EMERGING PLAN ISSUES:
THIRD PARTY PROTECTIONS, ABSOLUTE PRIORITY POSTLASALLE, CLASSIFICATION OF CLAIMS AND RES JUDICATA
RAKHEE V. PATEL
Kirkpatrick & Lockhart LLP
RAY W. BATTAGLIA
DEBORAH L. INNOCENTI
Oppenheimer, Blend, Harrison & Tate, Inc.
State Bar of Texas
22 ANNUAL ADVANCED
BUSINESS BANKRUPTCY COURSE
May 6-7, 2004
Houston
ND
CHAPTER 10
RAYMOND W. BATTAGLIA
Shareholder
OPPENHEIMER, BLEND, HARRISON & TATE, INC.
711 Navarro, Sixth Floor
San Antonio, TX 78205
210.299.2361 (direct phone)
210.224.7540 (fax)
[email protected]
AREAS OF EXPERIENCE
Business Reorganizations
High Wealth Individual Financial Workouts
Business and High Wealth Individual Bankruptcies, Concentrating on Debtor, Creditor
Committee, Secured Creditor and Landlord representations
EDUCATION
J.D., University of Houston Law Center, 1983
B.A. University of Texas at San Antonio, 1980
PROFESSIONAL AFFILIATIONS/CERTIFICATIONS
Named in the 2001-2002 Edition of The Best Lawyers in America published by
Woodward/White, Inc. of New York
American Bankruptcy Institute
San Antonio Bankruptcy Bar Association, Past President
Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization
ADMITTED
Texas Bar
U.S. Court of Appeals for the Fifth Circuit
U.S. District Court, Western District of Texas
U.S. District Court, Southern District of Texas
EXPIRIENCE
Mr. Battaglia has over 19 years of experience representing all manner of interests involved in financial
restructuring for businesses and high wealth individuals, both in and out of Bankruptcy Court. The
following is a summary of some of his representations:
Debtors - Confirmed 26 Plans of Reorganization in Chapter 11 cases, including the following:
·
Star Food Processing, Inc. - The Debtor was the largest manufacturer of processed foods for the
U.S. Military
·
Tom Fairey Company - The Debtor was the largest distributor of John Deere heavy equipment in
North America with assets and liabilities in excess of $40 million
·
Sutherland Media, Inc. - The Debtor and its affiliates published suburban newspapers throughout
Texas and Ohio.
·
Twigland Fashions, Inc. - The Debtor sold young women’s fashions at 18 retail locations located
across the United States
Unsecured Creditor’s Committees
·
McGinnis Hedge Funds - The Debtors operated a series of hedge funds heavily invested in
sophisticated investments involving Russian debt instruments. The case involved unsecured creditor claims
in excess of $125 million and investors interests totaling more than $180 million.
·
Healthcare International - The Debtor was a publicly traded health care provider with a chain of
mental health care hospitals and rehabilitation centers located in the southern and western United States.
·
Quantum Soutwest Medical Management, Inc. and Quantum Southwest Medical Associates, Inc. The Debtors operated a delegated heatlhcare network of more than 1500 providers serving 34,000
Pacificare enrollees.
Trustees - Represented Chapter 11 and Plan trustees on numerous occasions, including the following cases:
·
Mustang Oil & Gas, Inc. - Chapter 11 Trustee in the liquidation of the assets of an equipment and
materials supplier to the oil and gas drilling industry.
·
Winn’s Store’s Inc. - Retained by the Plan Trustee to pursue avoidance actions against more than
350 defendants.
Secured Creditors
·
Counsel to the secured lender group in the Chapter 11 proceedings of Al Copeland Enterprises, Inc.
(Church's Fried Chicken and Popeye's Fried Chicken). Successful in defeating a management plan and
confirming competing plan proposed by the Lender Group.
Mr. Battaglia is a frequent speaker and author at numerous institutes and continuing legal education courses
sponsored by the State Bar of Texas, the University of Texas and Lorman Business Center numerous other
institutes and continuing legal education courses.
RAKHEE V. PATEL
Kirkpatrick & Lockhart LLP
2828 N. Harwood Street, Suite 1800
Dallas, Texas 75201
Telephone: (214) 939-4998
Fax: (214) 939-4949
PRACTICE AREAS:
Bankruptcy, Business Reorganization and Business Restructuring. Representation of debtors,
secured and unsecured creditors, equity holders, trustees and committees in chapter 11 reorganization
and out-of-court restructuring and/or liquidation.
LAW RELATED HONORS, APPOINTMENTS AND PUBLICATIONS
Law clerk for the Honorable Harlin D. “Cooter” Hale, United States Bankruptcy Judge for the
Northern District of Texas, November 2002 to July 2003
Law clerk for the Honorable Robert C. McGuire, Chief Judge for the United States Bankruptcy Court
for the Northern District of Texas, August 2001 to October 2002
Co-Author, “From Solicitation to Confirmation: The Final Thirty Days,” presented at Advanced
Business Bankruptcy Course 2003, San Antonio, Texas, May 22-23, 2003
PROFESSIONAL ACTIVITIES:
Dallas Bar Association, Member
Dallas Asian-American Bar Association, Member
Dallas Young Lawyers Association, Member
American Bankruptcy Institute, Member
Turnaround Management Association, Member
EDUCATION:
Tulane Law School, J.D., cum laude, 1996
University of Florida, B.S., Business Administration, 1993
COURTS OF PRACTICE:
United States Court of Appeals for the Fifth Circuit and the Tenth Circuit
United States District Courts for the Northern, Southern, Eastern and Western Districts
of Texas
All State Courts in the State of Texas
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
Chapter 10
TABLE OF CONTENTS
I.
INTRODUCTION....................................................................................................................................... 1
II.
THIRD PARTY PROTECTIONS................................................................................................................. 1
A. Overview ............................................................................................................................................. 1
B. The Minority View ............................................................................................................................... 1
C. The Majority View ............................................................................................................................... 2
D. Seatco and Bernhard............................................................................................................................. 2
1. Seatco I and II............................................................................................................................... 3
2. Bernhard....................................................................................................................................... 4
E. Where Seatco and Bernhard Leave the Law............................................................................................ 4
F. Channeling Injunctions for Unknown Plaintiffs ...................................................................................... 5
1. Dow Corning................................................................................................................................. 5
2. Combustion Engineering ................................................................................................................ 5
3. Application in the Fifth Circuit ....................................................................................................... 6
III. ABSOLUTE PRIORITY POST-LASALLE .................................................................................................. 6
A. The Absolute Priority Rule .................................................................................................................... 6
B. The New Value Exception or New Value Corollary to the Absolute Priority Rule ..................................... 7
C. 203 North LaSalle ................................................................................................................................. 7
D. The Aftermath of LaSalle ...................................................................................................................... 8
1. The “Because Of” Test................................................................................................................... 8
2. Determination of What Constitutes Old Equity ................................................................................ 8
3. The Market Test: Termination of Exclusivity v. Bid Procedures ....................................................... 9
4. Standing to Object....................................................................................................................... 10
IV. CLASSIFICATION................................................................................................................................... 11
A. The Fifth Circuit: General Background ................................................................................................ 11
B. Bernhard and Sentry Operating............................................................................................................ 11
C. Notable Recent Decisions From Other Circuits ..................................................................................... 12
D. Conclusion ......................................................................................................................................... 12
V. IT’S NOT OVER: OBTAINING RES JUDICATA...................................................................................... 12
A. One Hurdle Down…........................................................................................................................... 12
B. Shoaf ................................................................................................................................................. 12
1. The Facts .................................................................................................................................... 12
2. The Opinion................................................................................................................................ 13
3. What Shoaf Means After Its Progeny ............................................................................................ 13
C. Conclusion ......................................................................................................................................... 15
VI. CONCLUSION......................................................................................................................................... 15
i
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
B.
Chapter 10
The Minority View
Court’s holding that third party releases are
prohibited rely upon a strict interpretation of various
sections of the Bankruptcy Code. Section 524(e) of the
Code states that “the discharge of a debt of a debtor
does not affect the liability of any other entity on, or
the property of any other entity for, such debt.” The
discharge limitations of § 524(e) coupled with the
express provisions of § 524(g) authorizing the issuance
of an injunction in favor of third parties in asbestos
cases (albeit under limited circumstances) evidences
Congress’ intention that third party releases are
prohibited under the Code.
Strict constructionists further contend that
incorporation of third party releases in a plan runs
afoul of section 1123(b)(6) which permits the inclusion
in a plan of “appropriate” provisions that are not
inconsistent with the Bankruptcy Code. Moreover,
since a plan may not be confirmed if it fails to comply
with applicable provisions of the Code, the inclusion of
a third party release renders a plan unconfirmable. 11
U.S.C. § 1129(a)(1).
The Ninth Circuit adopted this position in
American Hardwoods v. Deutsche Credit Corp. (In re
American Hardwoods), 885 F.2d 621 (9th Cir. 1989)
rejecting the argument that a permanent injunction
issued under § 105 to prevent the enforcement of a
judgment against a non-debtor guarantor was
substantively different from a discharge. In Resorts
Int’l v. Lowenschuss (In re Lowenschuss), 67 F.3d
1394 (9th Cir. 1995) the Ninth Circuit applied its
holding in American Hardwoods to a plan which
proposed to release a variety of non-debtors from
certain debts.
Similarly, the Tenth Circuit has declined to
approve a plan that proposed to release all claims
against the debtor as well as “any affiliate of the debtor
and any insider of the debtor.” Underhill v. Royal, 769
F.2d 1426 (10th Cir. 1985).
A number of courts have followed the lead of the
Ninth and Tenth Circuits in finding third party releases
to be impermissible.
See, e.g., In re Davis
Broadcasting, Inc., 176 B.R. 290, 292 (M.D. Ga.
1994); Bill Roderick Distrib., Inc. v. A.J. Mackay Co.
(In re A.J. Mackay Co.), 50 B.R. 756, 764 (D. Utah
1985); In re Future Energy Corp., 83 B.R. 470, 486
(Bankr. S.D. Ohio 1988); In re L.B.G. Props., Inc., 72
B.R. 65, 66 (Bankr. S.D. Fla. 1987); In re Scranes,
Inc., 67 B.R. 985, 989 (Bankr. N.D. Ohio 1986); In re
Bennett Paper Corp., 68 B.R. 518, 520 (Bankr. E.D.
Mo. 1986); In re Eller Bros., Inc., 53 B.R. 10, 12
(Bankr. M.D. Tenn. 1985).
The Fifth Circuit’s holding in In re Zale Corp., 62
F.3d 746, 760 (5th Cir. 1995) is often considered to
place the Fifth Circuit alongside the Ninth and Tenth
Circuit Court’s as strict constructionists, prohibiting
EMERGING PLAN ISSUES: THIRD
PARTY PROTECTIONS, ABSOLUTE
PRIORITY
POST-LASALLE,
CLASSIFICATION
AND
RES
JUDICATA
I.
INTRODUCTION
The law regarding Chapter 11 plans is constantly
evolving to change with the times and needs of various
debtors, creditors, and third parties. These relatively
new waters require care, though, to avoid the many
pitfalls that surround the Chapter 11 process. This
paper will address various emerging plan issues, many
of which have yet to be answered with bright-line
standards but instead are being developed through the
litigation of “creative plans of reorganization” and
ultimately, the courts.
II. THIRD PARTY PROTECTIONS
A. Overview
As the use of Chapter 11 is expanded to address a
broader range of economic calamities, many sections
of the Bankruptcy Code have also been stretched
beyond their likely original import. The effort to
extend the scope of discharge to non-debtor parties
through plan provisions that purport to either
temporarily or permanently limit liability is one such
expansion currently being debated by debtors, creditors
and courts. The intended beneficiaries of these
extraordinary plan discharges include corporate
insiders—shareholders, officers, plan funders, affiliates
and subsidiaries—as well as non-insiders such coobligors, indemnitors and insurers.
Use of the term “non-debtor discharge” is a
misnomer inasmuch as the release of the Debtor rarely
takes the form of a “discharge”. Rather, plans
attempting to provide for non-debtor relief incorporate
plan provisions releasing the non-debtor target, often in
conjunction with a permanent injunction to enforce the
release.
Those courts that have addressed the propriety of
non-debtor releases are decidedly split on the question.
Some circuits have toed the line of only granting
discharges to debtors while others have refused to read
§ 524(e) as prohibiting non-debtor discharges and have
recognized the need for creativity in crafting a
successful plan, especially for large, complex cases.
Until recently, the Fifth Circuit was considered to
be a member of the minority, prohibiting non-debtor
releases. Recent cases emanating from the Northern
District of Texas appear more receptive to a more
flexible approach to non-debtor relief.
1
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
the issuance of third party releases and injunctions. A
close reading of the case reveals that such an
interpretation is a gross overstatement of the holding of
the Court.
The Zale Court reversed the approval of a
settlement among a debtor, the debtor's D&O insurers,
and the creditors' committee that would have
permanently enjoined a variety of claims against the
settling defendants on the ground that the injunction
impermissibly discharged non-debtor liabilities. While
it is true the Zale Court found that the permanent
injunction exceeded the trial court’s powers under §
105, the Court left the door open to the issuance of a
temporary injunction under appropriate circumstances.
Judge Houser and Judge Hale have recently pushed
this door wide open in the Seatco and Bernhard Steiner
Pianos cases discussed below.
Chapter 10
A central focus of these and other cases permitting
non-debtor releases is the global settlement of massive
liabilities against the debtors and co-liable parties.
Additionally, in each case the non-debtor released
party made significant financial contributions to the
plan in exchange for the release, and in each instance,
the plan would not have been feasible, but for that
contribution.
After concluding that a particular case is
sufficiently extraordinary or unusual that a non-debtor
release might be warranted, courts that have upheld
such releases have generally analyzed the following
factors to determine whether a particular release is
permissible:
(1) There is an identity of interest between the
debtor and the third party, usually an
indemnity relationship, such that a suit
against the non-debtor is, in essence, a suit
against the debtor or will deplete assets of the
estate.
(2) The non-debtor has contributed substantial
assets to the reorganization.
(3) The injunction is essential to reorganization.
Without it, there is little likelihood of
success.
(4) A substantial majority of the creditors agree
to such injunction, specifically, the impacted
class, or classes, has ‘overwhelmingly’ voted
to accept the proposed plan treatment.
(5) The plan provides a mechanism for the
payment of all, or substantially all, of the
claims of the class or classes affected by the
injunction.
C. The Majority View
Currently, five Circuit Courts are considered to be
“pro-release” courts, having authored opinions holding
that bankruptcy courts have the power under § 105(a)
to issue third party releases or permanent injunctions
under appropriate and limited circumstances. These
courts have concluded that the plain language of §
524(e) does not bar non-debtor releases and that § 105
grants bankruptcy courts broad power to issues order
necessary to advance the bankruptcy process. In In re
Dow Corning Corporation, 280 F.2d 648, 657 (6th Cir.
2002), the Sixth Circuit stated that § 524(e) “explains
the effect of a debtor’s discharge. It does not prohibit
the release of a non-debtor.”
The Second Circuit upheld confirmation of plans
incorporating third party releases and permanent
injunctions in both the Drexel and Manville cases. In
each of these cases, the plans also provided significant
distributions to the parties affected by the releases and
injunctions. See Securities and Exchange Commission
v. Drexel Burnham Lambert Group, Inc. (In re Drexel
Burnham Lambert Group, Inc.), 960 F.2d 285, 293 (2nd
Cir. 1992); Kane v. Johns-Manville Corp. (In re JohnsManville Corp.), 843 F.2d 636, 640, 649 (2nd Cir.
1988).
In Robins, the Fourth Circuit similarly upheld
non-debtor releases that were a key element for plan
confirmation, where those same non-debtors made
significant financial contributions that were to be paid
to personal injury claimants under the plan. See
Menard-Sanford v. Mabey (In re A.H. Robins Co.), 880
F.2d 694, 702 (4th Cir. 1989).1
See In re Master Mortgage Inv. Fund, 168 B.R. 930,
935 (Bankr. W.D. Mo. 1994); In re Zenith Electronics
Corp., 241 B.R. 92, 110 (Bankr. D. Del. 1999).
The factors listed above are not intended to be
exclusive, exhaustive or conjunctive.
Rather, the
courts have engaged in a fact specific review, weig hing
the equities of each case. In re Master Mortgage Inv.
Fund, 168 B.R. at 935. The Sixth Circuit added the
following two additional factors to consider: “the plan
provides an opportunity for those claimants who
choose not to settle to recover in full and . . . [t]he
bankruptcy court made a record of specific factual
findings that support its conclusions.” In re Dow
Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002).
D. Seatco and Bernhard
In re Seatco, 257 B.R. 469 (Bankr. N.D. Tex.
2001) [“Seatco I”], In re Seatco, 259 B.R. 279 (Bankr.
N.D. Tex. 2001) [“Seatco II”], and In re Bernhard
Steiner Pianos, 292 B.R. 109 (Bankr. N.D. Tex. 2002)
1
An excellent overview of the majority and minority views
is set out in Gillman v Continental Airlines (In re
Continental Airlines), 203 F.3d 203 (3rd Cir. 2002).
2
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
are the latest in the line of cases adjudicating the
discharge of a Debtor’s shareholder guarantors. Both
opinions allowed the putative “discharges” under a
theory that they were permissible temporary
injunctions rather than true discharges.
Chapter 10
injunction that effectively discharged a non-debtor
from liability. Id. A temporary injunction, on the
other hand, was permissible. Id.
The Seatco court then applied Zale’s test of a
temporary injunction’s propriety: confirming that one
of two circumstances existed:
1.
a.
Seatco I and II
The Facts
The Debtor, an automobile seat manufacturer,
entered into an agreement with its primary secured
creditor, CIT, for a revolving and a term loan. Both
were secured by all of its assets and guaranteed by its
president. After suffering from the borrowing costs
and loss of business due to faulty materials from its
supplier, Seatco filed for bankruptcy.
The Plan included two injunctions, one permanent
and one temporary.
The permanent injunction
purported to enjoin all claims against any entity
wherein prosecution of the claim could result in a
claim being asserted against the reorganized debtor. Id.
at 473. The temporary injunction sought to enjoin
creditors who had allowed claims paid for under the
plan from proceeding against any officer, director,
shareholder, employee, or other responsible person of
Debtor to collect any portion of those claims. Id. at
474. CIT objected to both injunctions.
(1) when the non- debtor and the debtor
enjoy such an identity of interest that the suit
against the non-debtor is essentially a suit
against the debtor, and (2) when the thirdparty action will have an adverse impact on
the debtor's ability to accomplish
reorganization.
Id.
The test was easily met, according to the court, as
CIT’s successful pursuit of Kester on the Guaranty
would mean that Kester would be unable to satisfy the
claim and that CIT could execute against his stock in
the Debtor. As the court found that the Debtor’s
successful business operations depended on Kester
acting as president, the execution against his business
could derail the reorganization. Id.
The court’s second move was to look to the
traditional factors governing the issuance of
injunctions:
b. The Opinion
(1) The Permanent Injunction
Apart from indicating that courts in “large,
complex, mass tort-type bankruptcy cases” have
approved of broad permanent injunctions, the first
opinion did not reach a decision on its propriety. Id. at
474-75. It found instead that the Plan was internally
inconsistent, as the permanent and temporary
injunction provisions overlapped. Id. at 475.
Upon modification of the plan — which removed
all language affecting CIT out of the permanent
injunction paragraph and into the temporary injunction
paragraph — the court in Seatco II found CIT’s
objection to have no merit as the permanent injunction
language no longer affected CIT at all. 259 B.R. at
283. Rather the language was the usual instruction to
courts not familiar with the Code that the Debtor’s
discharge from debt was permanent. Id.
(1) a substantial likelihood that the movant
will prevail on the merits; (2) a substantial
threat that the movant will suffer irreparable
injury if the injunction is not granted; (3) that
the threatened injury to the movant
outweighs the threatened harm an injunction
may cause to the party opposing the
injunction; and (4) that the granting of the
injunction will not disserve the public
interest.
Id. (quoting In re Commonwealth Oil Ref. Co ., 805
F.2d 1175, 1188-89 (5th Cir. 1986). Central to the
court’s finding that this multi-factored test was met
was the Debtor’s solid plan of reorganization,
including a 100% distribution to its secured creditors
over six years and 35% to its unsecured. Id. A
liquidation, in contrast, would produce no distribution
to the unsecured creditors. Id.
In relation to the third and fourth factor, the court
found that the debtor’s successful reorganization
outweighed the harm of CIT’s delayed gratification
and that successful reorganization of debtors was in the
public interest. Id.
The court’s analysis of procedural due process
was a hazier scrutiny. Id. at 478. CIT initially
complained that it was not afforded its procedural due
(2) The Temporary Injunction
The court made three analytical moves in
determining whether a Plan may issue what amounts to
an injunction that extends beyond confirmation. 257
B.R. at 476-79. It first looked at the unusual
circumstances test articulated by the Fifth Circuit in In
re Zale, 62 F.3d 746 (5th Cir. 1995). Id. at 476-77.
In Zale, the Fifth Circuit held that an injunction
that extended post-confirmation was not improper so
long as it was not extended to become a permanent
3
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
process because the debtor did not obtain the
injunction through an adversarial proceeding per
Bankruptcy Rule 7001. Id. Essentially, however, CIT
admitted in oral argument that it had been afforded
these protections, and the court upon noting this, cites
Zale and In re American Dev. Int'l. Corp., 188 B.R.
925, 935 (N.D. Tex. 1995) for the proposition that a
party does not need to have an adversary proceeding to
be afforded its protection. Id. This question is still
open, however, as the court held that CIT did not have
standing to argue that other creditors were not afforded
due process. Id. at 478, n. 3.
Chapter 10
process protections. Here, the unusual circumstances
test was met because (in accord with Seatco), as sole
shareholder whose reputation was the engine behind
the company’s success, Ivan Kahn “[f]or all practical
purposes, at this time,…is the Debtor.” Id. Likewise,
the traditional temporary injunction factors were met.
The Debtor provided a plan wherein the creditors
would be paid in full were offered an “out” should the
debtor default.
E.
Where Seatco and Bernhard Leave the Law
Although the Fifth Circuit has aligned itself with
the circuits holding fast that § 105 does not give
bankruptcy courts power to permanently discharge
non-debtor parties, Zale when read with Seatco and
Bernhard seems to allow some flexibility if the
discharge provision can be construed to only control
the process and the timing by which the claimants can
pursue the party. This has the effect of permanently
discharging debt, since the plan when carried out
without a debtor’s default will satisfy the claims of the
potential complaining creditors. If the Seatco and
Bernhard reorganizatio ns succeed and the debts are
paid through the plan, the insiders who guaranteed
their corporations’ loans will have been insulated from
suit.
So what are the limits of controlling timing and
process? Seatco suggests that a plan might be able to
tick away the statute of limitations so that if the plan
results in default, rather than suing the insider
guarantors, creditors might be stuck with the debtor.
While Bernhard did involve a tolling of the limitations
period, the court considered the tolling only in finding
that non-debtors were granted a kind of stay that was
less than even a temporary injunction.
2.
a.
Bernhard
The Facts
Bernhard Steiner Pianos (“BSP”) was founded by
Ivan Kahn as part of the Kahn Pianos Group.
Subsequently, the Kahn family funds were depleted in
a construction project in Nigeria; after political
upheaval, the new Nigerian government refused to pay,
and the Kahns were forced to pursue it for payment
litigate. Ivan Kahn depleted his own assets in funding
this litigation and began a floor-plan leasing
arrangement with the Objecting Creditors in order to
acquire more capital, signing on as guarantor for the
loans. Kahn then borrowed funds from his company,
the Debtor, to help his family.
When its debt exceeded its capital, the Debtor
filed for bankruptcy.
It managed to continue
operations by obtaining agreements with third parties
to provide pianos to the Debtor and pay for operation
costs in exchange for 50% of the profits.
The resultant Plan endeavored to pay the
Objecting Creditors 100% of their claims; however, it
also limited their recovery to the terms of the Plan so
long as it was not in default. Should the Debtor fall
into default, the plan provided that any statute of
limitations for a cause of action against Kahn would be
tolled until that time.
In the present case, Debtor does not
expressly seek even a temporary injunction.
Instead, [the plan provision] purports to act
as a stay to the pending state court actions
against Kahn by directing recovery first
through the Plan process, and tolling the
Objecting Creditors' claims against Kahn
during the pendency of the Plan.
b.
The Opinion
The court adhered to the Fifth Circuit doctrine that
a plan of reorganization cannot be confirmed if it
purports to discharge non-debtor parties; however, it
then found that the supposed “discharge” of which the
Objecting Creditors complained was merely a control
over the process and timing of their claims. Id. at 116.
This control amounted to what was in effect, like
Seatco, a temporary injunction or a post-conformation
stay between the creditors and Kahn that was not
permanent and that could be lifted should the Debtor
fall into default. Id. at 117.
Critical to the court’s allowance of the discharge
was the plan successfully overcoming the three Seatco
tiers of analysis—the Zale unusual circumstances test,
the traditional temporary injunction factors, and due
292 B.R. at 116-17.
Thus, the court looked to the tolling provision as
one of several factual circumstances that allowed the
release to meet the four traditional temporary
injunction factors; and, since it is the tolling provision
that makes this stay something less than a temporary
injunction, it cannot logically be read as necessary to
meeting the test. Further, because Seatco, on which
Bernhard relies, does not contain such a provision, it
seems even more needless.
4
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
If Seatco and Bernhard are read in this way, the
release of a non-debtor party finds its analog in a
novation. The creditors and debtor have committed
themselves to replace the older debt with a new one,
one in which the creditor may only look to the
reorganized debtor vis-à-vis the plan for satisfaction.
Characterizing non-debtor discharge in this way,
particularly when dealing with non-debtor guaranteed
debt, may provide a means of escaping the Fifth
Circuit’s constrictive reading of § 524(e).
Chapter 10
court cannot exercise broader powers unless there was
a statutory basis for it. Id. Section 105(a) supplies
such a basis. Nevertheless, as a non-debtor release of
non-consenting parties is a dramatic measure, the court
chose to follow its sister circuits who require a sevenfactor “unusual circumstances” test.
See supra,
Section II.C.
(1) There is an identity of interests between
the debtor and the third party, usually an
indemnity relationship, such that a suit
against the non-debtor is, in essence, a suit
against the debtor or will deplete the assets of
the estate;
(2) The non- debtor has
contributed substantial assets to the
reorganization;
(3) The injunction is
essential to reorganization, namely, the
reorganization hinges on the debtor being
free from indirect suits against parties who
would have indemnity or contribution claims
against the debtor; (4) The impacted class, or
classes, has overwhelmingly voted to accept
the plan; (5) The plan provides a mechanism
to pay for all, or substantially all, of the class
or classes affected by the injunction; (6) The
plan provides an opportunity for those
claimants who choose not to settle to recover
in full and; (7) The bankruptcy court made a
record of specific factual findings that
support its conclusions.
F.
Channeling Injunctions for Unknown Plaintiffs
The waters are murkie r in the Fifth Circuit when it
comes to non-debtor parties seeking to channel
insurance and debtor funds as well as their own into a
fund to satisfy current and future plaintiffs. Two
recent cases in other circuits provide a good starting
point to the inquiry: In re Dow Corning, 280 F.3d 648
(6th Cir. 2002) and In re Combustion Engineering, 295
B.R. 459 (D. Del. 2003).
1.
a.
Dow Corning
The Facts
Dow Corning, the predominant manufacturer of
silicone gel breast implants, was pushed into
bankruptcy after medical studies indicated that the
silicone gel caused auto-immune diseases and tens of
thousands of women sued, claiming these injuries. In
re Dow Corning, 280 F.3d 648, 653 (6th Cir. 2002).
Litigation was consolidated by the Judicial Panel of
Multidistrict Litigation and a settlement reached;
however, hundreds of thousands more suits were
anticipated. Id.
The bankruptcy court, on the parties’ motions,
transferred the causes of action against Dow, its
shareholders, and other implant manufacturers (to
whom Dow sold silicone) to the bankruptcy court’s
jurisdiction. Id. at 654. The Trustee appointed
committees to represent the claimants and eventually a
plan was confirmed. Id. Under the plan, a fund was
established for payment of claims with funds poole d
from Dow’s insurers, shareholders and cash reserves.
Id. at 654-55. The bankruptcy court determined, based
on non-bankruptcy law, that these releases applied to
consenting creditors only. Id. The district court
disagreed broadening the releases to all creditors. Id.
Id. at 658.
The Dow plan failed the “unusual circumstances”
test for three reasons. First, the bankruptcy court found
that non-consenting creditors need not be enjoined
from suit in order for the reorganization to be
successful. Id. at 659. The Sixth Circuit construed this
to mean that the release and injunction were not
essential to reorganization. Id. Second, the bankruptcy
court failed to make “particularized factual findings”
that the non-debtor parties made “significant
contributions” to the reorganization. Id. And finally,
the Sixth Circuit found that the court’s determination
that the non-consenting creditors would be paid in full
to be erroneous. Id.
b.
The Opinion
While non-consensual, non-debtor releases were
beyond the traditional equity jurisprudence, the Sixth
Circuit disagreed with the bankruptcy court’s
reasoning that Grupo Mexicano de Desarrollo v.
Alliance Board Fund, Inc., 527 U.S. 308, 322 (1999)
prohibited such as use of equitable power. Id. at 657.
When read correctly, the court argued, Grupo
Mexicano stands for the proposition that a bankruptcy
1.
a.
Combustion Engineering
The Facts
Asea Brown Boven (“ABB”) is the parent of US
ABB and Combustion Engineering. In re Combustion
Engineering, 295 B.R. 459, 462 (D. Del. 2003).
Combustion Engineering was pushed into bankruptcy
due to its asbestos problems and filed with a
prepackaged plan. Id. Due to its insurers reimbursing
fewer of its asbestos claims, Combustion Engineering
5
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
had received capital contributions from US ABB in
order to make good on its claims. Id. When the
insurance was exhausted, Combustion Engineering had
to rely completely on ABB and US ABB, which in turn
forced them to refinance. Id. at 463. Subsequently,
ABB’s lenders required it to resolve Combustion
Engineering’s asbestos liabilities as a condition to any
further financing. Id.
The prepackaged plan that was negotiated and
crafted had three essential parts: a pre-petition
settlement fund, a post-petition asbestos PI trust, and a
release of the debtor as well as other non-debtor
parties. Included in this injunctive release were claims
against ABB, Lummus Global, Inc. (“Lummus”)—an
affiliated company—and the Oil, Gas, and
Petrochemical (“OGP”), a division of ABB.
In order to ensure its future financial viability,
ABB needed to sell its interest in Lummus and OGP.
Unless potential asbestos claims against Lummus and
OGP could be resolved, ABB would not be able to
realize any value for them.
Chapter 10
mass tort situations” only their application to guaranty
and partnership contexts. Id.
This footnote was subsequently referenced in In
re Zale, Corp., 62 F.3d 746 (5th Cir. 1995). There, the
court held that a permanent injunction was improper,
but that an unusual circumstances analysis might
permit a temporary one. 62 F.3d at 761. It then cited
to a Sixth Circuit case — Dow Corning predecessor —
Patton v. Beardon, 8 F.3d 343, 349 (6th Cir. 1993).
Seatco and Bernhard have already chipped away
some of the judicial resolve against guaranty releases
by construing them as temporary injunctions, and this
flexibility might forecast favorable treatment of the
Dow Cornings and Combustion Engineerings in the
Fifth Circuit.
The following components — which are not
necessarily apparent from the bare recitation of the
seven-factor unusual circumstances test — appear
essential to satisfy the Code and due process concerns:
•
b.
The Opinion
The Court utilized the analysis set out in Dow
Corning and applied the seven-factor “unusual
circumstances” test. Id. at 483. It found factors two,
three, six and seven were met, based on the evidence in
the record: the non-debtors contributed all of their
shared insurance and thus provided access to funds not
depleted by litigation of co-insureds. An identify of
interest existed as ABB’s need to sell Lummus and
OGP provided reason to contribute to Combustion
Engineering’s plan funding. The suits against affiliates
are derivative of Combustion Engineering’s alleged
liability. Id. at 484. Amounts in the “pot” of the nonaccepting creditors were “sufficient to provide the
opportunity to pay” them. Id. at 484.
Evidence was unavailable to establish factors four
and five. In regard to factor four, the court ordered
affidavits to be filed establishing whether “direct
notice” was provided to those holding non-derivative
claims against the non-debtors. Id. And for factor
five, the court required evidence establishing a separate
“pot” for the non-debtors’ creditors. Id. Thus the court
approved the confirmation in theory but gave the
parties ten days to remedy the evidentiary failings of
factors four and five.
•
•
•
•
3.
Application in the Fifth Circuit
In In re Vitek, Inc., 51 F.3d 530, 538 n.39 (5th Cir.
1995), the court “wonder[ed] ‘out loud’” in not only
dicta but a footnote whether injunctions were
appropriate when creditors of non-debtor parties
oppose them and cautioned bankruptcy courts against
trampling on those creditors’ rights. Nonetheless, the
court seemed not to question Ҥ 105 injunctions in
Appointment of committees or fully funded
and independent representatives to represent
the interests of pending and future litigants;
Due diligence reviews conducted by financial
professionals and overseen by independent
parties, such as the representatives of
pending and future claimants. These reviews
should investigate the accurateness of the
projected need for the fund and the
ampleness of the “pots”;
Contribution by the non-debtor parties of
funds that would not otherwise be available
the settlement and litigation funds. In
Combustion
Engineering,
the
funds
contributed by the non-debtor parties would
be at risk of depletion by co-insured litigation
if the plan release deal had not been struck;
A separate and adequate “pot” for those
parties who do not consent to the plan; and
Direct notice must be given to the impacted
classes and parties (who are required to
“overwhelmingly” approve of the plan).
Combustion Engineering suggests that it is
the aggressive attempt that is important,
which can be established by affidavits
describing the process.
No doubt this
process would be stronger if subjected to the
independent review described above.
III. ABSOLUTE PRIORITY POST-LASALLE
A. The Absolute Priority Rule
Section 1129 of the Bankruptcy Code governs
confirmation of plans in Chapter 11 cases. Section
1129 mandates, inter alia, that a court may only
confirm a plan if all impaired classes of creditors vote
6
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
to accept the plan. 11 U.S.C. § 1129(a)(8). If the plan
proponent cannot meet the requirements of Section
1129(a)(8), the plan proponent must resort to Section
1129(b) of the Bankruptcy Code, more commonly
known as the “cramdown” provision.
Section 1129(b) states that a plan can be
confirmed if all other requirements of Section 1129(a),
other than Section 1129(a)(8), are met and (1) the plan
is fair and equitable and (2) does not unfairly
discriminate with respect to each class of impaired
claims or interests that has not accepted the plan. 11
U.S.C. § 1129(b).
A plan is fair and equitable to secured creditors
only if
Chapter 10
holders to participate in a cramdown plan and receive
equity interests in the reorganized debtor without
payment in full to all creditors if they make an equity
contribution to the reorganized debtor (1) in money or
money’s worth, (2) that is reasonably equivalent to the
value of the new equity interests received in the
reorganized debtor, and (3) that is necessary for
successful reorganization of the restructured debtor.
Bank of Am. Nat’l Trust and Sav. Ass’n v. 203 N.
LaSalle St. P’ship , 526 U.S. 434, 442, 119 S. Ct. 1411,
1416, 143 L.Ed.2d 607 (1999).
Circuit courts are split on the continued viability
of the new value exception after the enactment of the
Bankruptcy Code. The Seventh and Ninth Circuit
Court of Appeals have ruled that the new value
exception is viable. See Bonner Mall P’ship v. United
States Bancorp Mortgage Co. (In re Bonner Mall
P’ship), 2 F.3d 899, 910-16 (9th Cir. 1993), cert.
granted, 510 U.S. 1039, 114 S. Ct. 681, 126 L. Ed. 2d
648, vacatur denied and appeal dismissed as moot, 513
U.S. 18, 115 S. Ct. 386, 130 L. Ed. 2d 233 (1994);
Bank of Am. Nat’l Trust and Sav. Ass’n v. 203 N.
LaSalle St. P’ship , 126 F.3d 955 (7th Cir. 1998), rev'd
without deciding issue, 526 U.S. 434, 119 S. Ct. 1411,
143 L. Ed. 2d 607 (1999). The Second and Fourth
Circuits have not explicitly rejected the new value
exception, but have expressly doubted its existence.
See In re Coltex Loop Cent. Three Partners, L.P., 138
F.3d 39, 44-5 (2nd Cir. 1998); In re Bryson Props.,
XVIII, 961 F.2d 496, 504 (4th Cir.), cert. denied, 506
U.S. 866, 113 S. Ct. 191, 121 L. Ed. 2d 134 (1992).
Other circuit courts, including the Fifth Circuit Court
of Appeals, have declined to rule on the existence of
the doctrine. John Hancock Mutual Life Ins. Co. v.
Route 37 Bus. Park Assocs., 987 F.2d 154, 162 n.12,
(3rd Cir. 1993); In re Greystone III Joint Venture, 948
F.2d 134, 142 (5th Cir.), modified, 948 F.2d 142 (5th
Cir.), cert. denied, 506 U.S. 821, 113 S. Ct. 72, 121 L.
Ed. 2d 37 (1992); In re Lumber Exch. Bldg. Ltd.
P’ship , 968 F.2d 647, 650 (8th Cir. 1992); Unruh v.
Rushville State Bank , 987 F.2d 1506, 1510 (10th Cir.
1993).
(1) the holder of the secured claim retains its
lien(s) to the extent of the allowed amount of
its claim and also receives deferred cash
payments totaling at least the allowed
amount of the claim that equals the present
value of the secured creditor’s interest in the
secured property on the effective date of the
plan;
(2) it provides for the sale free and clear of liens
securing the claim with liens to attach to the
proceeds from the sale, subject to the credit
bid provisions of Section 363(k) of the
Bankruptcy Code, and provides for treatment
of the replacement liens on proceeds in
accordance with (1) and (3) herein; or
(3) provides for the realization by the secured
creditor of the indubitable equivalent of the
secured claim.
A plan is fair and equitable to unsecured creditors only
if
(1) the allowed unsecured claim is paid in full on
the effective date or
(2) it complies with the absolute priority rule, i.e.
the holder of any claim or interest that is
junior to the claims or interests of unsecured
creditors will not receive or retain under the
plan any property “on account of such claim
or interest.”
C. 203 North LaSalle
In Bank of Am. Nat’l Trust and Sav. Ass’n v. 203
N. LaSalle St. P’ship, 526 U.S. 434, 119 S. Ct. 1411,
143 L.Ed.2d 607 (1999), the Supreme Court was
expected to resolve the split among the circuit courts
regarding the existence of the new value exception to
the absolute priority rule. While the Supreme Court
acknowledged that the new value exception may exist,
it held that new value plans that provide junior interest
holders (old equity interest holders) with the exclusive
opportunity, free from competition and without market
valuation, to obtain equity interests in the reorganized
entity violate the absolute priority rule. Id. at 458.
Thus, in order to obtain cramdown of a plan, creditors
must be paid in full before equity interest holders can
receive any distribution under the proposed plan on
account of their prior equity position in the debtor.
B.
The New Value Exception or New Value
Corollary to the Absolute Priority Rule
The “new value exception,” also referred to as the
“new value corolla ry,” is a common law exception to
the absolute priority rule and allows old equity interest
7
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
The Court reasoned that old equity’s exclusive
opportunity to invest in the reorganized entity and
receive equity in return must be considered property
received “on account of” its junior claim. On account
of should be read as meaning “because of.” Id. at 451.
The Court interpreted because of to mean a “causal
relationship between holding the prior claim or interest
and receiving or retaining property.” Id. The Court
implied that a greater degree of causal link between
possession of the old equity interest and receipt of the
new equity interest would be necessary to satisfy the
because of standard, stating
Chapter 10
competing plans, any determination that the
price was top dollar would necessarily be
made by a judge in a bankruptcy court,
whereas the best way to determine value is
exposure to a market.
Id. at 457 (footnote omitted). The Court declined,
however, to decide whether “a market test would
require an opportunity to offer competing plan or
would be satisfied by a right to bid for the same
interest sought by old equity.” Id. at 458. Thus, the
debate rages on regarding whether the new value
exception does exist, and if so, how the market test is
satisfied post-LaSalle. In addition, new issues have
cropped up to further tangle the absolute priority/new
value web.
[c]ausation between the old equity’s holdings
and subsequent property substantial enough
to disqualify a plan would presumably occur
. . . whenever old equity’s later property
would come at a price that failed to provide
the greatest possible addition to the
bankruptcy estate, and it would always come
at a price too low when the equity holders
obtained or preserved an ownership interest
for less than someone else would have paid.
A truly full value transaction, on the other
hand, would pose no threat to the bankruptcy
estate not posed by any reorganization,
provided of course that the contribution be in
cash or be realizable money’s worth.
D. The Aftermath of LaSalle
1. The “Because Of” Test
In In re PWS Holding Corp., 228 F.3d 224 (3rd
Cir. 2000), the plan proposed to release equity interest
holders from potential fraudulent transfer claims
arising from a leveraged recapitalization. The Third
Circuit held that the plan provision releasing equity
holders from liability did not violate the absolute
priority rule. The Third Circuit interpreted the LaSalle
“because of” standard as requiring a “causal
connection between holding the prior claim or interest,
and receiving or retaining property.” Id. at 238. The
Court held that because the objecting unsecured
creditor failed to present “direct evidence of
causation,” the release of potential claims against
equity holders did not violate the absolute priority rule.
Id. at 242. The Court specifically noted that the
estate’s potential fraudulent transfer claims were of
“marginal viability and could be costly for the
reorganized entity to pursue.”
In In re 4C Solutions, Inc., 302 B.R. 592, 599
(Bankr. C.D. Ill. 2003), the court found that where old
equity interests had the exclusive opportunity to retain
the ownership interests in the reorganized debtor
without a contribution of new value, the causal
relationship between ownership of the debtor and the
receipt of the new equity is presumptive. The court
also noted that causation was “all the more obvious”
since the plan proposed to vest all equity in the sole
shareholder of the parent company of the debtor,
effectively eliminating one tier of ownership, and
dissolve the parent company post-confirmation,
although the parent company was not a debtor in
bankruptcy. Id. at 600, n.7.
Id. at 453-54 (footnote omitted).
The Court further stated that old equity would not
need an exclusive opportunity to obtain the new equity
interests if it was offering top dollar for the new equity.
Id. at 456. Thus, the Court surmised, the exclusiveness
of the opportunity to obtain new equity in the
reorganized debtor, “with its protection against the
market’s scrutiny of the purchase price by means of
competing bids or even competing plan proposals” can
only arise “to do old equity a favor.” Id. Therefore, it
is the exclusive opportunity to acquire the new equity
interests that amounts to a property interest given only
on account of the old equity position, which runs afoul
of the absolute priority rule. Id.
With respect to whether the bankruptcy estate
would receive the greatest possible return in exchange
for the new equity interests, the Supreme Court noted
[i]t would thus be necessary for old equity to
demonstrate its payment of top dollar, but
this it could not satisfactorily do when it
would receive or retain its property under a
plan giving it exclusive rights and in the
absence of a competing plan of any sort.
Under a plan granting an exclusive right,
making no provision for competing bids or
2.
Determination of What Constitutes Old Equity
In Beal Bank v. Waters Edge Ltd. P’ship (In re
Waters Ed ge Ltd. P’ship), 248 B.R. 668 (D. Mass.
2000), the court distinguished new value corollary
8
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
cases based on the fact that the debtor’s plan proposed
the infusion of new value from a third party, albeit an
insider, the old equity interest holder’s son-in-law.
The court held that the absolute priority rule does not
bar the sale of new equity to anyone other than existing
equity holders in the debtor. Id. at 680. Instead, the
court found, the Bankruptcy Code relies on the
confirmation requirements as the safety net to ensure
fair and equitable treatment of the creditors. Id. The
Court did note that since the third party in this case was
an insider, the transaction required “greater scrutiny by
the bankruptcy court to ensure fairness” since it would
not be subject to market valuation or competitive
bidding. Id. The court found that “[w]hile old equity
could certainly not use an insider as a straw to retain its
investment,” the objecting creditor had failed to show
that the insider third party had been funded by or acted
on behalf of the old equity interest holder. Id. Thus,
under a Beal Bank analysis, absent the sale of new
equity to an insider of the old equity interest holders
being considered a straw transaction, the sale is not
subject to the absolute priority rule.
However, in In re Global Ocean Carriers, Ltd.,
251 B.R. 31 (Bankr. D. Del. 2000), the Delaware
District Court disagreed with the Beal Bank court. In
Global Ocean, the debtor proposed to sell all of the
stock in the reorganized debtor to the sister/daughter of
the two largest shareholders of the debtor in exchange
for substantial new value to be contributed to the
reorganized debtor. The Global Ocean court rejected
the Beal Bank court’s narrow reading of LaSalle and
therefore, did not reach the straw-man transaction
analysis. Instead, the court found that the prior equity
interest holder’s exclusive opportunity to determine
who would receive the equity interests in the
reorganized debtor and at what price, free from
competition or market valuation, violated the absolute
priority rule. Thus, insider transactions are subject to
the same absolute priority rule requirements as if the
old equity interest holders were retaining interests in
the reorganized debtor. See also Bank of Am.
Commercial Fin. v. CGE Shattuck, LLC (In re CGE
Shattuck, LLC), Nos. 99-12287-JMD, CM99-747, 1999
WL 33457789 (Bankr. D.N.H. 1999) (absolute priority
rule violated where 100% of new equity is from “new
entity organized by a pre-petition equity holder who
alone, or with its affiliates, is contributing a majority of
the new value”); In re Suncruz Casinos, LLC, 298 B.R.
833 (Bankr. S.D. Fla. 2003) (noting “conflict of
interest” of insider parties in contributing new value
for equity in reorganized debtor).
In In re 4C Solutions, Inc., 302 B.R. 592 (Bankr.
C.D. Ill. 2003), the court addressed whether the equity
interest holder of a non-debtor holding company which
owned the debtor company was the “holder of a claim
or interest” sufficient to trigger application of the
Chapter 10
absolute priority rule. The court found that although in
most instances the holder of an equity interest is the
current shareholder of the debtor company, in cases
where the debtor is owned by a holding company, “it is
necessary and appropriate to look beyond the mere
identity of the holder of the debtor’s stock.” Id. at 597.
In this Court’s view, this is necessary to fully
effectuate the policy against allowing insiders to use
the advantage of their insider status to acquire new
equity for less than fair value.” Id. The court, under
the facts, found that the equity interest holder of the
holding company was an interest holder in the debtor
by virtue of the fact that he exercised control over the
corporations affairs, by and through his control of the
board of directors, and the fact that he shares in the
profits of the debtor company, which flow through the
holding company. Id. at 598.
For a discussion of capacity in which former
equity interest holder and creditor of debtor receives
new equity, see In re Zenith Electronics Corp., 241
B.R. 92 (Bankr. D. Del. 1999), appeal dism’d, 250
B.R. 207 (D. Del. 2000), discussed supra, Section III.
C. 4.
3.
The Market Test: Termination of Exclusivity v.
Bid Procedures
One of the unresolved LaSalle issues is
“[w]hether a market test would require an opportunity
to offer competing plans or would be satisfied by a
right to bid for the same interest sought by old equity.”
LaSalle, 526 U.S. at 458.
In In re Situation Mgmt., 252 B.R. 859 (Bankr. D.
Mass. 2000), the debtor’s new value plan proposed a
bidding procedure for interested parties, including old
equity interest holders, to acquire the equity interests in
the reorganized debtor. A creditor filed a section
1121(d) motion to terminate exclusivity in light of the
debtor’s plan, which the debtor opposed. Id. The court
held that the filing of a new value plan in the case
formed sufficient cause to terminate exclusivity so that
the debtor could “gain acceptance of its plan.” Id. at
865. The court reasoned that the debtor had forfeited
its right to exclusivity since any party could bid on the
new equity interests and “assume control of the Debtor
if the bidder is successful.” Id. The court further
reasoned that by terminating exclusivity and allowing
competing plans, and the corresponding disclosure
statements, the debtor’s creditors and any interested
bidders on the new equity interests would be afforded a
more “informed process” than in the auction scenario
envisioned in the debtor’s plan. Id. at 865-66.
Accordingly, the court granted the creditor’s motion to
terminate exclusivity. The Situation Management
court found that allowing competing plans is a better
method of market valuation than allowing a bid
procedure,
9
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
For some decisions holding alternatively, see
Matter of Homestead Partners, Ltd., 197 B.R. 706,
716-17 (Bankr. N.D. Ga. 1996) (auction process is
superior market valuation method since it does not
disrupt the plan negotiation process); In re Davis, 262
B.R. 791, 799 (Bankr. D. Ariz. 2001) (individual
chapter 11 case noting that LaSalle suggests that either
the termination of exclusivity or a bid procedure will
suffice to meet the market valuation test but declining
to extend exclusivity); Bank of Am. Commercial Fin. v.
CGE Shattuck, LLC (In re CGE Shattuck, LLC), Nos.
99-12287-JMD, CM99-747, 1999 WL 33457789
(Bankr. D.N.H. 1999) (“the precise means of achieving
market competition will be determined on the facts in a
given case, but will involve either competing plans of
reorganization or a right for third parties to bid for the
same interest sought by old equity”).
Chapter 10
voted to accept the plan. Thus, section 1129(b)(2)(B)
did not even apply under the facts of the case.
Conceivably, the court’s ruling would foreclose an
objection even by a dissenting unsecured creditor on
absolute priority grounds pursuant to section
1129(b)(2)(B) since the court found that the former
majority shareholder was receiving the equity in its
capacity as a creditor.
Another bankruptcy court has found that a fully
secured creditor lacks standing to make an absolute
priority objection. In re New Midland Plaza Assoc.,
247 B.R. 877 (Bankr. S.D. Fla. 2000). The court
reasoned that section 1129(b)(2)(A) excludes the
absolute priority rule just as (b)(2)(B) and (C)
expressly includes it. Id. at 894. The court noted that
“Congress was obviously aware of the absolute priority
rule” as it included the rule with respect to classes of
unsecured creditors and classes of interests, yet it
excluded it from the subsection relating to classes of
secured claims. Id. The Midland Plaza court also
rejected an argument that section 1129(b)(2)(A)
implicitly includes the absolute priority rule. Id. at
894-95. See also In re Arden Properties, 248 B.R. 164
(Bankr. D. Ariz. 2000) (holding that the absolute
priority rule does not apply to secured claims).
One court has found that the bankruptcy court has
“an independent duty to determine whether a plan
complies with § 1129,” including the absolute priority
rule. In re MJ Metal Products, Inc., 292 B.R. 702
(Bankr. D. Wyo. 2003). In MJ Metal, there was no
class of impaired creditors objecting on absolute
priority grounds. The court went on hold that the plan,
which allowed only old equity interest holders to bid
for the equity of the reorganized debtor without
termination of exclusivity, violated the absolute
priority rule. Thus, the court denied confirmation even
though there was no impaired senior creditor or
interests objecting on the basis of absolute priority.
In In re Genesis Health Ventures, Inc., 266 B.R.
591 (Bankr. D. Del. 2001), the plan proposed to
provide to officers and directors of the debtor a
distribution of stock, forgiveness of loans, waivers,
releases and exculpations as an incentive to remain in
the employ of the reorganized debtor. The officers and
directors did not have to contribute any other value.
Although the court conceded that the payments to
former management “borders on payments to
management on account of their pre-petition equity
interests,” the court concluded that because the
distributions to former management “represents an
allocation of the enterprise value” otherwise
distributable to senior secured lenders, who consented
to such distribution, the absolute priority rule (and the
fair and equitable standard) were not violated. Thus,
the absolute priority rule is not violated where the
property retained by old equity interest holders under
4.
Standing to Object
In In re Zenith Electronics Corp., 241 B.R. 92
(Bankr. D. Del. 1999), appeal dism’d, 250 B.R. 207
(D. Del. 2000), the debtor’s plan proposed that one
hundred percent of the equity in the reorganized debtor
would vest in the debtor’s single largest creditor (and
majority shareholder). In exchange, the debtor would
receive new value in the form of cash and forgiveness
of substantial debt. Id. The minority shareholders
objected. The court found that the plan did not violate
the absolute priority rule of either section
1129(b)(2)(B) or (C).
The plan did not violate section 1129(b)(2)(C)
because the entity receiving the equity interest in the
reorganized debtor was receiving it in its capacity as “a
substantial secured and unsecured creditor who is
being given that right.” Id. at 106-7. The Zenith court
limited LaSalle to its facts – the retention of equity
interests by existing shareholders – and limited
LaSalle’s application to 1129(b)(2)(B). Id. In fact, the
Zenith court noted that had the plan offered the new
equity interests to the minority shareholders, it would
have raised LaSalle absolute priority issues. Id. The
court reasoned that to extend LaSalle beyond its facts
would
require in all cases that a debtor be placed
“on the market” for sale to the highest bidder.
Such a requirement would eliminate the
concept of exclusivity contained in section
1121(b) and the broad powers of the debtor
to propose a plan in whatever format it
desires.
Id.
Further, the plan did not violate section
1129(b)(2)(B) because all classes of creditors had
10
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
the plan comes from property otherwise attributable to
a senior class with the senior class’ consent.
In In re Made in Detroit, Inc., 299 B.R. 170, 18182 (Bankr. E.D. Mich. 2003), one bankruptcy court
stated, in dicta, that even if the plan provided for
payment in full to unsecured creditors, the absolute
priority rule would be violated by the retention of the
equity in the reorganized debtor by old equity interest
holders when payment in full to the unsecured
creditors is speculative. Thus, the result is that the
unsecured creditors would have standing to object on
the basis of the absolute priority rule even though the
plan technically provided for payment in full.
Chapter 10
deficiency claim would render the unsecured
deficiency claimant’s right to vote meaningless.
Plan
proponents
could
effectively
disenfranchise the holders of such claims by
placing them in a separate class and
confirming the plan over their objection by
cramdown. With its unsecured voting rights
effectively eliminated, the electing creditor’s
ability to negotiate a satisfactory settlement
of either its secured or unsecured claims
would be seriously undercut. It seems likely
that the creditor would often have to “elect”
to take an allowed secured claim under §
1111(b)(2) in the hope that the value of the
collateral would increase after the case is
closed. Thus, the election under § 1111(b)
would be essentially meaningless.
IV. CLASSIFICATION
A. The Fifth Circuit: General Background
11 U.S.C. § 1122(a) provides, in relevant part,
that a plan “may place a claim or an interest in a
particular class only if such claim or interest is
substantially similar to the other claims or interests of
such class.” Thus, dissimilar claims may not be
classified together. Section 1122 goes on to provide
that unsecured claims that are small in overall dollar
value may be separately classified from other
unsecured claims for administrative convenience, also
known as the convenience class. 11 U.S.C § 1122(b).
In Phoenix Mut. Life Ins. Co. v. Greystone III
Joint Venture (In re Greystone III Joint Venture), 995
F.2d 1274 (5th Cir. 1992), vacated in part on reh’g per
curium, (1992), the Fifth Circuit noted that section
1122(a) only governs permissible inclusions of claims
in a class rather than requiring that substantially similar
claims be grouped together. Id. at 1278. The Court
then focused on the existence of section 1122(b) and
ruled that interpreting section 1122(a) to allow
unqualified classification of like claims in separate
classes would render section 1122(b) superfluous. Id.
Thus, the court found that section 1122 “must
contemplate some limits on classification of claims of
similar priority.” Id.
The Fifth Circuit then issued the commandment:
thou shalt not separately classify substantially similar
claims “in order to gerrymander an affirmative vote on
a reorganization plan.” Id. at 1279. Thus, the court
articulated one purpose of separate classification that is
impermissible.
The court stated that because
classification of claims affected the “integr ity of the
voting process,” “if claims could be arbitrarily placed
in separate classes, it would almost always be possible
for the debtor to manipulate ‘acceptance’ by artful
classification.” Id. at 1277.
The Court went on to hold that a non-recourse
deficiency claim arising under section 1111(b) cannot
be separately classified from general unsecured claims.
This is because separate classification of the unsecured
Greystone, 995 F.2d at 1280. The Court found the
separate classification to be an impermissible attempt
to gerrymander an affirmative vote by the general
unsecured creditors and therefore, found the plan
unconfirmable.
The Fifth Circuit in Greystone recognized that
separate classification may be justified for good
business reasons. Id. at 1280-81. See also Heartland
Fed. Sav. & Loan Ass’n v. Briscoe Enterprises, Ltd., III
(In re Briscoe Enterprises, Ltd., III), 994 F.2d 1160 (5th
Cir. 1993) (applying business justification standard
enunciated in Greystone and In re U.S. Truck, 800 F.2d
581 (6th Cir. 1986)). However, the Greystone court
rejected the separate classification proposed by the
debtor because the separate classification did not treat
the separately classified creditors any differently –
thus, it did not have the practical effect of achieving
any legitimate purpose.
B.
Bernhard and Sentry Operating
In In re Bernhard Steiner Pianos USA, Inc., 292
B.R. 109 (Bankr. N.D. Tex. 2002), the bankruptcy
court upheld the separate classification of otherwise
similar unsecured claims based on the business
justification exception. In Bernhard Steiner, the debtor
operated a piano store, selling new and consigned
pianos. Id. at 111. The debtor’s plan separately
classified the claims of the consignment creditors from
other general unsecured creditors. Id. at 113. The
court found that accelerated repayment to this class of
creditors over other unsecured creditors was necessary
to “repair [the debtor’s] tarnished consignment name in
a small market” which was necessary to secure
consigned pianos post-confirmation. Id. at 114. Future
sales of consigned pianos were an “integral part” of the
debtor’s future. Id. Further, the court found that
because the plan did contemplate different repayment
11
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
Chapter 10
terms to the separate classes, there was no evidence the
separate classification was for the impermissible
purpose of gerrymandering an affirmative vote. Id.
Instead, the separate classification would ultimately
help the debtor achieve the desired result – the postconfirmation return of a significant portion of the
debtor’s business.
In In re Sentry Operating Co. of Texas, Inc., 264
B.R. 850 (Bankr. S.D. Tex. 2001), the bankruptcy
court considered the separate classification of trade
creditors from general unsecured. The debtor in Sentry
Operating operated funeral homes. Id. at 853. The
trade creditor class included certain creditors with
claims of minimal value, i.e. ministers, organists and
florists, but also contained creditors with a national
market with whom the debtor’s parent company did
business. Id. at 856-57. The debtor presented
testimony that the repayment of these creditors was
necessary to ensure the continued provision of services
that are essential to the operation of the debtor’s
business post-confirmation. Id. at 856.
The court found that the stated purpose for the
classification scheme – the preservation and
enhancement of the value of the debtor’s assets – to be
a permissible purpose for separate classification. Id. at
861. Under the facts, though, the court found that the
separate classification achieved dual purposes – the
permissible purpose of preserving and increasing value
and the impermissible purpose of gerrymandering an
affirmative vote. Id. The court rejected the separate
classification because the classification was not
“sufficiently narrowly drawn to achieve the stated
purpose.” Id.
unsecured deficiency claim invalid without sufficient
business reason).
In re Snyders Drug Stores, Inc., __ B.R. __, No.
03-44577, 2004 WL 626270 (Bankr. N.D. Ohio March
10, 2004) – The court upheld the separate classification
of reclamation creditors, trade vendors and landlords
from other general unsecureds as being supported by a
legitimate business reason. The court found that, under
Sixth Circuit law, the reclamation creditors potentially
held different repayment rights from other unsecured
creditors, therefore the separate classification was
based on a legitimate difference. The court also found
because the debtor hoped to do business with the trade
vendors in the future, while the debtor did not hope to
maintain an ongoing relationship with the landlords, a
separate classification of those classes was warranted.
C. Notable Recent Decisions From Other Circuits
In re Mahoney Hawkes, LLP, 289 B.R. 285
(Bankr. D. Mass. 2002) – The debtor was entitled to
insurance proceeds from liability policy for legal
malpractice. The court held that separate classification
of malpractice claimants from unsecured creditors does
not violate section 1122 because malpractice claimants
had superior right to insurance proceeds and were “in
effect, multiple secured creditors having claims against
a single fund.” Id. at 295.
In re American Homepatient, Inc., 298 B.R. 152
(Bankr. M.D. Tenn. 2003) – The court held that
separate classification of unsecured deficiency claim
from general unsecureds did not violate section 1122
pursuant to U.S. Truck. See also Beal Bank v. Waters
Edge Ltd. P’ship (In re Waters Edge Ltd. P’ship), 248
B.R. 668 (D. Mass. 2000) (separate classification of
unsecured deficiency claim allowed because claim is
not substantially similar to other unsecured claims); but
see In re Suncruz Casinos, LLC, 298 B.R. 833, 836-38
(Bankr. S.D. Fla. 2003) (separate classification of
Consider preparing and serving a separate notice
specifically advising creditors of the additional relief
sought through the plan.
D. Conclusion
At a bare minimum, to support a separate
classification of a class that would otherwise be subject
to a gerrymandering objection, the practitioner should:
•
•
•
Be prepared to develop a record that clearly
shows a legitimate business purpose for the
separate classification.
Narrowly tailor the separate class to achieve
the stated legitimate business purpose.
Be prepared to show that the separate class is
entitled to a different payment scheme and/or
holds different rights than members of the
other class of creditors in which they
otherwise should have been placed thereby
warranting differential treatment.
V.
IT’S NOT OVER: OB TAINING RES
JUDICATA
A. One Hurdle Down…
…but one big one to go. Supposing there are no
creditor objections or that a successful objection was
overturned by appeal, there is still a possibility that a
creditor may sue the “discharged” non-debtor party and
overcome a res judicata defense. The Fifth Circuit has
left somewhat of a quagmire in the wake of its seminal
bright-line case, Republic Supply Co. v. Shoaf, 815
F.2d 1046 (5th Cir. 1987). Thus, it is necessary to take
a brief history lesson.
B.
1.
Shoaf
The Facts
Command Energy Company (“Command”) was in
the business of drilling oil wells. Dr. Shoaf and Fred
12
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
Mergner were the principals of Command. Republic
Supply Company (“Republic”) sold supplies to
Command Energy on an unsecured basis. Republic
had the good business judgment to obtain a guaranty
from Dr. Shoaf. Upon his departure from Command
following a disagreement with Mergner, Shoaf sold his
interest in Command and terminated his continuing
guarantees, including his guaranty of Republic’s debt.
At the same time, Republic obtained a new guaranty
from Mergner. 815 F.2d at 1048.
Shortly after Shoaf’s departure, Command
defaulted on its debts to Republic exceeding $900,000.
Free-for-all litigatio n ensued, with Republic suing
Shoaf on his guaranty and Shoaf suing Command in
connection with the buyout of his interest in
Command. While those suits were pending, Command
filed a voluntary Chapter 11 petition. Id.
The sole source of funds available to Command’s
creditors consisted of the proceeds of a life insurance
policy on Mergner, which had matured due to his
death. A dispute arose over entitlement to the
insurance proceeds between Mrs. Mergner, who was
the named beneficiary, and Command, which had paid
the policy premiums. That dispute was ultimately
resolved in a settlement, which was implemented
through the plan of reorganization.
The settlement provided that Mrs. Mergner would
release $850,000 of the $1 million in insurance
proceeds to Command in exchange for Command’s
release of all liabilities owed or guaranteed by Mr.
Mergner and a release of all other guarantors. Shoaf
also agreed to release his claims against Command as
part of the settlement. The plan proposed to pay fifty
cents on the dollar to unsecured creditors. The
settlement with Mrs. Mergner accounted for 80% of
the distributions to unsecured creditors. Id.
This settlement proposal was incorporated into
Command’s plan and disclosure statement. At the
hearing on Command’s disclosure statement,
Republic’s representative (who also happened to be
president of the Unsecured Creditor’s Committee)
advised the court of Republic’s opposition to the plan
based on the proposed release of third-party guarantors
provided for in the plan. The court reserved this issue
for consideration at the confirmation hearing.
However, no creditor, including Republic, objected to
confirmation of the plan. Consequently, the plan was
confirmed without opposition, and the confirmation
order specifically incorporated the release of thirdparty guarantors. Id. at 1048-49.
After confirmation of Command’s plan, Shoaf
amended his answer in Republic’s suit on his guaranty
in include the defense of res judicata . At trial, the U.S.
District Court entered judgment in favor of Republic,
holding that the bankruptcy court was without
Chapter 10
authority under the Bankruptcy Code to release a thirdparty guarantor. Shoaf appealed to the Fifth Circuit.
2.
The Opinion
The court analyzed the issues by applying the
four-part test for res judicata set out in Nilsen v. City of
Moss Point, Miss., 701 F.2d 556, 559 (5th Cir. 1983)(en
banc):
[T]he parties must be identical in both suits,
the prior judgment must have been rendered
by a court of competent jurisdiction, there
must have been a final judgment on the
merits and the same cause of action must be
involved in both cases.
The court dispensed with each element of the test,
focusing primarily upon the question of whether a final
judgment was rendered by a court of competent
jurisdiction. Republic contended that the bankruptcy
court lacked subject matter jurisdiction to release
Shoaf’s guaranty, relying on § 524(e) of the Code. 815
F.2d at 1050. Since the court lacked authority to grant
the relief provided for in the plan and confirmation
order, Republic argued, the court also lacked subject
matter jurisdiction.
The Fifth Circuit declined to accept the
proposition that § 524 precludes release of guarantors,
but assumed for the purpose of the opinion that it was a
correct statement of the law.
Id. at n. 5.
Notwithstanding the presumption that the confirmation
order and plan were beyond the bankruptcy court’s
statutory authority, the Fifth Circuit still concluded that
the bankruptcy court had subject matter jurisdiction.
Consequently, the court concluded res judicata barred
Republic’s suit to enforce Shoaf’s guaranty.
3.
What Shoaf Means After Its Progeny
It is crucial to note that Shoaf has not opened the
door for a confirmed plan to serve as res judicata to all
matters decided in the plan. The release provision in
Shoaf was an integral part of a multi-party settlement.
As the court notes, it was a condition to the settlement.
Id. at 1048. The settlement itself was the nucleus of
the plan. Eighty percent of the distributions to
unsecured creditors in the case were directly
attributable to the settlement proceeds.
The open and notorious nature of the release was
known to Republic.
Its representative was the
president of the Creditors Committee. Republic noted
its opposition to the release at the disclosure statement
hearing in detail, yet declined to objection to the
confirmation. Finally, Republic contested the release
endorsement on its disbursement check from the
bankruptcy estate. Upon succeeding in having the
endorsement removed, Republic cashed the check.
13
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
Republic appeared to want to enforce the benefits of
the settlement while opposing the obligations imposed
upon it by the settlement.
Shoaf had developed a shaky instability, as its
successor cases have failed to provide analyses framed
by the elements of res judicata . Instead, these cases
regress to an application of the prior law and craft
more and more exceptions based on inadequate notice.
In the earlier Simmons v. Savell (In re Simmons),
765 F.2d 547 (5th Cir. 1985), a construction lien
creditor filed a proof of claim registering a secured
claim while the debtor listed the claim as unsecured
and disputed. The plan paid ten percent to its
unsecured creditors, including the construction lien
creditor, who accepted the plan with a notation
indicating his objection to classification. When the
creditor later opposed the sale of the debtor’s
homestead, the court held that the plan could not be
used as a means for objecting to proofs of claims and
expressed severe reservations over the lack of due
process. The court noted that the plan contained no
statement that it was intended as an objection to the
creditor’s claim. Id. at 553.
Relying on Simmons, in Sun Finance Company,
Inc. v. Howard (In re Howard), 972 F.2d 639 (5th Cir.
1992), the court did not allow a discharge provision to
bar a lien creditor suit post-confirmation because it
found that notice was lacking. It held that a secured
creditor had a “right to stay outside the bankruptcy
process by relying solely on the value of one’s lien.”
Id. at 641. It then concluded:
Chapter 10
Applewood’s indebtedness was also transferred.
Included in these assets was the equipment securing
Three River’s loan. The confirmed plan and sale order
designated that equipment was sold to NewCo in
exchange for NewCo assuming “all of the existing
obligors’ obligations.” Confusion then ensued as to
what portion of the obligations and whose. Three
Rivers argued that the indebtedness as to the
equipment only was transferred and that all the
Spiveys’ obligations remained intact; Applewood
Chair countered that since the going concern value of
the equipment equaled the debt, all obligations of all
parties were transferred.
To further complicate matters, NewCo became
Allcreek (and then later Applewood Furniture) and
entered into an assumption agreement with Three
Rivers. The language seemed to indicate that only the
indebtedness of Applewood Chair to Three Rivers was
assumed by NewCo:
That this assumption agreement shall in no
way be considered a novation nor shall it be
construed in any way to impair any of the
current existing collateral taken by Three
Rivers at the time of the initial execution of
the Promissory Note. The parties further
agree that the individual guarantees shall not
be impaired and that this shall not be
considered to be a novation with regard to
the individual guarantees of said note.
Id. at 916-17. During the next two years the following
events occurred:
Applewood Furniture and the
Spiveys defaulted on their payments, Applewood
Furniture ceased doing business, the equipment serving
as collateral vanished, and Three Rivers began to
foreclose on the Spiveys’ mortgage. Id. at 917. The
Spiveys’ defense was that their obligation was
discharged in the plan, as they were members of the
categories named — directors and principals. Id.
The Fifth Court held that res judicata did not bar
Three Rivers’ foreclosure and that this case was
distinguishable from Shoaf by its lack of specificity. In
Shoaf, the court argued, there was a paragraph in the
plan that expressly and particularly released Shoaf’s
guaranty. Further, this paragraph substituted for the
usual, stock paragraph providing for general release.
Thus a paragraph purporting to release the very roles
the non-debtor plays vis-à-vis the debtor (shareholder,
officer, etc.) is not enough.
Although the Fifth Circuit has not expressly so
held, its quarrels in Howard, Taylor and Applewood
concern the fourth element of res judicata, whether the
same claim or cause of action was raised in the plan
confirmation and the subsequent litigation, that is:
notice.
[This right] would be meaningless, however,
if the creditor's claim can be compromised
away without further notice and he is bound
by that compromise. Strict adherence to the
requirement that an objection be filed to
challenge a secured claim is necessary to
protect this important interest under the
Code.
Id.; see also, IRS v. Taylor (In re Taylor), 132 F. 3d
256 (5th Cir. 1998)(“in the context of a secured claim, a
confirmed plan does not substitute for an objection to a
proof of claim”).
The Fifth Circuit has also more recently narrowed
its Shoaf holding in terms of the specificity it requires
of the discharge language. In Applewood Chair Co. v.
Three Rivers Planning & Dev. Dist. (In re Applewood
Chair Co.), 203 F.3d 914 (5th Cir. 2000), Three Rivers
Planning loaned $100,000 to Applewood Chair and the
Spiveys, its president and his wife, which was secured
by all the company’s equipment parts and inventory
and by a mortgage on the Spiveys’ real property. The
bankruptcy court approved a sale order selling almost
all of Applewood’s assets to NewCo, to which
14
Emerging Plan Issues: Third Party Protections, Absolute Priority Post-LaSalle,
Classification and Res Judicata
•
The factors relied upon in the Simmons, Howard,
and Taylor opinions support the conclusion that claims
allowance, lien avoidance, and the determination of tax
claims are matters that should not be litigated in
conjunction with plan confirmation and cannot be
litigated effectively in that setting. Consequently, in
each of those cases, the debtor’s attempts to bar the
later claims or causes of action would fail to satisfy
each of the elements required for application of res
judicata.
Application of the same framework supports the
conclusion reached by the court in Shoaf. In Simmons,
Howard and Taylor the plan provisions at issue were
extraneous to the overall terms of the plans.
The same does not hold true for the release of
guarantees in the Shoaf case. On several occasions the
court noted that the release was a condition to the
settlement of the dispute over the insurance proceeds
and was an “integral” part of the plan. Since eighty
percent of the distributions to creditors were derived
from this settlement, it can be fairly concluded that
without the settlement and the attendant release of
guarantees, there would not have been a plan.
Based upon the holding in Shoaf and the
limitations noted above, it is apparent that plans may
still be used as a means for resolving disputes with
creditors (beyond the obvious disputes over time and
amount of payment) and seeking to bind creditors to
creative contractual solutions prescribed in a confirmed
plan.
The degree to which these objectives can be
accomplished requires an assessment of how central
the objective is to the essential or core purposes of the
plan. In addition, consideration should be given to
how far the objective strays from the fundamental
purpose and scheme of plan confirmation. The further
the objective strays from the essential purposes of plan
confirmation and the less instrumental that objective is
to the success of the plan, the less likely it is to be
considered something which could and should have
been litigated at plan confirmation.
And now,
Applewood indicates that the court will be miserly in
its construction of what paragraphs in the plan mean.
Any non-debtor release must be extremely specific and
not sketched by general umbrella language—in other
words, the actual names of the parties and the extent of
the debt must be identified.
•
•
•
•
•
Chapter 10
The additional relief should be open and
notorious. If, as in Taylor, the plan seeks the
determination of a tax claim, the plan should
specifically state the tax year, type of tax in
question and outline the issues and requested
relief relating to the tax in question. The
plan might even separate the requested relief
from other plan provisions to ensure that the
affected creditor is put on notice of the relief
sought.
The additional relief sought in the plan
should be correlated as closely as possible to
elements necessary under the Code to
confirm the plan.
Consider preparing and serving a separate
notice specifically advising creditors of the
additional relief sought through the plan.
Where the number of creditors implicated are
limited in number or where the importance of
the non-debtor relief is paramount, consider
invoking the adversary rules in conjunction
with plan confirmation and serving each
creditor with a summons along with the plan
packages.
Where subject matter jurisdiction might be at
issue, withdraw the reference to the District
Court. Consider a joint proceeding before
the bankruptcy court and the district court to
consider plan confirmation.
If appropriate, consider including a written
release of non-debtor parties on the face of
the ballot. Obtain prior court approval of all
such non-conforming ballots before mailing
them as part of a plan package.
VI. CONCLUSION
Third party protections through a plan, the
absolute priority rule, classification of claims, and res
judicata present challenging issues for courts and
practitioners in the coming years. It will be interesting
to see the development of the case law and Congress’
response, if any, as the case law surrounding these
issues continues to develop.
C. Conclusion
Even if the objective to be accomplished grades
high with respect to the measures suggested above, a
prudent debtor’s counsel will take some or all of the
following steps to insure the likelihood that the
additional relief sought through the plan is binding
upon the creditors:
15