In Part 1, we asked whether Bell Atlantic Corp. v. Twombly bears on the issue of preserving post-confirmation causes of action in Chapter 11 bankruptcy cases. That is, does § 1123(b)(3) impose Twombly‘s heightened “plausibility standard” on plan proponents seeking to preserve causes of action? We began to answer that question by reviewing two very recent cases, Johns v. Eastman Chemical (S.D. W. Va.) and MF Global Holdings USA v. Heartland Co-Op (S.D.N.Y.). For those two cases, Twombly pleading might be useful, but it’s not required. What about in Circuits other than the Second and Fourth? We’ll address the other Circuits in Part 2 but, even with the differences among the Circuits, courts have not explicitly or implicitly imposed Twombly on § 1123(b)(3).
However, we still think that Twombly provides a useful standard, especially for those of us who are haunted by res judicata/estoppel worries.
[Note: That was the view from my hotel room in Savannah when I finally got around to drafting Part 2. The next morning, TWO of those ships were impossibly close as they passed each other!]
Quick Twombly Recap
As we reminded in Part 1, the U.S. Supreme Court clarified Twombly‘s 2-pronged approach in Ashcroft v. Iqbal. First, a federal court need only accept as true factual allegations, not legal conclusions disguised as facts. Second, and more important for our purposes, the factual allegations must state a plausible claim for relief. After Twombly, courts must be less forgiving when gauging the sufficiency and plausibility of a complaint’s factual allegations. Our question is whether bankruptcy courts should insist that plan proponents satisfy that approach when describing causes of action in a plan.
Claim Preservation in Other Circuits
We imagined that Part 2 would give us an opportunity to provide an updated Circuit survey. Coming back to this over a month later (!), though, a Circuit survey isn’t very illuminating for our issue.
First, if there is a Circuit split on the preservation issue, generally, then it has likely consolidated into two camps: the 5th and, maybe, 6th Circuit, on the one hand, and the rest of the Circuits, on the other.
If you need something of a proper Circuit survey, then checkout Mark Collins’ and Cory Kandestin’s excellent SBLI article: Preserving and Prosecuting Causes of Action Post-Confirmation. We also enjoyed Siddharth Sisodia’s 2015 ABA article: What Level of Specificity is Needed to Preserve Post-Confirmation Claims? Norton also has a good article. Collier, not so much (surprisingly).
If you need something super simple and roughly accurate, then here’s our take:
- 5th Cir.: Read this Baylor article by John Busch
- 6th Cir.: Read Browning but also read In re Pen Holdings, Inc.
- Everyone else: At least identify claims by type or category and provide the basis for known claims
Indeed, the 5th Circuit’s “specific” and “unequivocal” language requirement has been softening, at best, and has been evolving rather unpredictably, at worst. Do you have to name potential defendants? Probably not. Does the 5th Circuit recognize “preservation by category”? Not reliably or predictably. And while Browning first appears worrisome for debtors, Pen (a lower court decision) does a good job distinguishing Browning and putting the 6th Circuit in the “everyone else” category. The rest of the Circuits, either at the Circuit level or in their lower courts, appear to follow the cases we discussed in Part 1.
Second, there doesn’t appear to be a split on these suggestions:
- An ambiguous preservation provision is always problematic
- Blanket claim reservations aren’t sufficient (i.e., “all claims of all types”)
- Listing claims by category or type is the minimum starting point
- Common law claims should get a more careful look
- Known common law claims should get an extra careful look
- Be as specific about names, facts, and the claims basis as possible
Third, there also doesn’t appear to be a split on the Twombly issue. To be sure, we’re unaware of any court that has addressed Twombly in the claim preservation context. However, even the 5th Circuit would be hard-pressed to insist that the preservation language survive a motion to dismiss. As pointed out in Pen, § 1123(b)(3) is not “designed to protect defendants from unexpected lawsuits.” Rather, it’s intended to permit creditors to identify and evaluate assets that might be available for distribution. Therefore, Twombly-quality pleading will almost certainly satisfy that intention, but it’s not necessary
That said, evaluating claim preservation language from the standpoint of Twombly is useful, especially for known, common law claims, particularly given that known common law claims are the claims that most often get challenged in the preservation context, even in the more “forgiving” Circuits. In fact, it’s not hard to imagine even a “forgiving” court coming down harshly on a debtor who, despite knowing about a claim and the facts surrounding that claim, buries that claim in a claim category or type when describing it. The same could be said for Chapter 5 claims, even if courts appear most-apt to accept categorical preservation for bankruptcy-type causes of action. That is, it might be onerous to disclose Chapter 5 claims on a per claim basis, especially in large cases, but their pertinent facts are generally known or available.
Arguably, the Circuits are less “split” on the claim preservation issue than they used to be and, except for the 5th Circuit, which is still evolving, most Circuits or their lower courts that have weighed-in agree that, with limited case-by-case exceptions, preserving claims by category or type will satisfy § 1123(b)(3). Most courts are more forgiving in larger cases than they are in smaller cases; for Chapter 5 claims than they are for common law claims; for unknown claims than they are for known claims; and for good faith claim investigation than they are for “hiding the ball.”
Focusing on, if not complying with, Twombly will not only assist practitioners in interviewing their debtor clients about potential claims, but also about how much due diligence and specificity a case’s circumstances warrant. Finally, it’s not hard to imagine the Supreme Court, if presented with this hairline split, forcing Twombly onto it, as the Court is prone to apply what it knows (e.g., Twombly) to the areas that it’s not fond of (e.g., bankruptcy).