When handling bankruptcy matters, lawyers must take care to reserve claims their clients want to pursue after a court confirms a Chapter 11 plan of reorganization. While it still is not completely clear what language attorneys must include in the reorganization plan or the disclosure statement to preserve these claims, the 5th U.S. Circuit Court of Appeals recently has clarified the law on point.

A debtor-in-possession in a Chapter 11 bankruptcy case, while continuing to operate its business and manage its assets, is vested with most of the powers of a bankruptcy trustee. This includes the power to pursue claims belonging to the bankruptcy estate, including both avoidance actions under the Bankruptcy Code and non-bankruptcy causes of action under state law.

When a judge confirms a plan of reorganization, the bankruptcy estate ceases to exist, the debtor is no longer a debtor-in-possession and the debtor loses the powers of a bankruptcy trustee it enjoyed prior to confirmation. However, Bankruptcy Code §1123(b)(3)(B) allows a plan of reorganization to provide for the retention of claims for post-confirmation pursuit.

The party vested with authority to pursue claims post-confirmation may be the reorganized debtor, a committee of creditors appointed during the bankruptcy case, a liquidating trustee or another representative of the bankruptcy estate appointed for that purpose.

The Bankruptcy Code does not tell practitioners exactly what a plan must state to reserve these claims post-confirmation. The 5th U.S. Circuit Court of Appeals addressed this issue in Dynasty Oil & Gas LLC v. Citizens Bank (In re United Operating, LLC (2008). In United Operating a reorganized debtor filed a state court suit post-confirmation asserting common law claims, although its confirmed plan did not mention reservation of state law claims.

The 5th Circuit affirmed the lower courts’ decisions that the claim-reservation language in the plan — which mentioned only claims arising under the Bankruptcy Code — was ineffective to reserve these state law claims and that the reorganized debtor therefore lacked standing to pursue these claims. The 5th Circuit held that, for a plan to reserve claims for effective assertion post-confirmation, the reservation must be "specific and unequivocal." Unfortunately, the 5th Circuit provided no guidance as to what sort of language or how much detail would satisfy the "specific and unequivocal" standard.

In 2011, the 5th Circuit provided some clarification in Spicer v. Laguna Madre Oil & Gas II, LLC (In re Texas Wyoming Drilling, Inc.), a case in which former shareholders of the debtor were sued post-confirmation for pre-bankruptcy dividends that were allegedly fraudulent transfers. The 5th Circuit first concluded that courts may look to the disclosure statement that accompanies a plan for voting to determine if claims have been effectively reserved and decided that judges need not focus solely on the plan itself. The 5th Circuit then acknowledged that a "categorical reservation" of claims may satisfy the "specific and unequivocal" standard.

The court held that the disclosure statement in Texas Wyoming met the standard, because it stated that "various pre-petition shareholders of the Debtor" might be sued for "fraudulent transfer and recovery of dividends paid to shareholders."

Clarifying the Standard

The 5th Circuit recently revisited this issue in 2012 in Compton v. Anderson (In re MPF Holdings US LLC). In MPF Holdings, the U.S. Bankruptcy Court for the Southern District of Texas in 2011 had applied a stringent standard for claim-reservation language to satisfy the "specific and unequivocal" standard.

The bankruptcy court held that, to satisfy this stringent standard, a debtor must: 1. individually identify the parties to be sued post-confirmation; 2. state that each party will be sued, rather than may be sued; and 3. set forth the legal basis for the suit. Additionally, the bankruptcy court held that the claim-reservation language at issue was not "unequivocal" because a provision excluding certain released claims from the litigation trust rendered the plan ambiguous.

The 5th Circuit rejected the bankruptcy court’s interpretation of the "specific and unequivocal" standard. Relying on Texas Wyoming, the 5th Circuit held that it is not necessary to name parties to be sued individually or to state that each party will (as opposed to may) be sued. The 5th Circuit also rejected the bankruptcy court’s view that, if a claim-reservation provision is ambiguous, then the plan per se fails to make a specific and unequivocal reservation.

Moreover, the 5th Circuit held that courts should apply general rules of contract interpretation in determining whether claim-reservation language is ambiguous. Applying those rules, the 5th Circuit held that the plan was not ambiguous and, therefore, even if ambiguity did render a plan equivocal per se, the plan satisfied the "specific and unequivocal" standard. Accordingly, the court found that the claim-reservation language at issue satisfied the United Operating standard, and it vacated the bankruptcy court’s decision.

The "specific and unequivocal" standard announced in United Operating continues to apply to claim-reservation provisions in Chapter 11 plans and disclosure statements in the 5th Circuit. While it is still not entirely clear exactly what is required to satisfy this standard, the Texas Wyoming and MPF Holdings cases provide practitioners with some guidance, specifically with respect to what courts do not require.

A plan need not individually identify each defendant to be sued. Further, a plan may specify parties who might be sued, rather than just those who will be sued. However, a general blanket clause preserving "any and all claims and causes of action" will not pass muster under United Operating.

Because courts have not defined clearly the "clear and unequivocal" standard, practitioners always should be as thorough and specific as possible in drafting claim-reservation provisions in Chapter 11 plans and disclosure statements.