Preserving causes of action in Sixth Circuit: In re Mountain Glacier
Clarification of Specificity Requirements for
Preserving Causes of Action in the Sixth Circuit: In re Mountain Glacier
An order confirming a chapter 11 plan constitutes a final order in bankruptcy proceedings. The confirmation order is entitled to preclusive effect, and res judicata principles bar relitigation of any issues that were raised or could have been raised in the confirmation proceedings. Section 1123(b) of the Bankruptcy Code provides for the preservation of claims. The chapter 11 plan must preserve the estate claims through appropriate reservations and then transfer the claims to a post-confirmation entity to ensure the debtor maintains standing.
The Sixth Circuit fell somewhere in between these two approaches. The leading case in this Sixth Circuit was Browning v. Levy,4 which had been cited by lower courts both inside and outside of the Sixth Circuit to support a more stringent standard.
On December 5, 2017, the Sixth Circuit Court of Appeals issued its decision in In re Mountain Glacier, LLC.5 The Sixth Circuit declined to extend its earlier decision in Browning v. Levy, and it clarified the level of specificity necessary to preserve a claim.
The facts in Mountain Glacier were straightforward. The debtor, Mountain Glacier, LLC, and Nestle Waters were in the middle of arbitration when the debtor filed its bankruptcy petition. The arbitration was stayed, and it remained stayed until the debtor’s plan of reorganization was confirmed and the bankruptcy proceedings were concluded. Shortly thereafter, the debtor attempted to resume arbitration. Nestle Waters objected on the basis that the debtor had not properly reserved the arbitration claim in its plan of reorganization. The bankruptcy court and the district court held that the debtor had properly preserved the arbitration claim. Nestle Waters appealed to the Sixth Circuit Court of Appeals.
The Sixth Circuit started its analysis with an explanation of the chapter 11 bankruptcy process and the disclosures required of the debtor. The court explained that the debtor is required to file a disclosure statement, which inventories all of the debtor’s assets and liabilities and gives creditors the information they need to make an informed decision regarding the proposed plan. The court also noted that any creditor can object to the disclosure statement or the proposed plan if the information provided is thought to be inadequate.
Nestle Waters argued res judicata barred the debtor’s attempt to restart the arbitration. Nestle Waters argued the Sixth Circuit Court of Appeal’s decision in Browning v. Levy set out stringent standards – even more stringent than those in the Bankruptcy Code – and the debtor failed to meet those standards to retain the arbitration claim.
In summary, in the Sixth Circuit, a debtor’s reservation is sufficient so long as it enables creditors to (1) identify the claims (or potential claims) at issue and (2) evaluate whether those claims might provide additional assets for distribution. It is not necessary that a debtor identify each defendant (or potential defendant) and provide a factual basis for the claim (or potential claim). The debtor does not need to “intone any magic words.”
This decision may indicate a pivot toward the majority approach, at least with regard to categorical preservation of preferential and fraudulent transfer claims under the general category of “avoidance claims.” With other known potential claims, it is imperative that debtors provide sufficient information for creditors to identify the claims and evaluate their potential recoverable value.
1 See generally Mark D. Collins and Corry D. Kandestin, Preserving and Prosecuting Causes of Action Post-Confirmation, Southeastern Bankruptcy Law Institute (2014), available at http://www.sbli-inc.org/archive/2014/documents/Preserving_and_Prosecuting_Causes_of_Action_Post_Confirmation.pdf (collecting cases); Siddharth P. Sisodia, What Level of Specificity Is Needed to Preserve Post-Confirmation Claims?, American Bar Association Articles (Oct. 6, 2015), available at http://apps.americanbar.org/litigation/committees/bankruptcy/articles/fall2015-1015-specificity-needed-to-preserve-post-confirmation-claims.html (collecting cases); Roye Zur, Preserving Estate Causes of Action for Post-Confirmation Litigation, 32 Cal. Bankr. J. 427 (2013) (collecting cases).
2 In re United Operating, LLC, 540 F.3d 351 (5th Cir. 2008).
3 See, Spicer v. Laguna Madre Oil & Gas II, L.L.C. (In re Texas Wyoming Drilling, Inc.), 647 F.3d 547, 549, 551 (5th Cir. 2011) (finding sufficient specificity and identification of claims where the claims were described as “various pre-petition shareholders of the Debtor [for] fraudulent transfer and recovery of dividends paid to shareholders” and defendants were not identified by name).
4 Browning v. Levy, 283 F.3d 761 (6th Cir. 2002).
5 In re Mountain Glacier, LLC, 877 F.3d 246 (6th Cir. 2017).
6 Mountain Glacier, 877 F.3d at 248, citing P.A. Bergner & Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner & Co.), 140 F.3d 1111, 1117 (7th Cir. 1998).
7 Mountain Glacier, 877 F.3d at 248.
8 Id. at 249 (internal citation omitted).
9 Id. at 249 (citing Browning, 283 F.3d at 774–75; P.A. Bergner, 140 F.3d at 1117 (holding that the reservation of a claim need not name a defendant, but only identify the type of claim the debtor seeks to retain); Harstad v. First Am. Bank, 39 F.3d 898, 903 (8th Cir. 1994) (describing Section 1123(b)(3) as “a notice provision” intended to ensure creditors know about claims that might enlarge the estate)).
10 Mountain Glacier, 877 F.3d at 249.