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.

Conclusion

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).

If you’d like to stay on top of this and other important bankruptcy confirmation issues, then you can subscribe to Plan Proponent via email here.

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.

Facts

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.

Law

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.

Eastman

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.

MF Global

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.

Twombly

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.

Conclusion

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.

If you’d like to stay on top of this and other important bankruptcy confirmation issues, then you can subscribe to Plan Proponent via email here.