The normal tendency in drafting a reservation of claims against third parties in settlement documents or the reservations of claim language in a proposed disclosure statement or bankruptcy plan on behalf of a creditor is to be as broad as possible. This is done so if you inadvertently forget to mention something specifically that may not be known at the time, it will be covered and fall under the all encompassing language. The United States Court of Appeals for the Fifth Circuit has called that practice into question and rejected blanket reservations of any and all claims language contained in a confirmed bankruptcy plan because it did not specifically state the claims the creditor was attempting to bring on behalf of the reorganized debtor.
In Wooley v. Haynes & Boone, L.L.P. (In re SI Restructuring, Inc.), Case No. 11-51106 (5th Cir. April 18, 2013), Debtor SI Restructuring f/k/a Schlotzsky’s Inc. filed for chapter 11 protection. Debtors retained Haynes & Boone LLP as counsel. Unsecured creditors committee (the “Committee”) successfully sought to bring adversary claims against the Wooleys, who were creditors. The Wooleys subsequently asked the Committee to pursue various state law claims against Haynes & Boone and five outside directors. During this time, Debtor filed a disclosure statement and plan dividing potential claims into (1) preference and avoidance litigation, and (2) potential litigation using blanket reservation language “of any and all claims.” The disclosure statement recognized the Wooleys allegation that additional claims should be asserted by the estates and stated generally that Wooleys retained the right to seek court authority to bring claims on behalf of reorganized debtor. While the adversary was proceeding, the plan was approved. The Wooleys then asked the plan administrator to pursue seven specific causes of action against Haynes & Boone and the independent directors. An agreement was reached in the adversary and the Wooleys agreed to withdraw claims against Debtor in exchange for partial payment of funds and plan administrator’s agreement not to oppose motion to seek authority to pursue the seven causes of actions on behalf of reorganized debtor. The Wooleys then filed a post-confirmation motion requesting that bankruptcy court allow them to bring derivative actions or actions on behalf of Debtor’s estate. The bankruptcy court denied the request because the Plan did not specifically reserve those cause of action. After the district court affirmed, the Wooleys appealed to the Fifth Circuit.
The Fifth Circuit affirmed the district and bankruptcy’s court’s denial of the Wooleys’ motion to pursue post-confirmation causes of action on behalf of reorganized Debtor due to a lack of standing to sue and rejected blanket reservation in the plan of “any and all claims” because the plan did not specifically reserve the causes of action. The Court acknowledged that while Section 7.7 of the Plan and the broad definition retaining all causes of action for the debtor was unequivocal, it held that blanket reservations of any and all claims are insufficient to reserve specific causes of action. In holding that there was no standing because the blanket reservation was not specific, the Fifth Circuit reaffirmed that a creditor may pursue claims for the debtor-in-possession if the debtor could bring the claim and if three requirements were met: (1) the claim is colorable, (2) the debtor-in-possession refuses unjustifiably to pursue the claim, and (3) the creditor obtains court approval to bring the claim. However, because the plan administrator did not have standing to pursue the claims because they were not specifically retained and set out in the plan, the Wooleys’ also did not have standing to sue. See Wooley v. Haynes & Boone LLP., Case No. 11-51106 (5th Cir. April 18, 2013).
The Fifth Circuit’s opinion places counsel in a difficult position especially when as in Wooley, the movant alleged that the claims were not discovered until after plan’s confirmation. In rejecting this contention, the Fifth Circuit held that there was enough known to at least raise specific causes of action such as breach of fiduciary duty which was arguably known before the plan confirmation. Further, the Fifth Circuit noted that the Wooleys did not raise an objection to the plan’s language. The moral of this opinion seems to be that you need to state specific causes of action even if only a thread of evidence to support it and a creditor should object and demand more specific claim reservation language in the plan as opposed to boiler plate language used most of the time to preserve the issue for appeal.
The opinions of this blog are solely the author’s and any comments, suggestions or replies are welcome and may be sent to John@jrjoneslaw.com.