Metropolitan News-Enterprise


Thursday, October 24, 2013


Page 11



“Ze Plane! Ze Plane!” — The Magic of Third Party Releases in a Confirmed Plan




(The author is the senior attorney for Cook Collection Attorneys PLC and publisher of

Welcome to Fantasy Island, a television show that aired in 1970s -1980’s. Our Fantasy Island might not bring love and riches, but financial relief which a Chapter 11 offers in a confirmed plan of reorganization. At the footsteps of the bankruptcy court, Tattoo cries out “Ze Plan! Ze Plan!”

Who disembarks from this famous plane and welcomed by Tattoo? Answer: Co-defendants, guarantors, conspirators, and indemnitors who seek the Ponce DeLeon fountain of eternal financial health to discharge their personal liability.

Where Do These Passengers Come From?

Mega or large scale tort cases. Mass tort defendants, asbestos producers and manufacturers, and or other uninsured or underinsured defendants routinely file Chapter 11. Unlike the routine Chapter 11’s filed by restaurants chains which usually crater, these large scale Chapter 11’s culminate in a complex plan of reorganization. These plans provide for payments due mass tort victims from a trust fund which is financed by newly issued common stock of the revested debtor, revenues over a period of years, and the proceeds of existent insurance policies. These trust funds consist of a multi-million or billion dollar portfolio which span years or even decades and provide for compensation due hundreds of thousands or millions of claimants. From the days of Johns Manville, this is old hat but very big business.

Chapter 11 Made E-ZEE

A Chapter 11 plan is a judgment, contract, and consent decree. In Re Bartleson 253 B.R. 75 (BAP., 9th Circuit, 2000). The plans bind everyone including the creditors and other parties subject to the court’s jurisdiction. Bankruptcy Code Section 1141(a). The debtor emerges revested with its assets. Section 1141(b). The debts are discharged. Section 1141(d)(1)(A). Unless otherwise, the plan provided terminates the interest of the pre-petition equity holders. Section 1141(d)(1)(B). Plans are genetically related to Dan Ackroyd’s BassOMatic. Hopefully everyone survived this paragraph (and article) but bankruptcy can be total eye glaze.

Most mass tort plans “channel” the damage claims to a trust fund away from the debtor who emerges from the plan as the revested debtor and ready to re-enter the commercial world, untethered to the billion dollar burden of litigation. For those readers who routinely represent clients afflicted with asbestos and related health issues, this is common knowledge and spawned million dollar careers for attorneys and professionals. What is not common knowledge is the scope of the plan and the potential impact upon other parties.

Chapter 11 Plans Can Discharge the Claims of Creditors Against Co-Defendants who Are Non-Debtors.

A little explanation goes a long way, and Title 11 at hand helps. Unlike other bodies of law, bankruptcy is statutory and complex. Try this: “ . . . . the Byzantine complexity of jurisdiction under the Act . . .]” In re Wencl, 71 B.R. 879, 884 (Bankr. D. Minn. 1987). Just ask the late Anna Nicole Smith who gave us Stern vs. Marshall 564 U.S.     (2011) which is the case that launched in excess 1,000 reviews, treatises and articles and case cites.

 Chapter 11 frees the debtor from its liabilities in exchange for a promise to pay (money or stock) to the creditors embedded in a judgment (i.e., the confirmed plan) (Section 1129(a)(7)(a)(ii). The creditor’s get something of a fair deal (or any deal) because the obligation to pay is a secured by the plan which is a judgment of the bankruptcy court and bears the force and effect of a federal judgment out of the district court. Section 1141(a). 28 USC § 151. The amount which creditors can expect should equal or exceed what creditors would get in a Chapter 7. Call the Chapter 11 plan a grand bargain. The plan swaps out the pre-petition claims and swaps in the payment under the confirmed plan.

The Big Question is whether a plan can discharge the creditor’s viable claims against the third parties who are co-liable conspirators, partners, guarantors, indemnitors, and joint tortfeasors. The answer is maybe. The Second, Third, Fourth, Sixth and Seventh Circuits authorizes a debtor in confirmed plan the right to discharge the claims held by creditors against non debtor third parties. A Chapter 11 plan will extinguish by release, discharge or injunction the creditor’s claims against non debtors, such as the guarantors. Menard-Sanford vs. Mabey (In Re A.H. Robbins Co., Inc.) 880 F. 2nd.694 (4th Circuit, 1989), In Re Dow Corning Corp. 280 F. 3rd. 648, 658 (6th Circuit, 2001), and Airadigm Communications Inc. v. Federal Communications Commission (In re Airadigm Communications Inc.), 519 F.3d 640, 657 (7th Cir. 2008). [These cases are worth reading.]

The minority view in the Ninth and Tenth Circuit (In Re Lowenschuss 67 F. 3rd. 1394, 1401 (9th Circuit, 1995) and In Re Western Real Estate Fund Inc. 922 F. 2nd. 592, 600 (10th Circuit, 1990)) bars a plan from extinguishing the tort, or contract, liability, arising from the debtor’s wrongful conduct, but owed by the non debtors. However, the creditor must necessarily object to this expansive release as part of the plan confirmation process.

Speak Now or Forever Hold Your Peace

Aside from the lambs, silence is fatal. Levy v. Cohen, 19 Cal.3d 165, 137 Cal.Rptr. 162, 561 P.2d 252 (1977) is the total party crasher. This case is the show that holds a confirmed plan is a federal judgment which imposes collateral estoppel (and even res judicata) even if the plan imposes terms are inconsistent with the bankruptcy law. Jot this down: “Since the objection could have been raised in the bankruptcy proceeding, the order confirming plan of arrangement is conclusive in the present action insofar as such order determined that defendants are not liable for liable for obligations of the limited partnership.” (page 258)]

If the medium is the message, glossing over the fine print is the message under Levy vs. Cohen: “Since the objection could have been raised in the bankruptcy proceeding, the order confirming plan of arrangement is conclusive in the present action insofar as such order determined that defendants are not liable for obligations of the limited partnership.” (Page 258). This case gave a pass to the general partners of a limited partnership, even though the Bankruptcy Act at the time prohibited the discharge of general partners in a partnership bankruptcy. This case turned a bankruptcy case into a true Fantasy Island for the general partners enjoyed a million dollar pass of crushing partnership liability. The creditors missed the boat.

Come Out, Come Out, Wherever You Are

You’ll find the “discharge, release and injunction” section of the confirmed plan in the “Effect of Confirmation” paragraphs and slightly north of the “reservation of jurisdiction section.” Look out for this: “Upon the effective date of the plan of reorganization, the claims, interests, demands, or causes action of all creditors, or third parties asserting the same, (collectively “claim”) of the debtor or any of the debtor’s divisions, subdivisions, subsidiaries, affiliates, corporate parents, shareholders, employees, officers, directors, independent contractors and agents (collectively “debtor”) and, in addition thereto, any person, whether a party to a lawsuit, related or unrelated to the debtor, who is claimed to be jointly, severally, or jointly and severally liable, or any other way, for the claims, interests, demands or causes of action of or against the debtor, or liable on any indemnity, guaranty, liable as co-tortfeasor, or civilly liable in tort or contract for any claim, whether in law or equity, asserted by the creditor or third party against the debtor, are irrevocably discharged, released and extinguished.”

This language offers a “self executing” injunction: “All creditors pursuing by suit, arbitration or other proceeded are enjoined, stayed and restraining from any continuing any proceeding with any person as described in this paragraph. The continued prosecution of, pursuit, filing, taking to trial or an appeal will be deemed a violation of this plan of reorganization and subject to contempt or an action for damages. The debtor and third parties may file a copy of the order confirming the plan in any judicial proceeding, arbitration or other proceeding as notice of the discharge, release and restraining order. Any and all creditors who violate this plan shall irrevocably submit themselves to the jurisdiction of this court for any and all proceedings under the terms of this plan.”

Sorry about the legal-ease and mind you, this language chews up a lot of fine print. This language comes in 57 varieties. The punch line is the same. This language is important because this language is the archetype of all broad discharges. This language discharges the claims against co-defendants who are on the hook for the wrongful conduct of the primary defendant who is now a debtor in the Chapter 11 and immune from suit. This language is a settled expectation and a nearly certainty in all large cases.

Well, Here’s Another Fine Mess You’ve Gotten Me Into!

The opening salvo in any Chapter 11 is for the creditor (or the attorney to be more exact) to file the proof of claim and request for special notice. If the case is out of state, the attorney should endeavor to retain local bankruptcy counsel to insure a running and accurate familiarity of the proceedings. Local counsel can explain the nuances of a cash collateral motion.

If the debtor has insurance, the plaintiff should move the court for relief from the automatic stay and continue the tort litigation but the recovery is limited to the insurance. In other cases, the debtor is uninsured, but relief from the automatic stay is still required to bring the tort claim to fruition and finalize the amount of the claim. Converting the tort claim into a final dollar figures is important for purpose of voting on the plan or any other matter, and more important, to receive a dividend.

Many large scale “mass tort” chapter 11 plans have very elaborate filing proceedings as a condition of payment from the trust funds. While these procedures are not necessarily too Byzantine, nonetheless, these procedures are very precise and require compliance with very tricky deadlines. A high eight figure recovery justifies a low five figure investment with bankruptcy counsel to navigate through this Labyrinth.

If the proposed plan seeks to discharge the creditor’s (i.e., the plaintiff) claims against co-defendants, indemnitors, co-tortfeasors, guarantors or other severally or jointly liable, the “Order Approving the Disclosure Statement and Setting the Date for Plan Confirmation,” requires an excruciating procedure in objecting to the plan. These procedures are the following: Filing and service objections before final “drop dead date,” serve electronically or by paper copy (or both) upon the debtor, and if in paper, accompany the paper filing with a CD in WORD which is searchable upon the debtor, debtor’s attorney, the creditor’s committee and its counsel, other committees and their counsel, the U.S. Trustee, parties requesting special notice, the court, and probably the senior lenders.” This list is typical. This is a must do list and some orders requires that the creditor fax the objection in addition to mailing (20 plus on a page). Do everything by 9:00 a.m. EST. Should something go wrong, the technical bankruptcy jargon is “Do not pass Go. Do not collect $200.”

Look Before You Leap

The plan is full of traps, loopholes and trip wires. Some plans compel the creditors to vote for the plan as a condition of payment. Other plans demand the forwarding of a Form #1099 by a certain date and at three different addresses. Other plans provide for a quick pay if the creditors reduce their claim to a fraction of the amount, and absent that option wait years. Other plans provide that the debtor offers “net profits” if any or if ever. Other plans permit the debtor to emerge from the bankruptcy and if a default, compel the creditors to file suit in state court, say, in Delaware which is a jurisdiction less than warm and fuzzy to creditor’s claims. If an installment plan (i.e., payments over months, and more likely many years), the plan lacks an acceleration clause, and renders enforcement, if a breach under the plan, very cumbersome. Some plans are born stone cold dead because any relief is limited to a proceeding before the bankruptcy court that might decline any relief if the plan is substantially consummated. Some plans apparently foreclose any remedies if a default. You thought that Stern vs. Marshall was dense.

The debtor who emerges from the Chapter 11 is called the revested debtor emboldened by a “fresh start,” courtesy of Local Loan vs. Hunt (1934) 292 U.S. 234, but subject to the plan terms. Rarely, but not never, does the revested debtor grant a security interest for the pre-petition creditors to secure the debtor’s performance under the plan. This means that the plan creditors, such as the mass tort claimants, are vulnerable to post confirmation trade, finance and other claimants who might encumber the revested debtor with a fresh set of liens and potentially render the debtor insolvent should the debtor, for the second time round, sputter, crater and die. Einstein would have made a first rate Chapter 11 attorney when he famously said, “The devil is in the details.” Had Einstein swapped his scientist lab coat for an attorney’s three button suit, he would have said, “The devil is in the plan.” Don’t expect the creditor’s committee to ride the rescue of the mass tort creditors. Many creditors committee represents trade creditors are adverse to tort creditors. Be aware of the institutional fraternization among major bankruptcy firms. Some bankruptcy judges emerge from the ranks of the bankruptcy bar. In a land of mass bankruptcy cases, and given high stakes and very big dollars, who you hire is very important. Credibility of counsel to the court is a big deal.

Coming Home From Fantasy Island

Some large scales Chapter 11’s offer claimants a significant recovery, and other pennies on the dollar. Expect offers to buy claims at pennies on the dollar. Expect that the confirmed plan, engineered by the debtor (your primary defendant), seeks to immunize the co- defendants and secondarily liable parties. This is not a guess, but a guaranty. This risk as a settled expectation. Be ready for the worst and read from the 200 page plan from “snout to tail” because buried somewhere in the carcass of the plan is that broad discharge. Once, you have found those magic words that would free the co-liable parties, and after a small smile they say “Eureka,” immediately run out and file a very timely objection to the plan. If you are local to the Chapter 11 case, great. If not, you should hire someone local.

Thanks for the trip to Fantasy Island and “please make sure your seat backs and tray tables are in their fully upright position . . . .”


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