In re: Arctic Glacier International, Inc.

Filing 17

MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 6/14/2017. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

)
)
)
)
Debtors in a Foreign Proceeding.
----------------- )
)
)
Eldar Brodski Zardinovsky a/k/a Eldar Brodski
a/k/a Eldar Brodski (Zardinovsky), EB Books, Inc.,
)
)
EB Design, Inc., EB Online, Inc., EB Imports, Inc.,
Lazdar Inc., Eldar Brodski Inc., Y Capital Advisors Inc., )
)
Valley West Realty Inc., Ruben Brodski, Ruben
Brodski Inc., Ester Brodski, and Yehonathan Brodski,
)
)
)
Appellants,
)
v.
)
)
Arctic Glacier Income Fund, James E. Clark,
Gary A. Filmon, David R. Swaine, and Hugh A. Adams, )
)
)
Appellees.
In re:
Arctic Glacier International, Inc.,

Chapter 15
Bank. No. 12-10605 (KG)
Adv. Proc. No. 15-51732 (KG)

Civ. No.16-617(SLR)

Kevin S. Mann, Esquire, of Cross & Simon, LLC, Wilmington, Delaware. Counsel for Eldar
Brodski Zardinovsky a/k/a Eldar Brodski a/k/a Eldar Brodski (Zardinovsky), EB Books, Inc.,
EB Design, Inc., EB Online, Inc., EB Imports, Inc., Lazdar Inc., Eldar Brodski Inc., Y Capital
Advisors Inc., Valley West Realty Inc., Ruben Brodski, Ruben Brodski Inc., Ester Brodski,
and Yehonathan Brodski.
Paul N. Heath, Esquire, Marcos A. Ramos, Esquire, and Brendan J. Schlauch, Esquire, of
Richards Layton & Finger, P.A., Wilmington, Delaware; David Woodcock, Esquire, Mark W.
Rasmussen, Esquire, Arielle S. Tobin, Esquire, and Allison L. Fuller, Esquire, of Jones Day,
Dallas, Texas. Counsel for Arctic Glacier Income Fund, James E. Clark, Gary A. Filmon,
David R. Swaine, and Hugh A. Adams.

MEMORANDUM OPINION

Dated: June /4 , 2017
Wilmington, Delaware

R~N,

enior District Judge

I. INTRODUCTION
Appellants Eldar Brodski Zardinovsky and others (collectively "plaintiffs") 1 filed this
appeal on July 19, 2016. (D.I. 1) The appeal arises from an opinion and order entered by
the bankruptcy court on July 13, 2016 dismissing a post-petition adversary proceeding
complaint filed by plaintiffs against debtor Arctic Glacier Income Fund ("AGIF") and
defendants James E. Clark, Gary A Filmon, David R. Swaine, and Hugh A Adams
(collectively, the "individual defendants," 2 and together with AGIF, the "defendants").
Zardinovsky, et al. v. Arctic Glacier Income Fund, et al. (In re Arctic Glacier Int'/, Inc.), 2016

WL 3920855, No. 15-51732 (KG) (Bankr. D. Del. July 13, 2016).
Following confirmation of AGIF's Plan of Arrangement ("Plan") under Canada's
Companies' Creditors Arrangement Act (the "CCAA"), plaintiffs purchased units in AGIF
between December 16, 2014 and January 22, 2015. On January 22, 2015, pursuant to the
Plan's distribution procedure, defendants made distributions to those who held units as of
December 15, 2014 - in other words, to those who sold their units to plaintiffs. The
complaint alleges that under U.S. securities law, defendants should have made distributions
to plaintiffs, rather than to the selling unitholders. 3 Defendants moved to dismiss the
complaint on the bases that: (i) various releases contained in the confirmed Plan and
confirmation orders insulate defendants from liability, and (ii) under the doctrine of res
judicata, defendants were only obligated to make distributions pursuant to the Plan, not U.S.

1

EB Books, Inc., EB Design, Inc., EB Online, Inc., EB Imports, Inc., Lazdar Inc., Eldar
Brodski Inc., Y Capital Advisors Inc., Valley West Realty Inc., Ruben Brodski, Ruben
Brodski Inc., Ester Brodski, and Yehonathan Brodski.
2 Individual defendants James E. Clark, Gary A. Filmon, and David R. Swaine were at all
relevant times trustees of AGIF; individual defendant Hugh A Adams was at all relevant
times secretary of AGIF.
3 "Unitholder" is the term used in the Plan (as defined herein) for shareholders.

securities law and, therefore, defendants violated no law in making the distributions. The
bankruptcy court agreed with defendants and dismissed the complaint. See Arctic, 2016
WL 3920855, at *1. For the reasons set forth herein, the court will affirm.
II. BACKGROUND 4
A. Insolvency Proceedings

AGIF was an income trust based in Canada which owned a group of companies that
manufactured and distributed packaged ice. 5 AGIF was listed on the Canadian Securities
Exchange ("CSE") under the symbol "AG.UN." AGIF's units traded on the U.S.-based OverThe-Counter ("OTC") market under the symbol "AGUNF."

(A?,~

34; A11,

~

55) On

February 22, 2012, AGIF and its affiliates commenced insolvency proceedings in Canada
under the CCAA. (A6,

~

26) The same day, the Canadian court appointed a monitor, and

the monitor commenced ancillary proceedings in the bankruptcy court under Chapter 15 of
the Bankruptcy Code. In the CCAA proceedings, under the supervision of the monitor and
the Canadian court, AGIF sold substantially all of its assets, and the proceeds were
sufficient to pay AGIF's secured creditors in full. (A5,

~

27) The remaining proceeds were

held by the monitor pending determination of the amount of creditor claims and the filing of
the Plan to govern distribution of the remaining proceeds to unsecured creditors and, to the
extent that all creditors could be paid in full, to make distributions to AGIF's unitholders.

B.

Plan, Sanction Order, and Recognition Order

AGIF held a meeting of unitholders to consider and vote on the Plan, and notice of
the meeting was provided to all unitholders. (See A350-401) The Canadian court
determined there had been sufficient notice of the meeting to unitholders, as well as

4

The bankruptcy court set forth a detailed summary of the factual and procedural
background in its memorandum opinion. See Arctic, 2016 WL 3920855, at *1-*14.
5 Citations to "A_" are to the appendix filed in support of plaintiffs' opening brief (D.I. 9).

2

sufficient service of documents related to the meeting. (A587,

~

3) The Plan was approved

by 99.81% of all unitholders who voted, and over 65% of unitholders voted. (A199; A44143) The Plan and orders contained provisions that released defendants from liability for any
actions or omissions related to, arising out of, or connected with the Plan. Each unitholder
was deemed to have consented and agreed to all provisions of the Plan, including the
releases. (A592, ~ 19(a)) The Plan, once approved, was binding not only on unitholders
but also on their "successors and assigns." (A 161,

~

1.3) The Canadian court approved

and sanctioned the Plan pursuant to the CCAA on September 5, 2014 (the "Sanction
Order"). The plan implementation date occurred on January 22, 2015. (A8-9,

~~

39, 45;

A584-604) The Sanction Order declared that the terms of the Plan governed the conduct of
AGIF and related parties as of the date of signing, and authorized them "to take all steps
and actions necessary or appropriate to implement the Plan":
[T]he Arctic Glacier Parties, 6 the Monitor and the CPS, 7 as the case may be, are
hereby authorized and directed to take all steps and actions necessary or
appropriate to implement the Plan in accordance with and subject to its terms
and conditions, and enter into, adopt, execute, deliver, complete, implement
and consummate all of the steps, ... distributions, payments, deliveries,
allocations, instruments, agreements and releases contemplated by, and subject to
the terms and conditions of, the Plan, and all such steps and actions are hereby
approved. Further, to the extent not previously given, all necessary approvals to
take such actions shall be and are hereby deemed to have been obtained from the
Directors, Officers, or Trustees, as applicable ....
(A589-90,

~

12) On September 16, 2014, the bankruptcy court entered an order (A460-66)

("Recognition Order") 8 recognizing the Sanction Order and giving "full force and effect in the

6

"Arctic Glacier Parties" is defined in the Plan as including AGIF and various other entities,
but not the individual defendants. (See A 151, § 1.1)
7 "CPS" is defined in the Plan as "7088418 Canada Inc. o/a Grandview Advisors and any
successor thereto appointed by the CCAA Court." (A 153, § 1.1) CPS, together with the
monitor, were empowered under the Sanction Order to administer and distribute available
funds under the Plan. (See A598, ~ 34)
8 The Sanction Order and the Recognition Order are referred to collectively herein as the
"Orders."

3

United States" to its provisions. (A462,

~

2) The Recognition Order provided that "due and

sufficient notice" of both the motion seeking approval and the Sanction Order itself had
been given and that "no other or further notice need be provided." (A461)
C.

Distribution Procedures Under the Plan and Orders

The Plan provides detailed procedures for the distribution to unitholders. Section 6.2
limits distributions "to each Registered Unitholder, as of the applicable Unitholder
Distribution Record Date." (A 168, § 6.2) Section 6.2 of the Plan provided that the monitor
would declare a record date that would determine which unitholders were eligible to receive
the distribution, and that the transfer agent would pay the distribution to each registered
unitholder as of the record date. Specifically, the Plan provided:
The Monitor shall declare a Unitholder Distribution Record Date prior to any
distribution .... On the Plan Implementation Date or on any Distribution Date, as the
case may be, the Monitor shall transfer amounts as determined by the Monitor in
accordance with the [Plan] ... to the Transfer Agent .... [l]n no event later than five
(5) Business Days following receipt of the Unitholder Distribution, the Transfer
Agent shall distribute each Unitholder Distribution ... to each Registered
Unitholder, as of the applicable Unitholder Distribution Record Date ... based
on each Registered Unitholder's Pro Rata Share ....
(A 168, § 6.2) (emphasis added) The Plan further provided that the unitholder distribution
record date must be "at least 21 days prior to a contemplated Unitholder Distribution ... "
(A 159, § 1.1)
Section 8.3 of the Plan provides the steps and transactions to be undertaken on the
plan implementation date:
The steps, transactions, settlements and releases to be effected in the
implementation of the [Plan] shall occur, and be deemed to have occurred, in the
following order without any further act of formality ...
(a) the Monitor ... shall use the Available Funds to fund the following reserves and
distribution cash pools in the order specified below:
(i) Administrative Costs Reserve;
(ii) Insurance Deductible Reserve;
(iii) Unresolved Claims Reserve;
(iv) Affected Creditors' Distribution Cash Pool; and

4

(v) Unitholders' Distribution Cash Pool;
and administer such reserves and distribution cash pools pursuant to and in
accordance with the [Plan];
***
(d) the steps, assumptions, distributions, transfers, payments, contributions,
liquidations, dissolutions, wind-ups, reduction of capital, settlements and releases
set out in Schedule "B" of the [Plan] shall be deemed to be completed in the order
specified therein ...
(A174, § 8.3) (emphasis added) Schedule "B" to the Plan provides specific instructions as
to steps to be taken on the plan implementation date:
In order to effect the wind-up, liquidation and dissolution of certain of the Arctic
Glacier Parties to facilitate the satisfaction of Proven Claims and a distribution by the
Fund to Unitholders pursuant to and in accordance with the [Plan], the following
steps, assumptions, distributions, transfers, payments, contributions, liquidations,
dissolutions, wind-ups, reduction of capital, settlements and releases shall be
deemed to occur (a) immediately after the completion of the step set out in Section
8.3(c) of the [Plan]; (b) in the order specified in this Schedule "B"; and (c) in the
manner specified in this Schedule "B".
(A 187, Sch. B) Schedule B of the Plan provides specific instructions as to the last step in
the distribution procedures:
[AGIF] shall be deemed to have paid a distribution to each Unitholder in the amount
of their Pro Rata Share of the Unitholders' Distribution Cash Pool immediately
following the completion of Steps 1 through 29 above and such amount shall be
transferred by the Monitor to the Transfer Agent and distributed by the Transfer
Agent to the Unitholders in accordance with Section 6.2 of the [Plan].
(A197, Step 30) Section 8.3 only allows for distributions "in accordance with" the Plan (i.e.,

§ 6.2); Schedule "B" only allows for distributions "in accordance with Section 6.2 of the ...
Plan." (A187)
The Sanction Order provides that distributions shall be made in accordance with the
CCAA, the Plan, and court orders, under the exclusive authority of the monitor:
THIS COURT ORDERS AND DECLARES that, in addition to the Monitor's
prescribed rights under the CCAA, and the powers granted by this Court to the
Monitor and the CPS, as the case may be, the powers granted to the Monitor and
the CPS are expanded as may be required, and the Monitor and CPS are
empowered and authorized before, on or after the Plan Implementation Date, to take
such additional actions and execute such documents ... as the Monitor and the
CPS consider necessary or desirable in order to perform their respective functions
5

and fulfill their respective obligations under the Plan, the Sanction Order and any
Order of this Court in the CCAA Proceedings and to facilitate the implementation of
the Plan and the completion of the CCAA Proceedings, including to ... (ii)
administer and distribute the Available Funds, (iii) establish, hold, administer and
distribute . .. the Unitholders' Distribution Cash Pool, ... (v) effect
distributions to the Transfer Agent in respect of distributions to be made to
Unitholders ... and, in each case where the Monitor or the CPS, as the case may
be, takes such actions or steps, they shall be exclusively authorized and
empowered to do so, to the exclusion of all other Persons including the Arctic
Glacier Parties, and without interference from any other Person.
(A598-99,

~

34 (emphasis added)) Thus, the Sanction Order empowers the monitor to

administer and distribute funds to unitholders "without interference from any other Person"
including the Arctic Glacier Parties. (Id.) Further, the definition of "Person" includes any
"Government Authority" or any agency, regulatory body, officer or instrumentality thereof or
any entity, wherever situated or domiciled." (A 157, § 1.1) Government Authority is defined
as "any government, regulatory or administrative authority ... or other law, rule or
regulation-making or enforcing entity having or purporting to have jurisdiction on behalf of
any nation .... " (A 156, § 1.1)

E.

U.S. Securities Laws Governing Distributions

Plaintiffs do not appear to dispute that defendants made the distribution to
unitholders in accordance with the Plan. Rather, plaintiffs contend that defendants did not
comply with U.S. securities laws, which required making the distribution to plaintiffs, and this
contention is central to each of the claims in the complaint. The bankruptcy court set forth a
thorough explanation of the relevant statutes and rules in its opinion, 9 the substance of
which the parties do not appear to dispute. For the purposes of this memorandum opinion,
the court will briefly summarize the relevant authorities.
Rule 1Ob-17 of the Securities and Exchange Act of 1934 establishes an issuer's
mandatory set of disclosures if it trades on the OTC market and wishes to make a

9

See Arctic, 2016 WL 3920855, at *5-*7.

6

distribution. (A 11,

~

56) Notice of a distribution must be given to the Financial Industry

Regulatory Authority ("FINRA") 10 no later than ten days prior to the record date of an
issuer's offer of dividends. 11 (A11 ~ 58; 17 C.F.R. § 240.1 Ob-17(a) and (b)(1 ); In re
THCRILP Corp., 2006 WL 530148 at *4 (Bankr. D.N.J. Feb. 17, 2006)). The SEC gave

FINRA power to regulate payment of dividends. FINRA Rule 6490 ("Rule 6490") creates
procedures within FINRA for review and determination of the sufficiency of requests to issue
dividends. (A 12,

~~

63, 66; SEC Release No. 34-62434 (July 1, 2010) at *1)

FINRA is authorized by the SEC to adopt and administer the Uniform Practice Code
("UPC"), "the rules and regulations governing [OTC] secondary market securities
transactions." THCRILP, 2006 WL 530148 at *4. The UPC sets forth a basic framework of
rules governing broker-dealers with respect to the settlement of OTC Securities and
governs how distributions by securities issuers must be allocated to the holders of
securities. See SEC Release No. 62434 (July 1, 2010), n.8. FINRA lacks privity 12 with
issuers of OTC Securities: "FINRA does not impose listing standards for securities and

°

1

FINRA is a self-regulatory organization that regulates the OTC secondary market
pursuant to authority granted by the Securities and Exchange Commission ("SEC"). (A2, ~
1) It is the successor to the National Association of Securities Dealers, Inc. ("NASO").
FINRA "has the authority to determine the date on which a holder of AGIF units trading in
the United States ... has to own such units in order to receive a dividend." (A7, ~ 34)
"FINRA processes requests to announce and publish certain corporate actions [including
cash dividends and distributions] from issuers whose securities are quoted on the OTC ...
[and] publishes these announcements on the Daily List on its website." (A7-A8, ~~ 35-37)
11 This memorandum opinion will also refer to "distributions" and "dividends"
interchangeably. See Arctic, 2016 WL 3920855, at *1, n.3.
12 Despite the lack of privity between FINRA and issuers, the SEC notes the following
possible consequences of an issuer failing to observe the requirements of Rule 1Ob-17:
The other commenter questioned whether the proposed fees for providing CompanyRelated Action processing services might cause issuers to effect corporate actions
without notifying FINRA. In response to this point, FINRA noted that an issuer that
fails to notify FINRA of a proposed corporate action, as required by Rule 1Ob-17 is
potentially violating an anti-fraud rule of the federal securities laws and stated that
where it has actual knowledge of issuer noncompliance with Rule 10b-17, FINRA will
use its best efforts to notify the Commission.
SEC Release No. 62434 (July 1, 2010) (footnotes omitted).

7

maintains no formal relationship with, or direct jurisdiction over, issuers." Id. at *2-3. UPC
11140 determines which unitholders are entitled to a distribution. See NASO Notice to
Members 00-54 (August 2000). 13 The UPC provisions determine which unitholders are
entitled to a distribution by setting two dates: the "record date" and the "ex-dividend date"
("ex-date"). See THCRILP, 2006 WL 530148, at *5.
The record date refers to "the date fixed by the ... issuer for the purpose of
determining the holders of equity securities ... entitled to receive dividends ... or any other
distributions." Id. (citing UPC Rule 11120(e)). The record date is the date on which one
must be registered as a shareholder on the stock book of a company in order to receive a
dividend declared by that company. Thus, the record date determines to whom the issuer
sends the distribution. "The fact that an individual is the holder of record on the record date,
however, does not necessarily mean that such person is entitled to retain the dividend." Id.
at *6 (quoting Limbaugh v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 732 F.2d 859, 861
(11th Cir. 1984).
"In terms of entitlement, the ex-dividend date is the dividing line ... When stock is
sold prior to the ex-dividend date, the right to a dividend goes with the stock to the
purchaser, rather than staying with the seller." Id. (citations omitted) (emphasis added).
When stock is sold on or after the ex-date, it is "traded without a specific dividend or
distribution." 14 (A14-15, ~ 70; UPC Rule 11120(c); THCR/LP Corp., 2006 WL 530148 at *5)
The ex-date can only be set by FINRA and determines which unitholder is ultimately entitled
to the distribution. THCRILP, 2006 WL 530148 at *5. "Taken together, these two dates

13

For convenience, Rule 1Ob-17, Rule 6490, SEC Release No. 62434, UPC 11140, and
NASO Notice to Members 00-54 are referred to hereinafter as the "FINRA Rules."
14 Thus, the ex-date also determines the date when the price of the security is adjusted
downward to reflect loss of the right to the distribution. See NASO Notice to Members 0054 at *1.

8

delimit the timeframe during which a security, when sold, carries with it from the seller to the
buyer the right to receive a distribution." Id.; UPC 11140.
The ex-date generally precedes the record date, in which case the stockholder
legally entitled to the dividend is the individual to whom the dividend is sent. THCRILP,
2006 WL 530148, at *6. On the other hand, if the record date precedes the ex-date, and
the security is sold during the period between the two, the seller of the security (who held
the security on the record date) will receive the full, unadjusted price for the security, as well
as the distribution. However, the purchaser of the security - who is the holder on the exdate - will be legally entitled to the distribution. Under such circumstances, the seller will be
obligated to remit the value of the dividend to the buyer. See e.g., Sileo, Inc. v. United
States, 779 F.2d 282, 284 (5th Cir. 1986).

The FINRA Rules and the Plan's distribution procedures differ in two important
respects relevant to the appeal. First, with respect to notification requirements, the Plan
and orders make no mention of any obligations to notify FINRA, or to otherwise observe any
authority beyond the CCAA and the Plan. (A168, § 6.2; A598,

~

34) Indeed, under the

Sanction Order, compliance with any outside authority falls within the monitor's discretion,
and defendants and the monitor are released from liability for disregard of such authority.
(See A598,

~

34; A601,

~

40) The FINRA Rules, on the other hand, require that the issuer

notify FINRA ten days prior to the record date, and "further advise FINRA of, inter a/ia, the
date and amount of the dividend payment, and obtain FINRA's approval." (A14,

~

69; Rule

1Ob-17; Rule 6490)
Second, under the FINRA Rules, the size of the distribution may lead to a different
allocation. A dividend payment of 24% or less of the value of the subject security will invoke
UPC 11140(b)(1 ), which provides that "the date designated as the 'ex dividend' date shall
be the second business day preceding the record date if the record date falls on a business

9

day, or the third business day preceding the record date if the record date falls on a day
designated by the Committee as a non-delivery date." UPC 11140(b)(1 ). Where the
dividend is 25% or greater of the value of the subject security, UPC 11140(b)(2) applies,
requiring that "the ex-dividend date shall be the first business day following the payable
date." UPC 11140(b)(2).

F.

Distributions Made Under the Plan

On November 18, 2014, the monitor issued a report 15 disclosing an "Estimated
Unitholders' Distributed Cash on the Plan Implementation Date" of approximately USO
$0.153 per share. (A6, i130) The report predicted a plan implementation date around
January 8, 2015. (Id.) On December 11, 2014, AGIF published legal notices in the Wall
Street Journal, the Winnipeg Free Press, and the Globe & Mail, announcing that the
unitholder distribution record date would be December 18, 2014. (A553, A555, A557) On
December 15, 2014, AGIF issued a press release announcing that "unitholders of the Fund
as of December 18, 2014 will be entitled to receive the initial distribution from the Fund
pursuant to the [Plan]," but adding that the distribution amount had not yet been
established. (A6, i131) AGIF posted the press release, as well as a material change
report, on SEDAR:16
[AGIF] (the "Fund") announced on December 11, 2014 that unitholders of the Fund
as of December 18, 2014 will be entitled to receive the initial distribution from the
Fund pursuant to the Plan of Compromise or Arrangement ... approved by the
unitholders on August 11, 2014 (the "Plan"). The date and value of this distribution
will be announced by way of a press release once such information is determined.
(A563) Due to the three-day processing period for securities sales, only purchasers on or
before December 15, 2014, would have been registered unitholders as of the December 18,
15 The monitor issued periodic reports for purposes of public disclosure regarding AGIF.
(A6, i129)
16 SEDAR is the electronic filing system for the disclosure documents of public companies
and investment funds across Canada.
10

2014 record date. (A6-7,

~

32) AGIF did not notify FINRA of its planned dividend. As a

result, FINRA did not set an ex-date for AGIF units. (A7,

~~

33-34)

Beginning on December 16, 2014, plaintiffs began purchasing AGIF units on the
OTC market from the selling unitholders who had acquired their shares prior to confirmation
of the Plan. (A10,

~

50; A1400-02,

~~

18-19) Plaintiffs continued to purchase units up to

and including January 22, 2015. (A 10-11, ~~ 50-55) The complaint does not allege that
plaintiffs were unaware of AGIF's public disclosures. (A1-25; A39,

~

5)

On January 9, 2015, another press release announced that AGIF would implement
the Plan as soon as possible:
As previously announced by the Fund on December 15, 2014, the date and value of
the initial distribution to unitholders of the Fund, as contemplated in the Plan, will be
announced by way of a press release once such information is determined.
(A569) AGIF issued yet another press release on January 21, 2015, disclosing that the
plan implementation date would be the next day, January 22, 2015, and that "unitholders of
the Fund as of December 18, 2014 (the 'Record Date') were entitled to receive an initial
distribution from the Fund pursuant to the Plan of $0.155570 USO per unit of the Fund held
on the Record Date." (A44,

~

16; A571)

On January 22, 2015, AGIF distributed through a transfer agent $0.155570 USO per
unit to the unitholders of record as of December 18, 2014. (A8,
AGIF units were trading at approximately $0.20 per unit.
FINRA of the January 22 payable date.

(Id.,~

(Id.,~

~~

39-40) At this time,

40) AGIF did not notify

39) Given the three-day processing delay,

plaintiffs allege that the de facto and unofficial ex-date for the dividend was December 16,
2014 - the day after the last day on which a holder would have had to purchase units in
order to receive the dividend. (A6-7,

~~

32-34; A8-9,

~~

41-42) As plaintiffs began

purchasing units on December 16, 2014, they did not receive the dividend. (A10,
50)
11

~~

47, 49-

On January 23, 2015, the Investment Industry Regulatory Organization of Canada
("llROC") imposed a "trading halt" on AGIF units trading on the CSE, listing the reason for
the halt as "Pending Company Contact." (A574) FINRA also halted trading of AGIF units
on the OTC market, citing Halt Code "U1 ,"which refers to "Foreign Regulatory Halt."
(A579) llROC and FINRA lifted the trading halts on January 28, 2015. (A9,

~

44) When

trading resumed, the average unit price decreased by 75%, from a closing price of
approximately $0.21 per unit on January 22, 2015, to $0.05 per unit. (A9, ~ 45) The
decrease in unit price reflected the loss of the right to a dividend. (Id.)

G.

The Adversary Proceeding

On October 30, 2015, plaintiffs initiated the adversary proceeding by filing the
complaint.17 Plaintiffs assert that defendants "may pay dividends only with the approval of
[FINRA] ... and then only to holders of the securities that FINRA recognizes as having a
right to receive the dividend in accordance with FINRA's rules." (A2,

~

1) According to

plaintiffs, because the distributions were greater than 75% of the value of the security, UPC
11140(b)(2) applied, and plaintiffs were entitled to the dividend because they held units on
the payable date (January 22, 2015), the day before the ex-date. (A 10,

~

52) "[l]nstead of

paying [p]laintiffs the almost $2 million in dividends they were entitled to receive,
[defendants] paid the dividends to the parties who sold the units of AGIF to [p]laintiffs." (A2,
~

1) Plaintiffs allege that "Defendants violated securities rules and regulations by failing to

disclose material information relating to AGIF's decision to pay dividends that caused the
price of AGIF units to be wrongfully inflated by approximately 75% ... resulting in steep
losses to [p]laintiffs." (A2,

~

2) Plaintiffs further allege that individual defendant Adams,

AGIF's Secretary, admitted in a telephone conversation on or about March 5, 2015, that "he

17

See Zardinovsky, et al. v. Arctic Glacier Income Fund, et al., Adv. No. 15-51732 (KG)
(Bankr. D. Del.). (A 1-25)

12

had observed after the issuance of the [December 15, 2014] Press Release that there was
no change in the market price of AGIF units," that the press release "should have caused
the share price to have fallen by 75% on December 16, 2014, the first day units supposedly
began to trade without the right to receive the dividend," and "that despite this awareness ..
. [d]efendants affirmatively decided not to take any corrective." (A16-17,

,m 77-78) The

complaint asserts six causes of action, including:

Counts I and II - Common law negligence claims against all defendants based on
(i) alleged breach of their duty under the FINRA Rules to pay dividends to plaintiffs;
and (ii) alleged breach of their duty "to comply with all relevant statutes, rules,
regulations, authorities and agreements concerning the establishment of the exdate" in connection with the distribution. (A18-19, ilil 85, 86, 89, 90)
Count Ill - Breach of fiduciary duty against the individual defendants based on their
alleged failure "to ensure that dividend payments intended for unitholders were paid
to [p]laintiffs" as required by the FINRA Rules. (A 19, i193)
Count IV - Negligent misrepresentation against AGIF based on alleged failure "to
disclose material information" related to the distribution, including: (i) that AGIF
would disregard the FINRA Rules, (ii) that AGIF would "unilaterally establish the exdate without the review and approval of a regulator or exchange," and (iii) that "the
trading price of AGIF's stock had not appropriately adjusted downward to reflect"
AGIF's decision to announce a record date but not an ex-date under the FINRA
Rules. (A20, ilil 97-98)
Count V - Violation of FINRA Rules against AGIF for its alleged failure to disclose
material facts including: its disregard of FINRA Rules, its unilateral establishment of
the ex-date, and the fact that stock did not appropriately adjust downward after the
unitholder distribution record date had passed. (A21, ilil 104-107)
Count VI - Common law fraud against AGIF for its alleged failure to comply with the
FINRA Rules and to fully disclose the same material information mentioned above
with regard to the claims for negligent misrepresentation and violation FINRA Rules.
(A22-24, ilil 114-123)
Plaintiffs seek compensatory damages on all counts, reasonable attorney fees and costs,
prejudgment interest, punitive and treble damages, and the Plan distribution. (A24)
On January 21, 2016, defendants moved to dismiss the complaint under Federal
Rule of Civil Procedure 12(b)(6). (A33-77) Following the completion of briefing (A1135-81;
A1388-1412) and oral argument (see D.I. 15-3), the bankruptcy court dismissed the
13

complaint on two separate grounds: (i) the Plan's distribution procedure is a final
adjudication that supersedes any conflicting obligations that plaintiffs seek to impose
through the asserted claims; and (ii) the releases contained in the Plan and Orders barred
plaintiffs' claims. See Arctic, 2016 WL 3920855 at *15-*21. On July 19, 2016, plaintiffs filed
this appeal. (A 1730)

Ill. STANDARDS OF REVIEW
The court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(1 ), which
provides for appeals of "final judgments orders, and decrees" of the bankruptcy court. 28
U.S.C. § 158(a)(1 ). The bankruptcy court's dismissal of the adversary proceeding is a final
order. (A728-29) When reviewing an order, judgment, or decree on appeal from a
bankruptcy court, the appellate court reviews the bankruptcy court's legal determinations de

nova, its factual findings for clear error, and its exercise of discretion for abuse thereof. See
In re United Healthcare Systems Inc., 396 F.3d 247, 249 (3d Cir. 2005). Where an issue
involves mixed questions of law and fact, the appropriate standard is either plenary review
or utilization of a mixed standard. See The Hertz Corp. v. ANG Rental Corp. (In re ANG

Rental Corp.), 280 B.R. 808, 814 (D. Del. 2002), aff'd In re ANG Rental Corp., 57 Fed.
Appx. 912 (3d Cir. 2003).
IV. ISSUES RAISED ON APPEAL
Plaintiffs assert the following issues on appeal: (i) whether the bankruptcy court
erred in holding that the doctrine of res judicata bars plaintiffs' claims, even though the Plan
and Orders did not address the legal obligations on which they base their claims; (ii)
whether the bankruptcy court erred in holding that the doctrine of res judicata bars plaintiffs'
claims, even though the violations of law on which plaintiffs base their claims post-dated the
Plan and Orders; and (iii) whether the bankruptcy court erred in holding that the releases
contained in the Plan and Orders bar plaintiffs' claims, even though enforcement of the
14

releases would violate the Due Process Clause of the U.S. Constitution. (D.I. 8 at 3)

V. DISCUSSION
A.

The Plan and Orders Preclude Plaintiffs' Claims
1.

Doctrine of Res Judicata bars plaintiffs' claims

In opposition to the motion to dismiss, plaintiffs did not dispute that, as a matter of
law, defendants were required, under both U.S. and Canadian law, to comply with every
aspect of the Plan, including making distributions to unitholders in accordance with the
Plan. 18 Nor do the parties dispute that defendants in fact made distributions in accordance
with the Plan's procedures. (See A 1157,

~

51 (arguing plaintiffs "do not to hold [d]efendants

liable because of any acts in accordance with the Plan and Recognition Order") (emphasis
in original)) Rather, plaintiffs argued that defendants had "concurrent and additional
obligations" not addressed by the Plan with respect to making the distributions, including
taking steps to comply with FINRA requirements, and that defendants' failure to comply with
those additional obligations predicated the claims in the complaint. Because the Plan
neither address the alleged concurrent and additional FINRA compliance obligations nor
posed any conflict, plaintiffs argued that the Plan did not preclude their claims. (See id.)
The bankruptcy court rejected this argument, determining "the Plan's distribution
procedure is an adjudication, and to the extent that there is a conflict between that
adjudication and the FINRA Rules, the Plan will supersede." Arctic, 2016 WL 3920855 at
*15. Because plaintiffs' claims sought to impose additional duties on defendants based
upon FINRA Rules, the bankruptcy court determined plaintiffs' claims must be dismissed.
See id. at *16-*17. The bankruptcy court concluded that the imposition of any such

18

See 11 U.S.C. § 1142 (debtor "shall carry out the plan and shall comply with any orders
of the court"); A974-76 (debtor must "generally do all such acts and things in relation to [its]
property and the distribution of the proceeds among [its ] creditors as may be ... directed
by the court by any special order.").

15

additional obligations would conflict with the Plan, which provided "one, and only one"
procedure for making distributions. See id. "In other words, when faced with conflicting
obligations under the Plan and the FINRA Rules, [d]efendants must follow the former,
notwithstanding the latter." Id.
Plaintiffs continue to argue on appeal that defendants failed to comply with additional
obligations outside of the Plan's distribution procedures which included disclosures under
the FINRA Rules. (See 0.1. 8 at 20-21) Plaintiffs argue that there was "nothing in the Plan
that eliminated [defendants'] common law and statutory obligations to make" the FINRA
disclosures, nor did the Plan establish a "comprehensive scheme delineating exactly what
information [defendants] were and were not required to disclose to potential investors," thus
the Plan did not preclude the disclosure obligations. (Id. at 22) Conversely, defendants
argue that the Plan established an exclusive procedure for distributions and that the
bankruptcy court reached the correct conclusion under well settled case law that plaintiffs
claims were precluded by the Orders under the doctrine of res judiciata. (See 0.1. 10 at 17)

Res judicata "gives dispositive effect to a prior judgment if a particular issue,
although not litigated, could have been raised in the earlier proceedings." Bd. of Trs. of

Trucking Emps. of N.J. Welfare Fund, Inc. v. Centra, 983 F.2d 495, 504 (3d Cir. 1992). This
equitable doctrine requires: "(1) a final judgment on the merits in a prior suit involving (2) the
same parties or their privities; and (3) a subsequent suit based on the same cause of
action." Id. (citations omitted). For claim preclusion purposes, a plan confirmation order is
a final order on the merits. In re Bowen, 174 B.R. 840, 846 (Bankr. S.O. Ga. 1994) ("An
order confirming a plan of reorganization possesses all the requisite elements of common
law res judicata.")
The court agrees the Plan sets forth an exclusive procedure for distribution to
unitholders in section 6.2 (A 168), and it is a final order on the merits. See E. Minerals &
16

Chem. Co. v. Mahan, 225 F.3d 330, 334 (3d Cir. 2000). To the extent plaintiffs assert that
defendants failed to satisfy their obligations under the Plan, the Plan imposed no obligations
on defendants to comply with FINRA Rules or any authority outside the CCAA and court
orders. In re Howe, 913 F.2d 1138, 1143 (5th Cir. 1990) (stating it is "well settled that a plan
is binding upon all parties once it is confirmed and that all questions that could have been
raised pertaining to such plan are res judicata"). To the extent plaintiffs assert that the
Plan's distribution procedure omitted important procedures under the FINRA Rules, which
defendants were required to undertake, plaintiffs are barred from re-litigating any aspect of
the Plan, including its distribution procedures. In re Szostek, 886 F.2d 1405, 1408, 1413
(3d Cir. 1989) (confirmed plan is res judicata as to all issues decided or which could have
been decided at the hearing on confirmation); 11 U.S.C. § 1127. To the extent plaintiffs
assert that the Plan's distribution procedures conflicted with FINRA Rules, directing
distributions to the wrong unitholders, the Plan must supersede. See Bowen, 174 B.R. at
847 ("the binding effect of a confirmed plan of reorganization is such that res judicata
applies even when the plan contains provisions that are arguably contrary to applicable law
... [c]onsequently, challenges to a confirmed plan of reorganization which allege that the
plan is contrary to applicable law, either bankruptcy or otherwise, are bound to be
unsuccessful."); Karathansis v. THCRILP Corp., 2007 WL 1234975, *5 n.18 (D.N.J. Apr. 25,
2007), aff'd 298 Fed. App'x 120 (3d Cir. 2008) (prior decision interpreting "UPC 11140 as to
trump the confirmed plan constitutes an errant conclusion of law"). The bankruptcy court
correctly concluded that the res judicata effect of the Plan and Orders preclude plaintiffs'
claims.
Plaintiffs further argue that, in reaching the conclusion that their claims are barred
under the doctrine of res judicata, the bankruptcy court overlooked a critical fact: all events
on which plaintiffs base their claims occurred after the confirmation of the Plan. (See 0.1. 8
17

at 15) According to plaintiffs, "it is well settled law that the doctrine of res judicata is
inapplicable to claims based on post-confirmation acts" and, therefore, the Plan and Orders
could not have addressed or resolved plaintiffs' claims. (Id.; D.I. 16 at 2-3) Plaintiffs cite

Donaldson and J&K Adrian Bakery in support, but both cases are factually distinguishable
and involved unrelated post-confirmation wrongful conduct.
In Donaldson, the bankruptcy court approved a chapter 11 plan requiring two
principals of a corporation, who were its sole officers and shareholders, to guarantee
payments to taxing authorities for which they were personally liable, along with partial
payments on account of unsecured claims. See Donaldson v. Bernstein, 104 F.3d 547, 554
(3d Cir. 1997). After paying the tax obligations, the reorganized debtor failed to make
remaining payments as required by the plan, claiming that adverse business conditions
caused it to miss its payments. Thereafter, the chapter 11 case was reopened and
converted to chapter 7. See id. at 551. The chapter 7 trustee filed an action against
defendants alleging that they obtained confirmation of the plan under false pretenses,
knowing they would not fund the plan after payment of the tax debts for which they were
personally liable, and seeking damages on the basis of post-confirmation breach of fiduciary
duty for allegedly having diverted business opportunities and funds from the reorganized
debtor to a separate company they owned and controlled. The Donaldson court determined
that the action was not barred by the doctrine of res judicata because "claims for postconfirmation acts are not barred by the res judicata effect of the confirmation order." Id. at
555. Unlike this case, however, defendants in Donaldson failed to comply with the terms of
the chapter 11 plan. See id. ("[t]he gravamen of the trustee's complaint is that [defendants]
breached their fiduciary duty after plan confirmation by failing to comply with [the plan] and
by diverting [debtor's] business opportunities).
In J&K Adrian Bakery, the court considered whether to dismiss a complaint asserting
18

claims relating to a chapter 11 debtor's alleged damage to property it occupied under a
commercial lease. ·See J&K Adrian Bakery, LLC v. Dayton Superior Corp. (In re Dayton

Superior Corp.), 2013 WL 153744, *1 (Bankr. D. Del. Jan. 15, 2013). The debtor confirmed
a chapter 11 plan in October 2009, which required rejection damages claims to be filed
within 30 days of the date debtor vacated the leased premises. Id. In November 2009,
plaintiff filed a rejection damages claim. Id. at *2. In August 2010, following negotiations,
the bankruptcy court entered a stipulated order resolving the amount of plaintiff's rejection
damages claim. Id. However, debtor failed to vacate the property until January 2011,
during which period the property damage occurred. Id. While the confirmation order barred
all claims not filed within a specified period "unless otherwise ordered by this court," the
court permitted the action for post-confirmation property damage to go forward based upon,

inter alia, (i) the court's authority to "otherwise order" under the express language of the
confirmation order, and (ii) the court's analysis of equitable considerations. Id. at *5.
The doctrine of res judicata is meant to give dispositive effect to a prior judgment of
a particular issue, which although not litigated could have been raised in the earlier
proceedings. (See id.) Here, the distribution procedure issues were addressed before Plan
confirmation and entry of the Orders. Upon confirmation, the Plan's distribution procedure
became a final judgment that was binding on all parties and cannot be re-litigated. The
cases cited by plaintiffs involve different facts and do not require a different result.
2.

Plaintiffs offer no way to harmonize conflicting obligations under the
Plan and FINRA Rules

Plaintiffs further argue on appeal that the bankruptcy court erred in ruling that the
Plan must supersede the FINRA Rules because there is no conflict between the two. (See
D.I. 8 at 16-20) According to plaintiffs, the Plan and FINRA Rules address the same postconfirmation issue - dividend distributions - and the bankruptcy court was required to
19

harmonize them under the Third Circuit's ruling in Karathansis. (See id. at 12) The
bankruptcy court considered whether the Plan's distribution procedures could be
harmonized with FINRA Rules under plaintiffs' suggested approaches and concluded they
could not be harmonized. See Arctic, 2016 WL 3920855 at *15-*17. Plaintiffs argue this
holding was in error because nothing in the Plan precluded compliance with FINRA Rules,
and defendants could have sought FINRA approval and paid the dividend in accordance
with FINRA Rules under two different approaches. First, plaintiffs argue that distribution in
separate "tranches" was permissible under the Plan and would have enabled compliance
with FINRA. (See id. at 16-17) Plaintiffs further argue that defendants could have made
distributions to both the selling unitholders under the Plan and to plaintiffs under the FINRA
Rules. (See id. at 19) Despite the fact that some distributions would have been made
twice, plaintiffs argue this was not only permissible under the Plan but also required under
Third Circuit law. Because compliance with FINRA Rules would conflict with the terms of
the Plan and Orders, the court finds no error in the bankruptcy court's conclusion that the
two cannot be harmonized and the Plan must supersede.

a.

Requiring payment in tranches would conflict with the Plan

Defendants' dividend payment amounted to approximately 75% of the value of the
subject security. (A8,

~

40) In opposition to the motion to dismiss, plaintiffs argued that

defendants could have made distributions in "tranches" or separate, smaller distributions
(e.g., 24%, 24%, and 3%) without running afoul of the FINRA Rules. (See D.I. 15, 4/19/16
Hr'g. Tr. at 48:7-14; 80:9-13) A dividend payment of 24% of the value of the subject
security would have invoked UPC 11140(b)(1), rather than UPC 11140(b)(2). Subsection
(b)(1 ), which applies to smaller dividends, provides that "the date designated as the 'ex
dividend' date shall be the second business day preceding the record date ... " UPC
11140(b)(1). As the bankruptcy court observed, the procedure defendants followed when
20

announcing and distributing dividends in December 2014 through January 2015 was
consistent with both subsection (b)(1) of UPC 11140 and the Plan:
On Monday, December 15, 2014, [d]efendants announced that Thursday, December
18, 2014, would be the Unitholder Distribution Record Date. Given that the OTC
sale process takes three days, the de facto ex-date thus became Tuesday,
December 16, 2014, i.e., this was the date as of which a new security holder would
not be entitled to the dividend. UPC 11140(b)(1) also selects December 16 as the
ex-date because it is exactly two days before the December 18 Unitholder
Distribution Record Date. As the actual dividend distribution occurred on January
22, 2015, the procedure followed by AGIF was also consistent with the Plan, which
requires that "the Transfer Agent shall distribute each Unitholder Distribution ... to
each Registered Unitholder, as of the applicable Unitholder Distribution Record
Date," [which must be] "at least 21 days prior to a contemplated Unitholder
Distribution."

Arctic, 2016 WL 3920855 at *15 (internal citations and footnotes omitted). Thus, as the
bankruptcy court determined, for distributions of 24% or less, there is no conflict between
UPC 11140(b)(1) and the Plan's distribution procedures, as both allocate the distribution to
the same unitholders. However, where, as here, the dividend is 25% or greater of the value
of the subject security, UPC 11140(b)(2) applies, requiring that "the ex-dividend date shall
be the first business day following the payable date." UPC 11140(b)(2). Under subsection
(b)(2), the ex-date would be January 23, 2015, the day after the payable date of January
22, 3015, whereas the Plan required that the unitholder distribution record date - "the
dividing line between recipients and non-recipients of the distribution" - occur at least 21
days before the payable date. Thus, for larger dividends, such as the dividend at issue,
here, the FINRA Rules plainly conflict with the Plan's distribution procedures. Arctic, 2016
WL 3920855 at *15-*16.
In opposition to the motion to dismiss, plaintiffs argued that distribution via multiple
smaller tranches was both permissible under the Plan and would have harmonized the Plan
with FINRA Rules. (See D.I. 15, 4/19/16 Hr'g. Tr. at 48:7-14; 80:9-13) The bankruptcy
court could not reconcile plaintiffs' suggestion with the Plan for several reasons. First, the
21

tranches proposal "places a limitation on the Plan's dividend procedure" whereas "the Plan
makes no distinction between small and large dividends" and "[i]ts procedure is clearly
intended to apply to any dividend, of whatever size." Arctic, 2016 WL 3920855 at *16.
Moreover, the bankruptcy court concluded that "[t]o impose on the Plan FINRA's distinction
between small and large dividends is to conclude that the Plan is not comprehensive as to
its distribution procedure, even though it indicates that it is." Id. To do so also would have
"limit[ed] the Monitor's discretion in making distributions, contrary to the Sanction Order's
prohibition of such limitations," thus the bankruptcy court concluded that plaintiffs' tranches
proposal did not offer a way to harmonize the Plan. Id.
On appeal, plaintiffs argue that there was no basis for the bankruptcy court to
conclude that the Plan was comprehensive, as it does not set forth the number of dividend
payments, the amounts of the payments, the currency in which payments must be made, or
what was to occur during the period between Plan confirmation and the distribution to
unitholders. (See D.I. 8 at 18) Plaintiffs further argue that the Sanction Order did not
"prohibit limitations" on the monitor's discretion - rather, the bankruptcy court inferred this and with respect to post-confirmation events, all inferences should be drawn in favor of
interpreting a bankruptcy Plan in a manner consistent with statutes and regulations. (See
id. at 17-18). Conversely, defendants argue that the Plan does not allow for the monitor to

modify the amount or timing of distributions, and the bankruptcy court properly held that the
Plan presented "one, and only one" path for making distributions. (See D.I. 10 at 19)
The court agrees that the Plan permits no limitation on the monitor's discretion, is
comprehensive as to its distribution procedure, and does not include a procedure for
separate distributions. In accordance with the Sanction Order, the monitor is obligated only
to follow the CCAA, the Plan, and the Orders. (A598,

~

34 (the monitor or CPS "shall be

exclusively authorized and empowered to [make distributions], to the exclusion of all other
22

Persons, including the Arctic Glacier Parties, and without interference from any other
Person.")) As the bankruptcy court notes, where the Plan imposes applicable law
requirements, it does so explicitly. Arctic, 2016 WL 3920855 at *16 (citing Plan at A170-72,
§§ 6.1 O(a), 6.1 O(b), 6.11, 6.13). The Plan does not subject the monitor to any applicable
law requirements in discharging its obligations under the distribution procedures set forth in
section 6.2. (A 168) The Plan is also comprehensive. Section 8.3 and Schedule "B" of the
Plan provide a sequence of steps that must begin on the plan implementation date - the
date on which funds are transferred to pay unitholder distributions. (See A 157, §1.1; A 168,
§ 6.2 (setting forth distribution procedure); A187-A197, Sch. B (listing 29 separate steps for
distribution) The Plan's distribution procedure plainly does not contemplate distribution in
separate tranches. The Plan requires the monitor to "transfer amounts as determined by
the Monitor in accordance with the [Plan] ... from the Unitholders' Distribution Cash Pool ..
. to the Transfer Agent." (A 167-68, §§ 2.6, 6.2) The unitholders' distribution cash pool is
defined as "an amount equal to the Available Funds less the amounts used to fund the: (a)
Administrative Cost Reserve; (b) Insurance Deductible Reserve; (c) Unresolved Claims
Reserve; and (d) Affected Creditors' Distribution Cash Pool." (Id.) These provisions are a
mathematical formula with which the monitor was required to comply in order to make the
distribution. The explicit language of the Plan permits no modification with respect to either
the amount or timing of a distribution. The cases cited by plaintiffs do not require a different
conclusion. 19

19

Of the cases cited by plaintiffs that required application of a provision of a confirmed
bankruptcy plan, all are distinguishable. The only such case cited within this circuit is
Sunbeam-Oster Co. v. Lincoln Liberty, 145 B.R. 823 (W.D. Pa. 1992). In that case, the
court considered whether the bankruptcy court had erred in awarding interest on an allowed
claim where the confirmed plan was silent on the issue. Other cases cited by plaintiffs
required the court to determine whether the confirmed plan conflicted with another court
order, not FINRA rules. See Dana Corp. v. Fireman's Fund Ins. Co., 169 F. Supp. 2d 744
(N.D. Ohio 1999); In re Diaz, 459 B.R. 86 (Bankr. C.D. Cal. 2011 ). In Miller v. U.S. (In re
23

b.

Requiring separate distributions to plaintiffs would violate Plan

In opposition to dismissal, plaintiffs argue that a second way to harmonize the Plan
with FINRA Rules was to require distributions under both the Plan and FINRA Rules, even if
that results in paying some dividends twice - once to the selling unitholders and once to
plaintiffs - and cited the Karathansis case in support. (See A 1158-59,

,m 57-60) The

bankruptcy court rejected plaintiffs' argument, concluding that a separate distribution to
plaintiffs would violate the Plan and Orders. See Arctic, 2016 WL 3920855 at *17. The
bankruptcy court observed that paying twice would violate the Sanction Order "by
impos[ing) an obligation on the Monitor that the Monitor did not choose." (Id. (citing
Sanction Order ,-r 34)) Moreover, "[i]t would constitute an additional step in the Plan's
distribution procedure, something the Plan does not allow." (Id. (citing A174, ,-r 8.3; A187,
Sch. B))
On appeal, plaintiffs argue that, under Karathansis, the bankruptcy court was
required, but failed, to harmonize the Plan with the FINRA Rules which would require
distribution to plaintiffs. (See 0.1. 8 at 13) Although this would result in making some
distributions twice, plaintiffs argue that this was the solution reached in the Karathansis
case, which was affirmed by the Third Circuit and is binding authority. (See id.) According

Miller), 284 B.R. 121 (N.D. Cal. 2002), the court was required to address an ambiguous
plan provision and interpreted the provision in accordance with the Bankruptcy Code.
Neither Holywell Corp. v. Smith, 503 U.S. 47 (1993), nor Ohio v. Kovacs, 469 U.S.
274 (1985), involved the application of any provision of a confirmed plan. In Holywell, the
trustee of the estate was required to file tax returns as the assignee of property of the estate
despite the fact that the plan was silent about the payment of income tax. See Holywell,
503 U.S. at 47. In Kovacs, the state filed a complaint seeking a declaration that debtor's
obligation to clean up a waste disposal site was not dischargeable in bankruptcy, and the
Supreme Court held that the obligation was a "debt" or "liability on a claim" subject to
discharge. See Kovacs, 469 U.S. at 274. Plaintiffs cite the following statement by the
court: "[W]e do not question that anyone in possession of the site - whether it is [the debtor]
or another ... - must comply with the environmental laws of the State of Ohio" (D.I. 8 at
14), but it is unclear how this case supports plaintiffs' position.

24

to plaintiffs, neither the bankruptcy court nor the defendants identified any substantive
difference between AGIF's Plan and the bankruptcy plan at issue in Karathansis, and the
bankruptcy court distinguished that case without any basis for doing so. (See id. at 19; D. I.
16 at 9).
Conversely, defendants argue that plaintiffs' proposal would "harm the unitholders
who did not trade their units by reducing later distributions" and "subject [defendants] to
liability for not following the Plan from unitholders who did not receive their pro rata share."
(D.I. 10 at 22-23) Defendants assert that an express purpose of the Plan was "to provide
for the distribution of any surplus of the Available Funds to each Unitholder in the amount of
their Pro Rata Share." (See A162, § 2.1(c)) The term "Pro Rata Share" is defined in the
Plan as "the percentage that the Trust Units held by a Unitholder at the applicable
Unitholder Distribution Record Date bears to the aggregate of all Trust Units, calculated as
at the applicable Unitholder Distribution Record Date." (A 157, § 1.1) According to
defendants, "[p]aying a distribution twice would violate these provisions because each
unitholder then would not receive its pro rata share as of the applicable record date," which
would necessarily subject defendants to liability for failure to comply with the Plan. (See
D.I. 10 at 23) Defendants further argue that plaintiffs have misconstrued the holding of
Karathansis, which they contend did not require the Plan and FINRA Rules to be

harmonized and did not suggest that defendants were obligated to follow the FINRA Rules.
(See D.I. 10 at 21)
In Karathansis, former shareholders claimed they were entitled to receive a
distribution under a bankruptcy plan because they held shares on the record date
established by the plan, even though they sold their shares before the effective date of the
plan. See Karathansis, 2007 WL 1234975 at *1. The debtors disagreed, arguing that under
UPC 11140 (the same rule plaintiffs rely on here), distributions must be paid to subsequent
25

purchasers, and not to the holders as of the record date (as required by the plan). See id.
at *4. The bankruptcy court in that case ruled that the FINRA Rules trumped the plan and
that the dividend should be distributed to the purchasing shareholders. See id. On appeal,
the district court reversed the bankruptcy court's ruling, holding that (1) the FINRA Rules did
not supersede the plan, and (2) the plan allocated the dividend to selling shareholders and
thus the selling shareholders should be paid the dividend. See id. at *8. Karathansis
therefore supports the bankruptcy court's ruling that defendants were obligated to make
distributions in accordance with the Plan, notwithstanding the FINRA Rules.
Plaintiffs argue that this reading of the Karathansis decision is "incomplete" and that
it "disregards the ruling that the FINRA rules and the terms of the Plan had to be
harmonized" and that "compliance with both FINRA rules and the Plan was necessary to
harmonize the two." (See D.I. 8 at 13-14, n.5) The court disagrees. While the Karathansis
court noted that the plan and UPC 11140 could be read in harmony and also "recognize[d]
that the net effect of its holding is that the Debtor may have to pay twice," this was only
because the debtors in that case had already mistakenly made distributions under the
FINRA Rules and were now required to pay according to the "plain and unambiguous"
terms of the bankruptcy plan, which controlled. 2

° Karathansis does not suggest that, had

the debtors paid first in accordance with the plan, debtors would have been required to pay
again in order to satisfy the FINRA Rules - the outcome that plaintiffs espouse here.
Karathansis does not provide a basis for the relief that plaintiffs seek in the complaint.

Under well settled case law, defendants had a duty to comply with the Plan - not the
FINRA Rules. See Howe, 913 F.2d at 1143 (it "is well settled that a plan is binding upon all

20

Importantly, the Karathansis court did not address the possible unjust enrichment that
could arise from such an outcome and remanded to the bankruptcy court for further
proceedings. See Karathansis, 2007 WL 1234975, at *9.

26

parties once it is confirmed"); see Karathansis, 2007 WL 1234975 at *9 (holding FINRA
Rules did not supersede plan). The court agrees with the bankruptcy court's conclusion
that the FINRA Rules imposed conflicting obligations on defendants - not "concurrent and
additional obligations" - and that the Plan controls. Absent the Plan being procured by
fraud, or plaintiffs establishing a due process violation, the doctrine of res judicata bars
plaintiffs from now contesting the Plan's distribution procedure, "even if only to argue that
the procedure omits important steps that [d]efendants should have been required to take."
Arctic, 2016 WL 3920855 at *17. While res judicata is a sufficient basis to affirm the

bankruptcy court's dismissal of the complaint, the court will also consider the merits of
plaintiffs' appeal of the bankruptcy court's conclusion that the releases contained in the Plan
and Orders provided an additional basis for dismissal.
B.

Plaintiffs' Claims Are Barred by Releases in the Orders and Plan
1.

Discharges and releases

The Plan and Orders contained broad release provisions shielding defendants from
liability for any actions or omissions related to, arising out of, or connected with the Plan.
a.

The Plan

Section 9.1 of the Plan contains the following broad release:
On the Plan Implementation Date and in accordance with the sequential steps and
transactions set out in Section 8.3 of the [Plan], the Arctic Glacier Parties, the
Monitor, Alvarez and Marsal Canada Inc. and its affiliates, the CPS, the Trustees,
the Directors and the Officers, each and every present and former employee
who filed or could have filed an indemnity claim or a DO& T Indemnity Claim against
the Arctic Glacier Parties ... and any Person claiming to be liable derivatively
through any or all of the foregoing Persons (the "Releasees") shall be released and
discharged from any and all demands, claims, actions, causes of action,
counterclaims, suits, ... and other recoveries on account of any liability,
obligation, demand or cause of action of whatever nature which any Person
may be entitled to assert, ... whether known or unknown, matured or unmatured,
direct, indirect or derivative, foreseen or unforeseen, existing or hereafter arising,
based in whole or in part on any omission, transaction, duty, responsibility,
indebtedness, liability, obligation, dealing or other occurrence existing or
taking place on or prior to the later of the Plan Implementation Date and the
27

date on which actions are taken to implement the [Plan] that are in any way
related to, or arising out of or in connection with the Claims, the Arctic Glacier
Parties' business and affairs whenever or however conducted, the [Plan], the
CCAA Proceedings, any Claim that has been barred or extinguished pursuant to
the Claims Procedure Order or the Claims Officer Order ... and all claims arising
out of such actions or omissions shall be forever waived and released (other
than the right to enforce the Arctic Glacier Parties' obligations under the [Plan] ... )
all to the full extent permitted by applicable law, 21 provided that nothing in the
[Plan] shall release or discharge a Releasee from any obligation created by or
existing under the [Plan] or any related document.
(A175-76, § 9.1 (emphasis added)) This release is effective as of the plan implementation
date (January 22, 2015).22
b.

The Sanction Order

The Canadian court explicitly approved the Plan's broad release provision in the
Sanction Order: "[T]he Plan (including without limitation the ... releases set out therein) is
hereby sanctioned and approved pursuant to the CCAA." (A588

~

9; see also A595,

~

28

(ordering and declaring that "the releases contemplated by the Plan are approved"); A589,

~

11 (implementing releases as of the plan implementation date)) The Sanction Order also
included broad authorization and approval of any steps and actions taken by defendants
that are related to distributions:
THIS COURT ORDERS that the Monitor, the Transfer Agent and any other Person
required to make any distributions, payments, deliveries or allocations or take any
steps or actions related thereto pursuant to the Plan are hereby authorized and
directed to complete such distributions, payments, deliveries or allocations and
to take any such related steps or actions, as the case may be, in accordance with
the terms of the Plan, and such distributions, payments, deliveries and
allocations, and the steps and actions related thereto, are hereby approved.

21 The Plan defines "Applicable Law" as:
any law, statute, regulation, code, ordinance, principle of common law or
equity, municipal by-law, treaty, or order, domestic or foreign ... having the
force of law, of any Government Authority having or purporting to have
authority over that Person, property, transaction, event or other matter and
regarded by such Government Authority as requiring compliance.
(A151, § 1.1)
22 A8-9, ~~ 39, 45 (asserting "Plan Implementation Date" is January 22, 2015).
28

(A591, 1116 (emphasis added)) The Sanction Order also specifically released all claims
arising out of payment of the distribution:
THIS COURT ORDERS that none of the Monitor, the CPS, the Trustees, the
Arctic Glacier Parties, or any individuals related thereto shall incur any liability
as a result of payments and distributions to Unitholders, in each case on behalf
of AGIF, once such distribution or payment has been made by the Monitor to, and
confirmation of receipt has been received by the Monitor from, the Transfer Agent.
(A600-01, 1140 (emphasis added)) The Sanction Order further deems each unitholder as
having consented to the provisions of the Plan in their entirety, including the releases, and
provides that if there is any conflict between the Plan and any other agreement, the Plan
shall control:
THIS COURT ORDERS that, as of the Plan Implementation Date [i.e., January 22,
2015], each Affected Creditor and Unitholder shall be deemed to have consented
and agreed to all of the provisions of the Plan in their entirety, and, in particular,
each Affected Creditor and Unitholder shall be deemed: (a) to have granted,
executed and delivered to the Monitor and the Arctic Glacier Parties all documents,
consents, releases, assignments, waivers or agreements, statutory or otherwise,
required to implement and carry out the Plan in its entirety; and (b) to have agreed
that if there is any conflict between the provisions of the Plan and the provisions,
express or implied, of any agreement or other arrangement, written or oral, existing
between such Affected Creditor or Unitholder and the Arctic Glacier Parties as of the
Plan Implementation Date, the provisions of the Plan take precedence and priority,
and the provisions of such agreement or other arrangement shall be deemed to be
amended accordingly.
(A592, 1119 (emphasis added)) Finally, paragraph 29 of the Sanction Order provides an
injunction applicable to all "Releasees," which, as defined in§ 9.1 of the Plan, includes all
defendants:
THIS COURT ORDERS that all Persons shall be permanently and forever barred,
estopped, stayed and enjoined, from and after the Effective Time [i.e., 12:01 a.m.
on the Plan Implementation Date of January 22, 2015], in respect of any and all
Releasees, from: (i) commencing, conducting or continuing in any manner, directly
or indirectly, any action, suits, demands or other proceedings of any nature or
kind whatsoever (including, without limitation, any proceeding in a judicial, arbitral,
administrative or other forum) against the Releasees ... (iii) commencing,
conducting or continuing in any manner, directly or indirectly, any action, suit or
demand, including without limitation by way of contribution or indemnity or other
relief, in common law or in equity, for breach of trust or breach of fiduciary duty,
under the provisions of any statute or regulation, or other proceedings or any nature
29

or kind whatsoever (including, without limitation, any proceeding in a judicial, arbitral,
administrative or other forum) against any Person who makes such a claim or might
reasonably be expected to make such a claim, in any manner or forum, against one
or more of the Releases ... or (v) taking any actions to interfere with the
implementation or consummation of the Plan; provided, however, that the foregoing
shall not apply to the enforcement of any obligations under the Plan.
(A595-96,

~

29)
c.

The Recognition Order

Pursuant to the Recognition Order, the bankruptcy court gave all provisions in the
Sanction Order "full force and effect in the United States" and further declared that no
liability can arise from AGIF's compliance with the Plan: "Neither the Debtors nor the
Monitor shall incur any liability as a result of acting in accordance with the terms of the Plan
and this Sanction Recognition Order." (A465,

~

9) The Recognition Order further: grants

defendants a broad release that was substantially the same as the one in the Plan,
discharging any claims "whether known or unknown, matured or unmatured" arising out of
or "in any way related" to the Plan, the bankruptcy proceedings, or AGIF's business affairs:
Debtors ... the Trustees, the Directors and the Officers ... shall be released and
discharged from any and all demands ... including any and all claims ... whether
known or unknown, matured or unmatured, direct, indirect or derivative, foreseen or
unforeseen, existing or hereinafter arising, based in whole or in part on any
omission, transaction, duty, responsibility, indebtedness, liability, obligation, dealing
or other occurrence existing or taking place on or prior to the later of the Plan
Implementation Date and the date on which actions are taken to implement the
[Plan] that are in any way related to, arising out of or in connection with the Claims,
the Debtor's business and affairs whenever or however conducted, the Plan, the
Canadian Proceedings and the Chapter 15 Cases ...
(A463-64,

~

5)
2.

The releases are sufficiently broad to bar plaintiffs' claims

In opposition to dismissal, plaintiffs argued that the release in paragraph 9 of the
Recognition Order, which states that AGIF shall not "incur any liability as a result of acting in
accordance with the terms of the Plan and this Sanction Recognition Order," is inapplicable
to their claims because plaintiffs "do not seek to hold [d]efendants liable because of any

30

acts in accordance with the Plan and Recognition Order." (A1157, ~ 51 (emphasis in
original)) Rather, plaintiffs asserted "liability is predicated on defendants' disregard of its
concurrent and additional obligations under U.S. law that did not conflict in any respect with
the Plan or Recognition Order." (Id.)
The bankruptcy court determined that the releases contained in the Plan and Orders
were sufficiently broad to encompass plaintiffs' claims, which are all "predicated on not
having received distributions." See Arctic, 2016 WL 3920855, at *18. In reaching this
conclusion, the bankruptcy court observed that the releases: took effect on the plan
implementation date of January 22, 2015 (A175-76, § 9.1; A589,
~

~

11; A592,

~

19; A595-96,

29); covered the period during which the alleged acts of misconduct occurred (December

2014 through January 22, 2015, when defendants made the distribution) (A463-64,

~

5);

prohibited all claims against defendants "in any way related to, or arising out of or in
connection with the Claims, the Arctic Glacier Parties' business and affairs whenever or
however conducted, the [Plan], the CCAA Proceedings ... " (A175-76,
at~

~

9.1; see also A463

5); specifically prohibited "any liability as a result of payments and distributions to

Unitholders ... " (A600-01,

~

40); and included any actions or omissions (A 175-76, § 9.1

("all claims arising out of such actions or omissions shall be forever waived and released").
See Arctic, 2016 WL 3920855 at *18 (summarizing releases). The bankruptcy court

rejected the "concurrent and additional obligations" argument in the context of the releases
as well. See id. The bankruptcy court concluded that plaintiffs' claims, predicated on not
having received the distributions, "clearly relate to, arise out of, or are in connection with the
Plan's distribution procedure, whether the procedure as implemented involved actions taken
for the benefit of the Selling Unitholders, or omissions of actions that would have benefitted
[p]laintiffs." Id. at *18 (holding such actions call within § 9.1 of the Plan). The court finds no
basis to disturb this conclusion. Plaintiffs' briefing on appeal does not substantively address
31

the scope of the releases. Rather, plaintiffs assert that they are either not bound by the
releases or that any enforcement of the releases would be in violation of their rights to due
process. The court finds no merit in plaintiffs' additional arguments addressed below.

3.

Plaintiffs are bound by the releases

In opposition to the motion to dismiss, plaintiffs argued that they were not bound by
the releases because their claims arose after the dates that the Plan and Confirmation
Orders were entered, and they had no connection to defendants as of those dates. (See
A 1154-56) The bankruptcy court rejected this argument, holding that the Plan was binding
not only on the unitholders who voted to approve the Plan and participated in the
bankruptcy proceedings, but also on their "successors and assigns" which include plaintiffs.

Arctic, 2016 WL 3920855 at *19. On appeal, plaintiffs argue that the bankruptcy court
"erred because it assumed, without undertaking an appropriate analysis, that the [selling
unitholders] assigned [to plaintiffs] rights and obligations under the Plan (or that
[defendants] somehow succeeded to such rights and obligations)" but "did not explain this
or identify a recognized test for what constitutes an assignment." (D.I. 8 at 24) The court
disagrees that the bankruptcy court did not undertake an appropriate analysis. In reaching
its conclusion that plaintiffs stepped into the shoes of the selling unitholders, and acquired
no greater rights than the selling unitholders, the bankruptcy court relied on the KB Toys
case, affirmed by the Third Circuit. See Arctic, 2006 WL 3920855 at *20 (citing In re KB

Toys, 470 B.R. 331, 343 (Bankr. D. Del. 2012), aff'd, 736 F.3d 247 (3d Cir. 2013)).
In KB Toys, a chapter 11 trustee objected to proofs of claim filed by a purchaser of
debtors' trade claims ("ASM") on the ground that the original claimants, from whom ASM
purchased its claims, were in possession of avoidable preferences that they had yet to turn
over or repay, thus the purchased claims must be disallowed under section 502(d) of the
Bankruptcy Code. See KB Toys, 470 B.R. at 331. Under section 502(d), a bankruptcy
32

claim is disallowed if a claimant receives property that is avoidable or recoverable by the
bankruptcy estate. See 11 U.S.C. § 502(d). In objecting to the claims, the trustee did not
allege that ASM itself received an avoidable transfer, but rather that ASM's claims must be
disallowed because each original claimant received a preferential transfer before
transferring its claim to ASM. Conversely, ASM argued its claims should not be disallowed
under section 502(d) because: (i) "any claim of any entity" as used in section 502(d)
referred only to the claimant and, consequently, the disability was a personal allowance that
remained with the original claimant; and (ii) its claims were entitled to protections of a good
faith purchaser under section 550(b) 23 of the Bankruptcy Code.
The bankruptcy court disallowed ASM's claims, concluding that a claims purchaser
holding a trade claim is subject to the same section 502(d) challenge as the original
claimant: as the bankruptcy court put it, under section 502(d), "[d]isabilities attach to and
travel with the claim." Id. at 335. In reaching this conclusion, the bankruptcy court carefully
examined the text of the statute and the legislative history of section 502(d), noting that its
predecessor, section 57g of the 1898 Bankruptcy Act, dealt with the right of a creditor to
share in the debtor's assets within the distributive scheme of the statute, and provided that
claims were not allowed until the creditor surrendered the preferential transfers to the
estate. Id. at 336. Because section 57g established the basis for allowance or
disallowance of particular claims, the legislative history supported a consistent interpretation

23

Section 550 of the Bankruptcy Code governs the liability of a transferee of an avoided
transfer, and subsection (b) provides that: "[t]he trustee may not recover ... from a
transferee that takes for value, including satisfaction or securing of a present or antecedent
debt, in good faith, and without knowledge of the voidability of the transfer avoided; or any
immediate or mediate good faith transferee of such transferee." 11 U.S.C. § 550(b).
33

of its statutory successor, section 502(d), that disabilities travel with claims. See id. 24 On
appeal, the Third Circuit agreed with the bankruptcy court's analysis:
The language of section 502(d) states that "any claim of any entity" who received an
avoidable transfer shall be disallowed. Thus, the statute operates to render a
category of claims disallowable - those that belonged to an entity who had received
an avoidable transfer. Further, the statute provides that such claims cannot be
allowed until the entity who received the avoidable transfer, or the transferee, returns
it to the estate. 11 U.S.C. § 502(d) (stating that the trustee shall disallow such
claims "unless such entity or transferee has paid the amount, or turned over any
such property, for which such entity or transferee is liable ... "). Accordingly, "any
claim" falling into this category of claims is disallowable until the avoidable transfer is
returned. Because the statute focuses on claims - and not claimants - claims that
are disallowable under§ 502(d) must be disallowed no matter who holds them.

KB Toys, 736 F.3d at 252-53.
While plaintiffs argue on appeal that the bankruptcy court erroneously determined
that defendants succeeded to the rights and obligations of the selling unitholders without
undertaking an appropriate analysis, defendants do not attempt to distinguish the transfer of
a claim against a debtor in the course of the debtor's bankruptcy proceedings in KB Toys
from the transfer of an equity security in the course of a debtor's bankruptcy proceedings
here, or why a substitution of parties was not effected thereby. Compare Fed. R. Bankr. P.
3001 (e)(2) (stating, with regard to the transfer of a claim" ... the transferred shall be
substituted for the transferor"); Black's Law Dictionary 1470 (8 1h ed. 2004) ("substitute"
means "one who stands in another's place"); Carnegia v. Georgia Higher Educ. Assistance

Corp., 691 F.2d 482, 483 (11 1h Cir. 1982) (claim transfer "constituted a substitution of parties
with no change in the nature of the claim"); Rhodes, Transfer of Stock§ 7.1 (71h ed., April
2017 update) ("As a general rule, the [stock] transferee takes no greater rights and is

24

The bankruptcy court further rejected ASM's argument that it was entitled to the
protections of a good faith purchaser argument, holding that ASM was a "sophisticated
entity," well aware of the bankruptcy process, who had access to both the SOFA and the
Original Claimants, and thus, was on "constructive notice" of the potential preference
actions and could have discovered the potential for disallowance under section 502(d) with
"very little due diligence." See KB Toys, 470 B.R. at 342.
34

subject to the same liabilities as the [stock] transferor"). The Plan and Orders
unambiguously provide that all unitholders are deemed to have approved the releases,
whether they voted to approve the Plan or not, and that all unitholders are bound by the
releases, including successors and assigns.

(A592at~19; A180-81at~11.1

(deeming

Plan approved by all unitholders); A 161 at§ 1.3 (providing releases apply to successors
and assigns)) If purchasers of units are not "successors and assigns" of the unitholders as
contemplated by the Plan, plaintiffs offer no alternative interpretation. As successors and
assigns of the selling unitholders, plaintiffs acquired the same rights and obligations that the
selling unitholders had in the units under the provisions of the confirmed Plan.
Plaintiffs' only attempt to distinguish KB Toys appears to hinge entirely on the
distinction between a sale and an assignment. Plaintiffs argue that "[a]lthough [plaintiffs] did
acquire their units," there was no assignment, because "those units did not come with all of
the rights and obligations established by the Plan." (Id. at 26). Because there was no
assignment, plaintiffs reason, they are not bound by the releases. Plaintiffs argue that "an
assignment does not exist where only part of the assignor's interests in the property is
transferred or where an assignor retains control over the fund or the right to receive funds.
(See id. at 8, 26) Plaintiffs reason that, if an assignment had occurred, then plaintiffs would
have received the distribution on account of the purchased units. (See id. at 23, 26) "Given
that the [Selling] Unitholders undeniably retained rights under the Plan after they sold their
units, an assignment from such unitholders to [plaintiffs] did not occur." (See id. at 26)
Because the original claimants in KB Toys "did not retain contract rights relating to the
property" they transferred - i.e., their trade claims - plaintiffs argue that KB Toys has no
application here. (See D.I. 8 at 26, n.8)
The bankruptcy court in KB Toys noted that the terms "assignment" and "sale" are
not easily distinguishable and that, in the bankruptcy context, "use of the distinction
35

between the two terms has been widely criticized." Id. at 340 (citing criticisms). It further
noted that "[t]he Bankruptcy Code does not define 'sale' or 'assignment,' although the
[Bankruptcy] Code definition of 'transfer' arguably includes both." Id. at 340. 25 The
bankruptcy court in KB Toys court went on to observe that, even if there was a principled
way to distinguish between an assignment and a sale of the claims at issue, such an
exercise in the context of its section 502(d) analysis, was "unhelpful and unrevealing of the
appropriate outcome." See id. at 341. The distinction offers little assistance here as well.
Plaintiffs' argument that the selling unitholders "retain[ed] contract rights relating to the
property" and, thus, plaintiffs are not bound by the releases, is unpersuasive in light of the
nature of the property transferred: selling unitholders could transfer, and plaintiffs could
acquire, only those rights attached to the units as of the date they were purchased. The
rights attached to the units on the date they were purchased did not include the right to
receive distributions under the Plan. This does not alter the conclusion that transfer of units
from the selling unitholders to plaintiffs intended to vest in plaintiffs any "present rights" in
the units assigned - the right to receive future distributions - along with the obligations the
units carried under the Plan. See Miller v. Wells Fargo Bank. Intern. Corp., 540 F.2d 548,
55 (2d Cir. 1976) The court agrees with defendants: "to rule that a party that buys a
bankruptcy claim after plan confirmation is not bound by the terms of the plan would
completely undermine the certainty and finality a plan must provide in order to be effective."

25

See KB Toys, 470 B.R. at 341 n.11 (explaining same). Section 101(54)(0) of the
Bankruptcy Code defines "transfer" as "each mode, direct or indirect, absolute or
conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an
interest in property." 11 U.S.C. § 101 (54)(0). As the KB Toys court explained: "According
to Black's Law Dictionary, a 'sale' is 'the transfer of property or title for a price' (citing
Uniform Commercial Code§ 2-106(1 )), while an 'assignment' is 'a transfer of rights or
property.' Therefore, a 'transfer' of property can be either an assignment or a sale." KB
Toys, 470 B.R. at 341 n.11 (internal citations omitted).

36

(D.I. 10 at 29); see also 11 U.S.C. § 1127 (restricting post-confirmation plan modifications);
In re Philadelphia Newspapers, LLC, 690 F.3d 161, 169 (3d Cir. 2012) (public policy of

affording finality to bankruptcy judgments fosters confidence in finality of confirmed plans
and facilitates successful reorganizations).
Plaintiffs further argue that even if they could be regarded as assignees of selling
unitholders, plaintiffs' specific claims were never held by the selling unitholders and, thus,
as a matter of law, the transferring unitholders could not have bound their assignees by any
release. (See D.I. 8 at 26) According to plaintiffs, their claims are based on legal rights
independent of, and separate from, the rights that the selling unitholders may have
possessed: common law tort claims grounded in defendants' acts of negligence and fraud
occurring after Plan confirmation, which resulted in injuries to plaintiffs and not the selling
unitholders. (See id.) The court agrees with defendants that this argument fails to
recognize that the Plan and Orders bar all claims related to payments and distributions to
unitholders by any person. (See D.I. 10 at 30) The Plan specifically bars any claims that
"any Person may be entitled to assert ... whether known or unknown, matured or

unmatured ... foreseen or unforeseen, existing or hereinafter arising.") (A175-76, § 9
(emphasis added)). The broad language covers all claims, including those in existence at
the time the Plan was approved and those arising after the fact, made by "any Person" in
connection with the Plan's distribution procedure. The cases cited by plaintiffs do not
address the enforceability of a plan release against an entity that buys a claim after plan
confirmation and compel no different outcome.

26

26

See Medtronic AVE Inc. v. Advanced Cardiovascular Systems, 247 F.3d 44 (3d Cir.
2001) (determining whether manufacturer's pending patent infringement claims against
competitor were subject to mandatory arbitration under a third-party's arbitration agreement
with competitor following manufacturer's acquisition of the third party); Longacre Master
Fund, Ltd. v. ATS Automation Tooling Sys., Inc., 496 F. App'x 135, 139 (2d Cir. 2012)
(determining sufficiency of allegations in breach of contract dispute between buyer of
37

4.

Enforcement of the releases does not violate due process

While the bankruptcy court recognized that "there are limits to the types of claims
from which defendants can be shielded by a release," it also noted that the only relevant law
plaintiffs proffered as being beyond the reach of the releases is the Due Process Clause of
the U.S. Constitution. Arctic, 2016 WL 3920855 at *18. A release is ineffective if a
plaintiff's due process rights were violated in the confirmation of the plan. See Bowen, 174
B.R. at 844. In opposition to the motion to dismiss, plaintiffs argued that "releases and/or
discharges of claims in bankruptcy are unenforceable where, as here, claims arose after the
date of the discharge or release and the plaintiffs' interests were not represented in the
underlying bankruptcy proceeding." (A 1152-53,

~

41) Plaintiffs cited the Third Circuit's

decision in Chemetron in support. See Jones v. Chemetron, 212 F.3d 199 (3d Cir. 2000).

(A 1154,

~

48) In Chemetron, a plaintiff who was not yet born as of the date of a discharge

in bankruptcy asserted personal injury claims based on his mother's exposure to toxic
chemicals. Chemetron, 212 F.3d at 200. The Third Circuit held that the discharge did not
prevent claimant from pursuing his personal injury claims because
[he] had no notice of or participation in the Chemetron reorganization plan. No
effort was made during the course of the bankruptcy proceeding to have a
representative appointed to receive notice for and represent the interests of
future claimants. Therefore, whatever claim [plaintiff] may now have was not
subject to the bankruptcy court's bar date order and was not discharged by that
court's confirmation order.
Id. at 210 (citation omitted). The bankruptcy court distinguished that case: "Unlike the
Chemetron plaintiff, who was not yet born at the time of the bankruptcy discharge, [p]laintiffs

here purchased units from the Selling Unitholders, who were either themselves
appropriately noticed of the Plan and release it contained, or were the 'successors and

bankruptcy claim and seller); Miller v. Wells Fargo Bank Int'! Corp., 540 F.2d 548 (2d Cir.
1976) (addressing trustee's claim to recover, as voidable preferences, payments by debtor).
38

assigns' of unitholders who participated in the bankruptcy proceeding." Arctic, 2016 WL
3920855 at *19.
Plaintiffs argue on appeal that the bankruptcy court erred in distinguishing
Chemetron, which held that a due process violation occurs when a party whose claims are

barred did not have both (i) notice of the plan, and (ii) its interests represented in in
connection with the bankruptcy proceedings. (See D.I. 8 at 28-30) According to plaintiffs,
the Canadian court should have "appointed [someone] to represent the interests of
claimants in the position of the [plaintiffs]" - presumably, purchasers of units on the OTC
"Pink" market27

-

and because it did not, the releases are ineffective under Third Circuit's

decision in Chemetron. (See id.)
The court finds no merit in plaintiffs' attempt to analogize their position with that of
the unborn personal injury claimant in Chemetron. The record demonstrates that
unitholders received sufficient notice of the meeting, the Plan, and its releases. (See A356401,

,.m 1.7, 5.1 O; A587, ,.-r 3)

The Plan was accepted by 99.81 % of the unitholders who

voted on it. (A218-19) Each unitholder was deemed to have consented and agreed to all of
the provisions of the Plan in their entirety." (A592 at ,.-r 19; see also A 180-81 at ,.-r 11.1) The
Plan explicitly provides that it is binding not only on the selling unitholders but also on their

27

See generally http://www.otcmarkets.com/marketplaces/otc-pink. The website provides
that the OTC Marketplace is for "broker-dealers to trade all types of securities without
requiring company involvement." (See A1125; http://www.otcmarkets.com/learn/otc101-faq)
Companies listed on the OTC Link have been described by the SEC as "among the most
risky investments." (See A1133; http://www.sec.gov/answers/pink.htm) The website also
includes the following warning:
With no minimum financial standards, this market includes foreign companies
that limit their disclosure, penny stocks and shells, as well as distressed,
delinquent, and dark companies not willing or able to provide adequate
information to investors. As Pink requires the least in terms of company
disclosure, investors are strongly advised to proceed with caution and
thoroughly research companies before making any investment decisions.
http://www.otcmarkets.com/marketplaces/otc-pink.
39

"successors and assigns." (A 161 at§ 1.3) The record demonstrates that the selling
unitholders received appropriate notice sufficient to satisfy due process and an opportunity
to be heard regarding confirmation of the Plan. Unlike the unborn claimant in Chemetron,
plaintiffs bought claims from unitholders who had notice of the insolvency proceedings and
participated in those proceedings. The complaint does not allege that the due process
rights of selling unitholders were violated during the bankruptcy proceedings, nor does it
allege that plaintiffs did not have notice of the bankruptcy proceedings or the Plan.
The bankruptcy court correctly concluded that plaintiffs' claims are barred by the
doctrine of res judicata and by the releases contained in the Plan and Orders. Based on the
foregoing, the court need not consider the additional bases on which defendants assert that
dismissal of the adversary proceeding should be affirmed. 28
VI. CONCLUSION
For the foregoing reasons, the bankruptcy court's opinion and order are affirmed,
and plaintiffs' appeal is denied. An appropriate order shall issue.

28

Defendants contend that: (i) the fraud claims must be dismissed because there is not a
single factual allegation that defendants acted with the requisite scienter; (ii) the
misrepresentation claims fail as a matter of law because plaintiffs have not adequately
alleged actionable omissions or justifiable reliance; and (iii) the negligence claims do not
satisfy pleading requirements because plaintiffs cannot show as a matter of law that
defendants owed plaintiffs any duty to comply with Rule 1Ob-17 or the FINRA Rules. (See
D.I. 10 at 34-39)

40