to be a challenging endeavor for the circuit courts, bankruptcy courts, and bankruptcy practitioners. In general, when a bankruptcy court confirms a chapter 11 Plan, a debtor loses its debtor-in-possession status and with it, standing to pursue the estate’s claims post-confirmation. Section 1123(b)(3)(B) of the Bankruptcy Code provides that the 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 such claim or interest.”[2] A debtor-in-possession or a trustee may preserve the standing to bring claims post-confirmation only if the Plan expressly provides for the “. . . retention and enforcement [of claims] . . . .”[3] and “. . . the [P]lan expressly retains the right to pursue such actions.”[4]

Circuit courts have interpreted the requirement of express retention of claims in the Plan with varying levels of specificity. The retention language in the Plan has to be “specific and unequivocal.”[5] If the Plan contains no preserving language, a litigant will not be able to pursue the claims post-confirmation.[6] In addition, a blanket reservation of “any and all claims arising under the Bankruptcy Code” is also not sufficient.[7] Conversely, a general reservation indicating the type or category of claims to be preserved is held to be sufficiently specific.[8] Moreover, there is no need to itemize the parties against whom the claims might be brought.[9] Only preservation of a specific type or category of claim is necessary.[10] In addition, the blanket reservation in the Plan along with identification of specific claims in a disclosure statement might also be sufficient to preserve standing as long as claims are identified in a disclosure statement.[11] Both the Fifth Circuit and the Second Circuit have held that courts may consult the disclosure statement in addition to the Plan to determine whether a post-confirmation debtor has standing.[12]

Even though section 1123(b)(3)(B) of the Bankruptcy Code does not require the retention language be “specific and unequivocal,” there is “some logic” to the requirement.[13] The Fifth Circuit has held that “absent ‘specific and unequivocal’ retention language in the Plan, creditors lack sufficient information regarding their benefits and potential liabilities to cast an intelligent vote.”[14] In In re Texas Wyoming Drilling, Inc., the Fifth Circuit held that “the purpose of the rule is to put creditors on notice of any claim [the debtor] wishes to pursue after confirmation and enable creditors to determine whether the proposed [P]lan resolves matters satisfactorily before they vote to approve it.”[15] The rule allows timely and comprehensive resolution of the estate, and to secure prompt, effective administration and settlement of all of debtor’s assets and liabilities within a limited time.[16]

An ambiguity in the Plan’s preservation language can also be fatal to the debtor’s or trustee’s standing to bring claims post-confirmation. Ambiguity in the language may result when the Plan’s language is not clear as to against which party or claim is preserved. Not all circuits, however, have ruled on whether the ambiguity in the preservation language can be fatal to the litigant’s standing. Only the Fifth Circuit has found standing where the reservation language was ambiguous.[17] Using traditional tools of contractual interpretation to interpret whether the Plan’s language is ambiguous,[18] the Fifth Circuit has held that the ambiguity as to which parties or claims were preserved does not create an inference that no claims are preserved. And that it only creates an inference that only those parties or claims not covered in the plan’s ambiguous language are to be released.[19]

A type or category of claim preserved in the Plan and the claim subsequently brought post-confirmation is also critical. A litigant has no standing to pursue the type of claim that is not of the same type or category preserved in the Plan.[20] For example, in In re United Operating LLC, the Plan preserved only types of claims arising under the Bankruptcy Code.[21] Post-confirmation, the litigant tried to bring common-law tort based claims.[22] The Court held that the Plan’s blanket reservation of “any and all claims” arising under the Bankruptcy Code, nor its specific reservation of other types of claims under various Bankruptcy Code provisions were sufficient to preserve the common-law claims.[23]

Moreover, at least in one case, a debtor argued that it still had standing to pursue claims post-confirmation even though there was no preserving language in the Plan by arguing that section 1141(b) of the Bankruptcy Code preserves the claims to be brought post-confirmation.[24] Section 1141(b) of the Bankruptcy Code provides that “[e]xcept as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.”[25] The debtor argued that because preference claims were not reserved in the Plan, they became the property of the debtor, and therefore, the debtor can bring those actions.[26] The court did not agree with this argument for the following reasons.[27] The court reasoned that if it were to agree with the debtor’s argument, section 1123(b)(3) of the Bankruptcy Code would be rendered a nullity.[28] The court reasoned that there is no automatic preservation of claims to be brought post-confirmation under section 1141(b) of the Bankruptcy Code.[29]

A trustee or debtor-in-possession should also note that, even though a litigant may have standing to pursue the claims post-confirmation, there are four defenses that may prohibit litigation of such claims. A defendant can raise all of the following defenses: 1) Res judicata,[30] 2) Judicial Estoppel,[31] 3) Equitable Estoppel,[32] and 4) Laches (Statute of limitations).[33] Res judicata will bar a subsequent action if the litigant bringing the claim had knowledge and ability to bring such claim in the prior proceeding.[34] The defenses would not apply, however, if in an earlier proceeding, the defendant fraudulently concealed or prevented the litigant from asserting or preserving claims.[35]

In conclusion, section 1123(b)(3)(B) of the Bankruptcy Code is intended to give notice to the debtor’s creditors and other interested parties of all potential claims that can be brought against them post-confirmation. A proper understanding of how specific the retention language needs to be is crucial because in the absence of a “proper” language in the Plan, the debtor risks losing an important interest of the bankruptcy estate.

Bankruptcy author headshot

Siddharth P. Sisodia, Esq., a Member of NYCLA and its Bankruptcy Law Committee, received his J.D. and LL.M. in Bankruptcy, both from St. John’s University School of Law. While pursuing his law degree, he interned for the Honorable Sean H. Lane, U.S. Bankruptcy Court Judge for the Southern District of New York and interned for the Office of the U.S. Trustees for the Southern District of Florida. He can be reached at 305-206-4799 or siddharth.p.sisodia@gmail.com.

 [1] Title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (2006) will be referred to as the Bankruptcy Code throughout this article.

[2] 11 U.S.C. §1123(b)(3)(B).

[3] Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351, 355 (5th Cir. 2008).

[4] In re United Operating, LLC, 540 F.3d at 355.

[5] Id.; Harstad v. First American Bank, 39 F.3d 898, 902-03 (8th Cir. 1994); See also P.A. Bergner & Co., v. Bank One, Milwaukee, N.A. (In re P.A. Bergner & Co.,), 140 F.3d 1111, 1117 (7th Cir. 1998).

[6] Harstad, 39 F.3d at 902-03.

[7] In re United Operating, LLC, 540 F.3d at 356.

[8] Fleet Nat’l Bank v. Gray (In re Bankvest Capital Corp.), 375 F.3d 51, 59 (1st Cir. 2004) (collecting cases); In re United Operating, LLC, 540 F.3d at 355.

[9] In re United Operating, LLC, 540 F.3d at 355; The Alary Corporation v. Sims (In re Associated Vintage Grp., Inc.,), 283 B.R. 549, 563 (9th Cir. B.A.P 2002).

[10] In re United Operating, LLC, 375 F.3d at 355.

[11] Katz v. I.A. Alliance Corp. (In re I. Appel Corp.), 300 B.R. 564, 570 (S.D.N.Y.) (2003) affrmd by Katz v. I.A. Alliance Corp. (In re I. Appel Corp.), 104 Fed.Appx. 199, 2004 WL 1496858 at *1 (2d Cir. 2004).

[12] Spree v. Laguna Madre Oil & Gas, L.L.C. (In re Texas Wyoming Drilling, Inc.), 647 F.3d 547, 552 (5th Cir. 2011).

[13] In re P.A. Bergner & Co., 140 F.3d at 1117.

[14] In re United Operating, LLC, 540 F.3d at 355.

[15] In re Texas Wyoming Drilling, Inc., 647 F.3d at 550.

[16] In re United Operating, LLC, 540 F.3d at 355.

[17] Compton v. Anderson (In re MPF Holdings U.S., LLC,), 701 F. 3d 449, 456 (5th Cir. 2012) citing In re Texas Gen. Petroleum Corp., 52 F.3d 1330, 1336 (5th Cir. 1995).

[18] See Nat’l Benevolent Ass’n of the Christian Church v. Weil, Gotshal & Manges, LLP (In re Nat’l Benevolent Ass’n of the Christian Church), 333 Fed. App’x 822, 828 (5th Cir. 2009).

[19] Id.

[20] In re Texas Wyoming Drilling, Inc., 647 F.3d at 550.

[21] In re United Operating, LLC, 375 F.3d at 355.

[22] Id.

[23] Id.

[24] Harstad, 39 F.3d at 902.

[25] 11 U.S.C. § 1141(b).

[26] Harstad, F.3d at 902.

[27] Id.

[28] Id.

[29] Id. at 903.

[30] Browning v. Levy, 283 F.3d 761, 772 (6th Cir. 2002); In re Kelley, 199 B.R. at 703; Sure-Snap Corporation v. State St. Bank & Trust Co., 948 F.2d 869. 876 (2d Cir. 1991); In re Associated Vintage Grp., Inc., 283 B.R. at 558-60.

[31] Browning, 283 F.3d at 775; In re Associated Vintage Grp., Inc., 283 B.R. at 566.

[32] In re Associated Vintage Grp., Inc., 283 B.R. at 566.

[33] In re Bankvest Capital Corp., 375 F.3d at 61.

[34] Kelley v. South Bay Bank (In re Kelley), 199 B.R. 698, 705 (9th Cir. B.A.P 1996).

[35] Browning, 283 F.3d at 770.

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