Post-confirmation Standing and Estoppel How Much Disclosure Is Necessary
For example, there are varying opinions on the level of specificity necessary in a reorganization plan to effectuate the transfer of claims and causes of action to a post-confirmation trust and to create jurisdiction. While certain courts, as discussed below, find standing from general, catch-all provisions, others require claim and defendant specific information.
Additionally, even in jurisdictions that do not require increased specificity, defendants may still attack a post-confirmation trust's ability to assert claims and causes of action that were not scheduled or otherwise disclosed prior to confirmation. Though the applications of these legal theories are far from uniform, they are pitfalls that require careful consideration during plan formulation.
The Detail Necessary to Preserve Claims and Causes of Action
For some time, the general practice of plan proponents to preserve claims and causes of action for post-confirmation litigation, whether by the reorganized debtor or a liquidating trustee, was to state all claims and causes of action. See, e.g., P.A. Bergner & Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner & Co.), 140 F.3d 1111, 1117-18 (7th Cir. 1998) (pending action was preserved where plan provided for retention of actions pending on date disclosure statement was approved). This practice is in a state of evolution as courts are adopting varying standards regarding the necessary level of specificity of the "preserved" claims and causes of action. For example, in the Tenth Circuit, Code-specific references such as claims and causes of action under 11 U.S.C. §§544, 547 and 550 are necessary, but details of the specific defendants and claims are not. Retail Marketing Co. v. Northwest Nat'l. Bank, 120 B.R. 203, 208-09 (Bankr. E.D. Okla. 1990), aff'd., In re Mako, 985 F.2d 1052 (10th Cir. 1993). Under the Tenth Circuit's standard, the aforementioned provisions would preserve and effectively transfer both preference and strong-arm powers to a post-confirmation trust. Id. However, the aforementioned provision would not preserve or transfer fraudulent transfer claims under §548 due to the absent section reference. See, e.g., In re Western Integrated Networks LLC, Case No. 04-01330, 2005 WL 674890, * 4 (Bankr. D. Colo. March 24, 2005) (citing Retail Marketing, 120 B.R. at 208); see, also, In re Ice Cream Liquidation Inc., 319 B.R. 324 (Bankr. D. Conn. 2005) (holding that the failure to include turnover actions under 11 U.S.C. §542(a) in a confirmed reorganization plan resulted in a lack of standing to bring such claims).
However, other courts have adopted more lax standards that do not require such specificity. In the Matter of Texas General Petroleum Corp., 52 F.3d 1330, 1335 (5th Cir. 1995) (holding that plan provisions reserving the right to bring "avoidance actions" was sufficient). In fact, some courts have held that a general reservation in a reorganization plan, such as all avoidance actions, is sufficiently specific as it gives notice to creditors that their claims may be challenged post-confirmation. In re Ampace Corp., 279 B.R. 145, 160-61 (Bankr. D. Del. 2002).
On the opposite end of the spectrum, some courts require defendant and claim-specific disclosures in a proposed reorganization plan and/or its accompanying disclosure statement. See, e.g., In re Browning, 283 F.3d 761, 774-75 (6th Cir. 2002) (holding that a blanket reservation was of little value "because it did not enable the value of (proposed defendant's) claim to be taken into account in the disposition of the debtor's estate''); In re G-P Plastics Inc., 2005 WL 48860 (E.D. Mich. 2005); Michaels v. World Color Press Inc. (In re LGI Inc.), 2005 WL 613387 (Bankr. D. N.J. 2005). The basis for such holdings is that potential defendants might vote differently on the proposed plan should they know that litigation is imminent. See Browning, 283 F.3d at 774-75.
While the potential adverse voting consequences motivate some plan proponents to exclude such disclosures, more often the exclusion of specific claims and causes is due to common practice. Under common practice, plan proponents typically have not completed their preference/ fraudulent transfer analysis at confirmation. See In re Arizona Fast Foods LLC, 299 B.R. 589, 593-94 (Bankr. D. Ariz. 2003) (citing In re Associated Vintage Group Inc., 283 B.R. 549 (9th Cir. BAP 2002)). Instead, plan proponents focus on the myriad other issues leading up to plan proposal, solicitation and confirmation. Indeed, the feasibility and liquidation analysis are often Herculean tasks that require significant time and effort.
Nonetheless, "adequate information" for inclusion in a disclosure statement is information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan. 11 U.S.C. §1125(a)(1). And certainly, a reasonably prudent investor would want to know about his potential liability before making such a decision. Browning, 283 F.3d at 774-75.
The importance of these cases is that there is an array of standards and exceptions to such standards regarding the necessary level of specificity. Proper plan formulation, therefore, requires research and review of the applicable case law for the respective jurisdiction.
Indeed, not all jurisdictions have adopted strict requirements. Irrespective of standing, other lines of defense exist such as the doctrine of judicial estoppel.
Judicial Estoppel: An Alternative to Standing
The doctrine of judicial estoppel exists to protect the integrity of the judicial system by preventing litigants from playing fast and loose with the facts by taking inconsistent positions. See In re Superior Crewboats Inc., 374 F.3d 330, 334 (5th Cir. 2004); Golfland Entertainment Centers Inc. v. Peak Investment Inc., 119 F.3d 852, 858 (10th Cir. 1997). However, the judicial estoppel doctrine is not intended to protect litigants, which typically negates any reliance requirement. Superior Crewboats, 374 F.3d at 334.
The factors courts typically apply are (1) the party's position is clearly inconsistent with a previous position, (2) the court must have accepted the previous position and (3) the non-disclosure must not have been inadvertent. Id. at 334-35 (citing In re Coastal Plains Inc., 179 F.3d 197, 206 (5th Cir. 1999)); see, also, In re Associated Vintage Group Inc., 283 B.R. 549, 566 (9th Cir. BAP 2002) (applying the same factors as Superior Crewboats). In Superior Crewboats, chapter 13 debtors failed to schedule a personal injury claim that accrued pre-petition. Subsequently, the debtors' case converted to chapter 7. The debtors informed the trustee of the claim, but claimed that it was barred by the statute of limitations. As such, the chapter 7 trustee abandoned the claim, discharged the debtors and closed the case. A year later, Superior Crewboats informed the chapter 7 trustee that the debtors were pursuing the claim.
Upon reopening the case and amending the debtors' schedules, the trustee sought to be substituted as plaintiff. Prior to ruling on the motion to substitute, Superior Crewboats moved to dismiss the lawsuit, which the district court denied. On appeal, the Fifth Circuit Court of Appeals reversed the district court and held that the doctrine of judicial estoppel barred the lawsuit. Superior Crewboats, 374 F.3d at 335-36.
Specifically, the Fifth Circuit held that the debtors had an affirmative duty to disclose the asset, even though the claim was unliquidated and contingent, and that the failure to disclose was tantamount to a representation that no such change existed. Id. The Fifth Circuit then held that the discharge and closing of the debtors' bankruptcy case as a no-asset case was an acceptance of the prior position that no claim existed. Id. Also, the debtors had knowledge of the claim, which prohibited any finding that the failure to disclose was inadvertent. Id. Although not addressing the trustee's ability to pursue the lawsuit, the trustee stands in the shoes of the debtors, and prior positions of a debtor are imputed to a subsequently appointed trustee.
Similarly, the court in Rosenshein v. Kleban held that the doctrine of judicial estoppel prohibited a post-confirmation debtor from asserting claims that were not disclosed prior to confirmation for its own benefit. 918 F.Supp. 98, 103 (S.D.N.Y. 1996). However, the Rosenshein court held that the judicial estoppel doctrine would not prohibit debtors, creditors or trustees from asserting previously undisclosed claims for the benefit of the creditor body. Id.
Yet not all jurisdictions apply the same standards for the judicial estoppel doctrine. Specifically, the Tenth Circuit adopted a slightly different set of factors for judicial estoppel. See, e.g., Golfland Entertainment Centers Inc. v. Peak Investment Inc., 119 F.3d 852 (10th Cir. 1997). Although Golfland addressed an unsuccessful bidder's assertions that the debtor was judicially estopped from changing the terms of the bid procedure, the Tenth Circuit declined to apply the judicial estoppel doctrine. Golfland, 119 F.3d at 858. The Tenth Circuit noted that judicial estoppel required, inter alia, the party adopting the inconsistent position to have succeeded in the earlier litigation and a detrimental change in position as a result of reasonable reliance on that conduct. Id. (citing Paul v. Monts, 906 F.2d 1468, 1473 (10th Cir. 1990)).
More importantly, the Tenth Circuit has generally refused to apply the doctrine of judicial estoppel as being inconsistent with the spirit of the Federal Rules of Civil Procedure. United States v. 49.01 Acres of Land, More or Less, 802 F.2d 387, 390 (10th Cir. 1986) (citing Parkinson v. California, 233 F.2d 432, 438 (10th Cir. 1956)). While Golfland indicated a willingness to apply the doctrine of judicial estoppel under the proper circumstances, it remains a matter of judicial discretion as courts uniformly agree that judicial estoppel protects the courts, not the litigants. Superior Crewboats, 374 F.3d at 334; Golfland, 119 F.3d at 858; Associated Vintage Group, 283 B.R. at 566.
Just as with the necessary level of specificity to acquire standing post-confirmation, the applicability of the judicial estoppel doctrine will vary by jurisdiction. Thus, a careful review of the applicable standard is important, even in the plan-formulation stage.
The time to consider post-confirmation standing and the doctrine of judicial estoppel, not to mention res judicata and equitable estoppel (not discussed herein for brevity's sake), is at plan formulation. Unfortunately, the demands of reorganizing a debtor and the myriad legal issues facing plan proponents often result in parties ignoring such issues.
Depending on the forum, plan proponents may or may not need to make such an analysis. However, this requires the expenditure of time and energy to determine beforehand the applicable standard of the forum. Otherwise, plan proponents beware: Defendants lie in wait for those that assume general reservations are sufficient.