Spicer v. Laguna Madre Oil & Gas II, L.L.C. (In re Texas Wyoming Drilling, Inc.)

Summarized by Aaron Kaufman , Gray Reed LLP
14 years 7 months ago

Citation:

--- F.3d --- (5th Cir. 2011)

Tag(s):

5th Circuit

Ruling:

In this informative decision applying the United Operating “specific and unequivocal” standard for reserving causes of action under a chapter 11 plan, the Fifth Circuit reminds us that “the purpose of the rule is to put ‘creditors on notice of any claims [the debtor] wishes to pursue after confirmation’ and enable ‘creditors to determine whether a proposed plan resolves matters satisfactorily before they vote to approve it.” Slip op. at 5 (quoting In re United Operating, LLC, 540 F.3d 351, 355 (5th Cir. 2008)). First, the court addressed the appellant’s argument that a bankruptcy court may not consider disclosure statements to determine whether causes of action were retained under the plan. The court observed that “the disclosure statement is the primary notice mechanism informing a creditor’s vote for or against a plan.” For that reason, the Fifth Circuit rejected the defendant/appellant’s argument and held that courts may consider disclosure statements in determining whether a post-confirmation debtor or trustee has standing to pursue causes of action. Second, the court considered the appellant’s contention that the plan documents were required to list all defendants by name to pursue any claims against them. Distinguishing this plan from the plan in United Operating—where the plan documents only contained a blanket categorical reservation of “any and all claims”—the Fifth Circuit noted that the plan documents in this case were far more specific. The plan and disclosure statement in TWD’s case revealed: (i) the existence of “Avoidance Actions”; (ii) the possible amount of recovery to which they would lead; (iii) the basis for the actions (in this instance, the pre-petition dividends and transfers to equity interest holders); and (iv) that the reorganized debtor intended to pursue such claims. Because of the specificity provided in this case, the Fifth Circuit held that the United Operating test was satisfied. Having rejected the appellant's second point on appeal, the court expressly did not decide whether defendants must always be listed by name. The court affirmed the bankruptcy court’s decision without considering the effect of conversion on the chapter 7 trustee’s standing. The court also held that res judicata and judicial estoppel did not apply here, where the debtor did not expressly list these causes of action in its schedules.

Procedural context:

Direct appeal from the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division, pursuant to 28 U.S.C. § 158(d)(2).

Facts:

Texas Wyoming Drilling (“TWD”) filed a chapter 11 plan and disclosure statement. Among other things, the plan cancelled all existing shares and interests in the debtor and reserved certain “Estate Actions” for the benefit of creditors. Under the plan, the “Estate Actions” term was defined to include avoidance actions arising under chapter 5 of the Bankruptcy Code. The disclosure statement was more specific. It contained a chart outlining “various claims and causes of action the Debtor or the Reorganized Debtor may pursue on behalf of the Debtor’s estate.” One group of potential defendants listed in the disclosure statement was “[v]arious pre-petition shareholders of the Debtor” who might be sued for “fraudulent transfer and recovery of dividends paid to shareholders.” Those potential claims were estimated in the disclosure statement at $4 million. Following confirmation, the reorganized debtor sued certain shareholders, including the appellants here, alleging fraudulent transfers under state and federal law, and seeking to recover fraudulent transfers under section 544 and 550 of the Bankruptcy Code. The defendant/appellants moved for summary judgment under the theory that the plaintiff lacked standing to pursue the avoidance actions against it, because they were not “specifically and unequivocally” reserved under the plan as required by the Fifth Circuit’s decision in In re United Operating, LLC, 540 F.3d 351, 355 (5th Cir. 2008). Prior to the hearing on the defendant/appellants’ summary judgment motion, the bankruptcy court converted the case to chapter 7 in light of the reorganized debtor’s material default under the plan. The defendants also argued that chapter 7 trust lacked standing to pursue the avoidance actions. The bankruptcy court denied summary judgment, holding that: (a) the court could consider the disclosure statement to determine whether the avoidance actions were specifically and unequivocally reserved; (b) the plan and disclosure statement, read together, adequately described the causes of action and potential of defendants to give the post-confirmation debtor/trustee standing to pursue the avoidance action; and (c) even if the claims were not properly reserved under the “specific and unequivocal” standard, the plan did not act as a waiver against the estate or chapter 7 trustee, but only against the reorganized chapter 11 debtor. The bankruptcy court certified a direct appeal to the Fifth Circuit under 28 U.S.C. § 158(d)(2).

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