VOLUME 7 NUMBER 5 JULY/AUGUST 2011

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1 Pratt s Journal of Bankruptcy Law VOLUME 7 NUMBER 5 JULY/AUGUST 2011 HEADNOTE: NO-CALL PROVISIONS, DUAL-FILED REORGANIZATION PROCEEDINGS Steven A. Meyerowitz 385 THE TREATMENT OF NO-CALL PROVISIONS, PREPAYMENT PREMIUMS, AND MAKE-WHOLE DAMAGES UNDER THE BANKRUPTCY CODE David S. Elkind and James Chang 387 THE HAZARDS OF DUAL-FILED REORGANIZATION PROCEEDINGS IN CANADA AND THE UNITED STATES Rachelle F. Moncur and Rowena White 398 BANKRUPTCY AND INSURANCE: WHEN THEY MEET AT THE CORNER Franklin Ciaccio 415 NOW YOU SEE IT, NOW YOU DON T: IMPRECISE CLAIM PRESERVATION LEADS TO EVAPORATING VALUE Bennett S. Silverberg and Sarah E. Castle 429 NON-JUDICIAL FORECLOSURE OF AIRCRAFT COLLATERAL: UNIQUE CHALLENGES FOR LENDERS Michael A. Nardella 436 UNWRAPPING ENGLISH PRE-PACKAGED ADMINISTRATIONS: A GUIDE TO PRE-PACKS Alastair Goldrein 444 TREATMENT OF BOND DEBT AND INTERCOMPANY CLAIMS UNDER MEXICAN BANKRUPTCY LAW Luis Enrique Graham, Salvador Fonseca, and Sergio Rodriguez Labastida 450 IN RE TOUSA, INC.: COMMERCIAL LENDING AND DEBT TRADING MARKETS BREATHE A SIGH OF RELIEF Larren M. Nashelsky, Rafael L. Petrone, Geoffrey R. Peck, and Chrys A. Carey 454 ANOTHER DERIVATIVES DISPUTE RESOLVED IN FAVOR OF LEHMAN Christy L. Rivera 461 BANKRUPTCY COURT HOLDS THAT THE SECTION 546(E) SAFE HARBOR DOES NOT APPLY TO SETTLEMENT PAYMENTS MADE IN A SMALL, PRIVATE LEVERAGED BUYOUT THAT POSES NO SYSTEMIC RISK TO THE SECURITIES MARKET Jason H. Watson, David A. Wender, and Jonathan T. Edwards 466 WHETHER THE GOODS AND INVOICES COMPRISING PENDING 503(B)(9) CLAIMS MAY BE INCLUDED IN A 547(C)(4) SUBSEQUENT NEW VALUE DEFENSE TO A PREFERENCE ACTION George D. Gaskin III 470

2 EDITOR-IN-CHIEF Steven A. Meyerowitz President, Meyerowitz Communications Inc. ASSISTANT EDITOR Catherine Dillon BOARD OF EDITORS Scott L. Baena Bilzin Sumberg Baena Price & Axelrod LLP Leslie A. Berkoff Moritt Hock & Hamroff LLP Andrew P. Brozman Clifford Chance US LLP Kevin H. Buraks Portnoff Law Associates, Ltd. Peter S. Clark II Reed Smith LLP Thomas W. Coffey Tucker Ellis & West LLP Mark G. Douglas Jones Day Timothy P. Duggan Stark & Stark Gregg M. Ficks Coblentz, Patch, Duffy & Bass LLP Mark J. Friedman DLA Piper Rudnick Gray Cary US LLP Robin E. Keller Lovells William I. Kohn Schiff Hardin LLP Matthew W. Levin Alston & Bird LLP Alec P. Ostrow Stevens & Lee P.C. Deryck A. Palmer Cadwalader, Wickersham & Taft LLP N. Theodore Zink, Jr. Chadbourne & Parke LLP PRATT S JOURNAL OF BANKRUPTCY LAW is published eight times a year by A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC , Copyright 2011 THOMPSON MEDIA GROUP LLC. All rights reserved. No part of this journal may be reproduced in any form by microfilm, xerography, or otherwise or incorporated into any information retrieval system without the written permission of the copyright owner. Requests to reproduce material contained in this publication should be addressed to A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC , fax: For permission to photocopy or use material electronically from Pratt s Journal of Bankruptcy Law, please access or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, CCC is a not-for-profit organization that provides licenses and registration for a variety of users. For subscription information and customer service, call Direct any editorial inquires and send any material for publication to Steven A. Meyerowitz, Editor-in-Chief, Meyerowitz Communications Inc., PO Box 7080, Miller Place, NY 11764, smeyerow@optonline.net, (phone) / (fax). Material for publication is welcomed articles, decisions, or other items of interest to bankers, officers of financial institutions, and their attorneys. This publication is designed to be accurate and authoritative, but neither the publisher nor the authors are rendering legal, accounting, or other professional services in this publication. If legal or other expert advice is desired, retain the services of an appropriate professional. The articles and columns reflect only the present considerations and views of the authors and do not necessarily reflect those of the firms or organizations with which they are affiliated, any of the former or present clients of the authors or their firms or organizations, or the editors or publisher. POSTMASTER: Send address changes to Pratt s Journal of Bankruptcy Law, A.S. Pratt & Sons, 805 Fifteenth Street, NW., Third Floor, Washington, DC ISSN

3 Now You See It, Now You Don t: Imprecise Claim Preservation Leads to Evaporating Value BENNETT S. SILVERBERG AND SARAH E. CASTLE A Texas bankruptcy court opinion should sound a note of caution for the beneficiaries of post-confirmation litigation trusts (and those that may purchase interests in these trusts) to closely perform diligence during the confirmation process and in their existing or potential investments. A recent decision by a Texas bankruptcy court should encourage holders of claims against Chapter 11 debtors to dust off previously confirmed Chapter 11 plans and, in the future, pay closer attention to the Chapter 11 plan confirmation process of their distressed borrowers. The decision in In re MPF Holdings US LLC 1 ( MPF ) highlights the risk that a debtor s imprecise disclosure of pre-confirmation causes of action assigned to a post-confirmation litigation trust could cost creditors their recoveries under the reorganization plan. 2 In an opinion somewhat critical of modern-day restructuring practice, Texas Bankruptcy Judge Jeff Bohm recently stated that the Fifth Circuit could well be telegraphing to the bankruptcy bar that the now you see it, now you don t provisions in plans are no longer acceptable: either the plan sets forth absolutely who Bennett S. Silverberg is Of Counsel in DLA Piper LLP (US) s Financial Restructuring group, based in the New York office. Mr. Silverberg may be contacted at Bennett.Silverberg@dlapiper.com. Sarah E. Castle is with the Financial Restructuring group based in the New York office, admission pending. 429 Published by A.S. Pratt in the July/August 2011 issue of Pratt s Journal of Bankruptcy Law. Copyright 2011 THOMPSON MEDIA GROUP LLC

4 PRATT S JOURNAL OF BANKRUPTCY LAW will be sued and on what basis or no suit will be allowed. 3 MPF renews the debate over the extent of disclosure required by the reservation and enforcement provision of the Bankruptcy Code. 4 At the end of the day, creditors bear the risk of non-compliance. The Bankruptcy Code does not speak to the level of disclosure or specificity required to preserve such claims or interests. It seems logical that creditors being asked to vote in favor of a plan should be provided with sufficient information regarding their benefits and potential liabilities to cast an intelligent vote. 5 However, it seems incongruous that parties with the least interest in pursuing litigation against creditors post-confirmation (i.e., the debtor and, in some instances, the creditors committee) would (and should) fully perform diligence and evaluate whether to pursue the causes of action reserved for prosecution by the creditors litigation trust. 6 Nevertheless, despite the apparent conflict of interest, the court in MPF held that reorganization plans must identify, with particularity, those claims being transferred to litigation trusts and whether, in fact, such claims and causes of action will be pursued. This leaves debtors and/or their creditors committees (that may not have any litigation trust beneficiaries among their members) to properly and fully perform diligence on claims against third parties and determine whether the litigation trust will or will not seek to prosecute such claims. Undoubtedly, defendants to litigation brought by litigation trusts will seek to expand the application of MPF nationally. Therefore, the impact of this case on the value of interests in litigation trusts could be widespread and have disastrous results for investors in those interests. SECTION 1123 OF THE BANKRUPTCY CODE Bankruptcy Code Section 1123(b)(3)(B) the reservation and enforcement provision provides a vehicle for post-confirmation entities to pursue claims on behalf of the creditor body. Specifically, Section 1123(b) (3) states that a 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 430

5 IMPRECISE CLAIM PRESERVATION interest. Frequently, the representative of the estate appointed for such purpose is a post-confirmation entity formed by the plan. 7 The entity then pursues the preserved claims and interests on behalf of certain of the debtor s creditors. The beneficiaries of the trust may be only a subset of the creditor body as of the bankruptcy filing date. Debtors have accepted the fact that some amount of disclosure of the litigation being transferred to a litigation trust is necessary to properly preserve the causes of action for the benefit of the litigation trust. In most jurisdictions, it has been sufficient to include a statement in the plan providing for the assignment of all claims and causes of action of a specific type held by debtors to the post-confirmation litigation trust. For example, debtors would include a provision in their Chapter 11 plan stating that all potential avoidance actions (specifically those created by Chapter 5 of the Bankruptcy Code) and other claims held by the debtors against their lenders, former directors and officers, and others were being transferred to the post-litigation trust for the benefit of creditors. MPF s plan of reorganization conformed to prior precedent in the Fifth Circuit it transferred the debtors interest in any avoidance action that might have existed against the transferees identified in the debtors statements of financial affairs to the post-confirmation litigation trust. THE SPECIFIC AND UNEQUIVOCAL BANKRUPTCY COURT DECISION IN MPF The bankruptcy court judge in MPF ruled that MPF s Chapter 11 plan lacked the necessary precision to preserve the litigation actions. In so ruling, the court held that the litigation trustee lacked standing to prosecute the preference actions and that the court lacked subject matter jurisdiction over the actions. Clarifying prior case law on the subject in the Fifth Circuit, Judge Bohm held that a generic reservation to pursue pre-confirmation causes of action, including preference suits, post-plan consummation does not satisfy the bright-line test established by the Fifth Circuit in United Operating. 8 Based on Judge Bohm s interpretation of United Operating, the bright-line test is as follows: 431

6 PRATT S JOURNAL OF BANKRUPTCY LAW Parties to be sued after confirmation must be individually identified in the plan or disclosure statement by reference in the plan; The legal basis for such suits must be set forth in the plan; and The plan must state that the putative defendants will be sued not that they may be sued, could be sued, or might be sued. 9 The MPF plan, according to Bankruptcy Court Judge Bohm, failed to pass all prongs of the specific and unequivocal test. The court did not disagree that the causes of action were specifically reserved the MPF plan identified the putative defendants by referencing the debtors statement of financial affairs. 10 These schedules set out the names and addresses of the putative defendants and the amounts paid to them within 90 days of the commencement of MPF s Chapter 11 case. The court, however, found that it was not unequivocal, after reviewing the debtor s plan documents, whether the putative defendants were going to be sued. As a result, the court held that the adversary proceedings were not properly preserved for the benefit of the post-confirmation litigation trust and could not be maintained. The creditors of MPF that were beneficiaries to the post-confirmation litigation trust, consequently, lost the benefit of these potential litigation recoveries. The decision in MPF has been certified by Judge Bohm for appeal directly to the Fifth Circuit Court of Appeals. 11 FACTS AND CIRCUMSTANCES: NO BRIGHT LINES IN THE OTHER FEDERAL CIRCUITS Courts in the other federal circuits have also confronted this same issue, but have come at the problem from a different direction. While it is nearly uniformly accepted that a blanket reservation of rights in a plan of reorganization is insufficient, 12 courts differ significantly on what is sufficient. Some courts require a high degree of specificity to preserve postconfirmation claims; 13 others do not. 14 Nevertheless, outside of the Fifth Circuit, no other courts have focused on the unequivocal requirement identified by the MPF court. Rather, to date, the emphasis has been on confirming whether the debtor has identified with specificity which claims the debtor is preserving post-confirmation. 432

7 IMPRECISE CLAIM PRESERVATION Underlying the Bankruptcy Code is a policy of moving companies through the reorganization process quickly and efficiently so they may emerge rehabilitated and ready for business. This goal seems at odds with those courts, including the MPF court, that have held that the debtor should bear the burden of investigating and assessing the merits of every potential cause of action the debtor could possibly hold. In observing this apparent policy conflict even before the MPF decision was rendered, Delaware Bankruptcy Court Judge Peter J. Walsh stated that: [T]he confirmation process is expedited by allowing debtors to include a general reservation of their right to pursue certain causes of action at a later date in large [C]hapter 11 cases, the investigation and litigation of all possible avoidance actions to final judgment can take years. To force the debtor to remain in bankruptcy until a final determination of all possible preference actions is made would act as a detriment to both the debtor and its creditors by slowing down the reorganization process. In most of the large [C]hapter 11 cases in this court, the plan of reorganization and/or liquidation is often confirmed before the debtor and/or a trustee has undertaken a detailed investigation of the potential preference actions. More often than not, it is appropriate to delay that undertaking until after plan confirmation. 15 This statement confirms the general sentiment that a thorough and complete investigation of all causes of action potentially available to the debtor or its estate simply does not happen. If the courts require such a level of diligence, the courts, debtors, and creditors should anticipate far more costly and time consuming Chapter 11 cases. CONCLUSION: WILL CREDITORS BEAR THE PRICE? As the MPF decision is appealed, holders of claims and distressed debt traders should be aware of the significant impact such a decision may have on the value of their claims if the MPF decision became widely accepted. Creditors will bear the risk if defendants to actions brought by post-confirmation litigation trusts are successful in arguing that the action against them was not adequately preserved. By the time the adequacy of 433

8 PRATT S JOURNAL OF BANKRUPTCY LAW disclosure is challenged, there is no available retroactive fix. The claims are lost forever. The MPF decision may be an isolated, aberrant decision. Even if true, the decision should sound a note of caution for the beneficiaries of postconfirmation litigation trusts (and those that may purchase interests in these trusts) to closely perform diligence during the confirmation process and in their existing or potential investments. The MPF appeal, and the uncertainty it creates in the claims trading marketplace, is something that distressed debt investors need to watch carefully. This recent case demonstrates the importance of not only ensuring there is adequate disclosure in Chapter 11 reorganization plans, but also ensuring that the risks associated with making a potential investment in claims against a Chapter 11 debtor are properly and fully investigated before committing to the investment. NOTES B.R. 736 (Bankr. S.D. Tex. 2011). 2 The post-confirmation litigation trust was the post-consummation legal entity created by MPF s reorganization plan to pursue such claims on behalf of creditors. 3 MPF, 443 B.R. at U.S.C. 1123(b)(3)(B) (2010). 5 MPF, 443 B.R. at The debtor, which may have an ongoing relationship with the putative defendants to the litigation reserved to the litigation trust, generally has little interest in associating itself with the litigation. Rather, the debtor is counting on the support of these vendors and potential defendants to reorganize and would prefer that no litigation be commenced against its business partners. The debtor also has little incentive to expend precious resources (both time and money) investigating the merits of any such litigation or determining on behalf of the creditor body which such contingent claims should be prosecuted by the litigation trust. 7 The entity can take many forms. For example, the post-confirmation entity can be the reorganized debtor, a limited liability company (with membership interests distributed to creditors under the reorganization plan), a corporation (with shares in corporation distributed to creditors under the reorganization plan) or a litigation trust (with beneficiaries interests distributed to the debtor s 434

9 IMPRECISE CLAIM PRESERVATION prepetition creditors). For the purpose of this article and our analysis, we will assume that the post-confirmation entity is a litigation trust. 8 Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351, 355 (5th Cir. 2008) (holding that in order to effectively preserve causes of action, the plan must expressly retain the right to pursue such causes of action and the retention language must be specific and unequivocal ). 9 MPF, 433 B.R. at Id. at As of the date of publication, the Fifth Circuit has not yet accepted this appeal. 12 Courts generally consider blanket reservation of rights language in the plan to be deficient, such as the following provision: In accordance with section 1123(b) of the Bankruptcy Code, the Company shall retain and may enforce any claims, rights, and causes of action that the Debtor or its bankruptcy estate may hold against any person or entity, including, without limitation, claims and causes of action arising under sections 542, 543, 544, 547, 548, 550 or 553 of the Bankruptcy Code. In re Pen Holdings, Inc., 316 B.R. 495, 502 (Bankr. M.D. Tenn. 2004). 13 See, e.g., Browning v. Levy, 283 F.3d 761, (6th Cir. 2002) (requiring identification of names and factual basis for reserved claims); D & K Properties Crystal Lake v. Mutual Life Ins. Co. of New York, 112 F.3d 257, 261 (7th Cir. 1997) (stating that identification of preserved cause of action must not only be express but must be specific ); In re Kelley, 199 B.R. 698, 704 (9th Cir. BAP 1996) (stating that a court will preclude a debtor from asserting an action post confirmation unless the debtor mention[s] the cause of action [to be preserved] in either his schedules, disclosure statement, or plan ). 14 See, e.g., In re Perry H. Koplik & Sons, Inc., 357 B.R. 231, 246 (Bankr. S.D.N.Y. 2006) (stating that reorganization plans may reserve claims in general terms); In re I. Appel, 300 B.R. 564 (S.D.N.Y. 2003), aff d 104 Fed. Appx. 199 (2d Cir. 2004) (following Ampace and finding that [i]t 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 high degree of specificity required by certain other jurisdictions); In re Ampace, 279 B.R. 145, 158 (Bankr. D. Del. 2002) [hereinafter Ampace] ( [T] here is nothing in [Bankruptcy Code Section 1123] to suggest that the plan must specifically identify each and every claim and/or interest belonging to the debtor that may be subject to retention and enforcement. ). 15 Ampace, 279 B.R. at