Evercore Capital Partners II, L.L.C. v. Davis Trust (In re Davis Offshore, L.P.)

Summarized by Kevin Baum , Windels Marx Lane & Mittendorf, LLP
14 years 8 months ago

Citation:

No. 09-41294 (5th Cir. June 16, 2011)

Tag(s):

5th Circuit

Ruling:

Affirming the Bankruptcy Court on other grounds, the Fifth Circuit found that, in the context of reorganizing a family-owned company, comprised of multiple entities (collectively, the “Debtors”), all of whose shareholders were represented by sophisticated law firms, and where the releases and exculpatory provisions (the “Provisions”) in the plan of reorganization (the “Plan”) and the unappealed confirmation order (the “Confirmation Order”) were essential to a reorganization, the Provisions barred the Nancy Sue Davis Trust’s (the “Trust”) fraud claims. Specifically, the Trust had sought leave to commence a fraud action against (1) certain members of a consortium of investors (the “Consortium”), including Gregg Davis (“Davis”), a member of the family who had owned the Debtors, who had purchased the Debtors’ assets through the Plan, (2) certain of the family’s former financial advisors (the “Financial Advisors”), and (3) certain of the Consortium’s representatives (the “Representatives” and collectively with the Consortium, Davis, and the Financial Advisors, the “Appellees”). First, the Fifth Circuit held that the Trust’s claims against each of the Appellees—except Davis—were barred because the Plan’s Provisions, which were “narrower” than those in the Confirmation Order, released any and all causes of action that occurred prior the date the Plan became effective, including the Trust’s fraud claims. Initially, the court rejected the Trust’s argument that the Plan’s releases’ prefatory clause, “except for Causes of Action arising under the Purchase Agreement or the Plan,” excluded the Trust’s claim. Specifically, the court reasoned that “the Trust’s claims did not ‘arise under’ the Purchase and Sale Agreement or the Plan at all.” Rather, the claims “ ‘arise from’ fiduciary, common law and statutory duties.” Next, the court also rejected the Trust’s argument that the Plan’s exculpatory clause’s exclusion of “willful conduct” permitted the Trust to bring its claims. The court found that the exculpatory clause was a general provision “that [bound] or protect[ed] both [the Debtors] and [the members of the Consortium other than Davis] from claims that might have been asserted by other parties to the bankruptcy.” The court, however, found that the mutual releases controlled because the releases were specific provisions that addressed the relations between the Trust and the Consortium, and thus, controlled over the general exculpatory clause. Accordingly, the mutual releases barred the Trust’s claims. Second, the Fifth Circuit held that the Trust’s claims against Davis were barred because the Confirmation Order contained a provision, which conflicted from the Plan, releasing all of the Debtors’ officers, including Davis, from claims that arose prior to the date that the Plan became effective. The Fifth Circuit rejected a rule that a confirmation order must always prevail over a conflicting plan, and instead, found that a reading of the Confirmation Order that released Davis was consistent with the Plan’s goal of ending litigation that might stand in the way of a sale. Although the court noted the Plan was quickly confirmed, the court also reasoned this was the most reasonable interpretation of the ambiguity between the Confirmation Order and the Plan because the parties, all of whom were represented by sophisticated counsel, had not appealed the Confirmation Order. Accordingly, because the Trust failed to appeal the Confirmation Order or the denial of its motion to revoke confirmation under §1144, it was too late to argue that fraud should be excluded from the Confirmation Order’s release.

Procedural context:

The Trust appealed the Bankruptcy Court’s order holding that both the Plan’s and the Confirmation Order’s releases barred the Trust’s fraud claims against the Appellees. Although the Trust appealed to the District Court, on the Appellees’ motion the Fifth Circuit certified the appeal for direct review.

Facts:

The Debtors were part of a family-owned oil and gas drilling business. After the family patriarch died, the Debtors began experiencing financial problems. Because of ongoing legal trouble and a severe cash shortage, the Debtors’ assets were sold to the Consortium, which included Davis, under a prepackaged chapter 11 plan. Under the Plan, which was confirmed in less than a week, the family members’ equity interests received approximately $31 million. “Represented by a coterie of sophisticated expert legal counsel, all interested parties exchanged releases in the [Plan].” While it did not vote for the Plan, the Trust also neither opposed the Plan nor appealed the Confirmation Order. Six months later, the Trust, alleging fraud, moved to revoke the Confirmation Order under §1144. Specifically, the Trust argued that it had recently become aware of alleged fraud perpetrated by some of the Consortium’s representatives’ (including Davis), which allowed the Consortium to purchase the assets for well below market value. The Bankruptcy Court concluded that no fraud had occurred. On appeal, the District Court held that the appeal moot because the Plan had been substantially consummated, and accordingly, vacated the Bankruptcy Court’s order. Although it did not appeal the District Court’s order, the Trust instead sought leave from the District Court to pursue damage claims against the certain members of the Consortium and the individuals, including Davis, who it claimed committed the alleged fraud. Since the motion would require the Court to interpret the Plan’s releases and exculpatory clause, the District Court referred the motion to the Bankruptcy Court. Denying the motion, the Bankruptcy Court found that the Trust was impermissibly attempting to collaterally attack the Plan and the Confirmation Order.

Judge(s):

Jones (concurring Jolly, Garza)

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