Does Bell Atlantic Corp. v. Twombly bear on the issue of preserving post-confirmation causes of action in Chapter 11 bankruptcy cases? That question occurred to my partner Ward Stone last month at Atlanta’s SBLI conference and I figured I’d try to answer it here. Although I didn’t find a case addressing the Twombly angle, I did find 2 very recent decisions that help answer the question.
First, District Judge Copenhaver (S.D. W. Va.) addressed the preservation issue, generally, in Johns v. Eastman Chemical on March 31, 2017. Second, Bankruptcy Judge Glenn (S.D.N.Y) also addressed it generally in MF Global Holdings USA v. Heartland Co-Op on April 13, 2017. Of course, these are just the 2 most recent cases–there are dozens of cases that address this issue. We’ll paint the big picture in Part 2.
Reading between the lines, those two judges, at least, would likely not impose Twombly‘s heightened “plausibility standard” on Chapter 11 plan proponents who are seeking to preserve causes of action for post-confirmation litigation. That is because both judges, even if they don’t state it in Twombly terms, adopt a pleading specificity that’s more forgiving than Twombly. However, as we’ll learn or be reminded of in this 2-part post, there is so much variation across the Circuits on the preservation issue that Twombly provides a useful framework for discussing the issue.
Therefore, we’ll split this post into 2 parts.
In Part 1, we’ll cover the Eastman Chemical and MF Global decisions and then “introduce” Twombly.
In Part 2, we’ll look at the preservation issue across the Circuits and then see what Twombly can add.
As tempting as it is to delve deep into the underlying facts of Eastman (contamination of the Elk River) and MF Global (more fallout from MF’s collapse), I’ll stay on the surface for both cases, as the legal issue is more important. In short, both cases involved motions to dismiss post-confirmation claims for failure to preserve the claims before confirmation.
In Eastman, Freedom Industries had filed a Chapter 11 after chemicals it had purchased from Eastman had leaked into and contaminated the Elk River. Johns, Freedom’s Chapter 11 plan administrator, sued Eastman after confirmation for all matter of claims arising from the contamination (the “Incident”). Eastman moved to dismiss on a number of theories, including the theory that Freedom was barred from pursuing claims related to the Incident because Freedom had not properly preserved those claims in its Chapter 11 plan.
On the preservation issue, specifically, Freedom’s plan provided that Freedom would have the “exclusive right to enforce and shall retain, all Causes of Action of the Debtor and the Estate against any Persons, including, without limitation, Claims or Causes of Action arising from or relating [to] the Incident.” In turn, it defined the “Incident” as the “occurrence whereby on January 9, 2014, a substance primarily consisting of [Crude MCHM] was released from Tank No. 396 at the [Freedom facility] onto the facility and into the Elk River in Charleston, WV.”
In MF Global, MF Global was an international commodities broker that collapsed with a Halloween 2011 bankruptcy filing following Jon Corzine’s risky foray into sovereign debt trading. Heartland Co-Op, a counter-party on a number of MF’s derivative contracts, had cancelled the contracts in response to the bankruptcy. MF’s Chapter 11 plan administrator sued Heartland for breach. Like Eastman, Heartland moved to dismiss, claiming that MF had not properly preserved its breach claims in its Chapter 11 plan.
Being a much larger case and involving way more potential claims, the MF Global plan and related documents were more general:
- The plan contained a general preservation clause which the Court had explicitly approved under § 1123(b)(3)(B);
- The schedules listed various contracts, including the subject contract, with specificity;
- The SOFA highlighted potential assets/liabilities associated with their termination;
- The SOFA, itself, also contained a general assertion of preservation;
- The disclosure statement put counter-parties on notice that MF might seek termination damages, generally;
- The plan contained additional language meant to defeat “list it or lose it”-type arguments.
The pleading standard might differ somewhat between the Second and Fourth Circuits, but the courts employed similar analytical steps.
First, both judges agree that a plan confirmation order is a final order with res judicata effect. Therefore, it is essential that a plan proponent preserve sufficiently any claims that it contemplates bringing after confirmation.
Second, the starting point in the Bankruptcy Code is § 1123(b)(3). Under § 1123(b)(3), a Chapter 11 plan may provide for
(A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or
(B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest.
Third, however, both judges recognize that the Code lacks express guidance about the specificity necessary to preserve a claim and, thus, that there is a conflict among the courts. In Part 2, we’ll focus on the conflict and the different approaches that different Circuits have adopted.
With those general principles and acknowledgments out of the way, Judge Copenhaver and Judge Glenn are left with deciding the preservation issue in their respective cases.
Judge Copenhaver denied Eastman’s motion to dismiss.
Although Judge Copenhaver recognizes that the Fourth Circuit had not addressed the specificity issue, he concludes that Eastman’s suggested pleading standard is “excessively onerous.” That is, Freedom should not have to, as Eastman insisted, “specifically reserve each cause of action it intended to bring,” count by count. Concluding that § 1123(b)(3) is intended to expedite confirmation and rehabilitation, Judge Copenhaver holds that a “blanket reservation of a type or category of claim is sufficient.”
Ultimately, Freedom’s plan contained a cause of action retention provision; it defined “causes of action” as including all claims arising under contract, tort, and under state law; and it also provided a general factual basis for the claims by expressly identifying and defining the “Incident” (i.e., the chemical spill). Eastman couldn’t claim that it wasn’t on notice.
Unlike Judge Copenhaver, Judge Glenn had binding Second Circuit precedent, as “exemplified by Judge Gerber’s decision in In re Perry H. Koplik & Sons, Inc.“:
Despite this conflict among the courts, it has been held in this Court, as affirmed by the district court and the Second Circuit, that a debtor’s plan of reorganization may reserve postconfirmation claims in general terms. In I. Appel [the Second Circuit] found a chapter 11 debtor’s general reservation of rights to litigate postconfirmation claims to be satisfactory, and rejected the notion that specific causes of action had to be preserved in a plan of reorganization…
Judge Glenn then emphasizes I. Appel, wherein Judge Marrero concluded that it is “neither reasonable nor practical to expect a debtor to identify in its plan of reorganization or disclosure schedules every outstanding claim it intends to pursue with the degree of specificity that the Katzes would require,” particularly given that such a specific description “of every claim the debtor intends to pursue could entail months or years of investigation and a corresponding delay in the confirmation…”
Similarly, he emphasizes Judge Walsh’s conclusion in Ampace that, “in large chapter 11 cases, the investigation and litigation of all possible avoidance actions to final judgment can take years” and confirmation often occurs “before the debtor and/or a trustee has undertaken a detailed investigation of the potential preference actions.”
In short, Judge Glenn concludes that Judge Marrero, Gerber, and Walsh’s approach “conforms to the plain language of” of § 1123(b)(3)(B), which, rather than requiring a “plan to specify every claim,” only provides that a “plan may do so.” (emphasis in original). And with that, Judge Glenn denied Heartland’s motion to dismiss.
Famously in Twombly and its progeny, the U.S. Supreme Court altered the notice pleading standard under Rule 8(a).
On the one hand, Rule 8(a) required, and still requires, that a claimant make “a short and plain statement of the claim showing that the pleader is entitled to relief.” On the other hand, the “no set of facts” standard from Conley has, with Twombly, been replaced by a stricter “plausibility” standard. That is, before Twombly, a court could only dismiss a claim if it appeared beyond doubt that there was “no set of facts” that the plaintiff could prove that would entitle it to relief. After Twombly, a plaintiff must plead “enough facts to raise a reasonable expectation that discovery will reveal evidence of illegal agreement.”
As Justice Souter explained, and as every motion to dismiss brief or decision after 2008 articulates in some form or fashion:
[W]e do not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face. Because the plaintiffs here have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.
The Court also clarified that it wasn’t imposing a “probability” requirement.
Having created more questions than it answered, though, the Supreme Court tried to clarify things in Ashcroft v. Iqbal:
Reaffirming Twombly, Justice Kennedy, in a 5-4 decision, “simplified” things by establishing a 2-pronged approach. First, a federal court need only accept as true factual allegations, not legal conclusions disguised as facts. Second, the factual allegations must state a plausible claim for relief.
The question, which we’ll explore in Part 2, is the extent to which Twombly has any bearing on or adds value to the preservation issue. We’ll try to answer that question in the broader context of how other Circuits, besides the Second and Fourth Circuits, determine whether a plan proponent has properly preserved causes of action. Some are less forgiving, and approach Twombly-style pleading.