Futter et al v. Duffy
Filing
2
MEMORANDUM OF DECISION AND ORDER - It is hereby ORDERED, that the Petitioners 1 request for leave to file an interlocutory appeal from the November 8, 2011 Bankruptcy Order is denied. U.S. BANKRUPTCY COURT-EDNY, 811-9055-DTE. Ordered by Senior Judge Arthur D. Spatt on 3/24/2012. (Coleman, Laurie)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
---------------------------------------------------------X
In Re:
FUTTER LUMBER CORPORATION,
Debtor.
MEMORANDUM OF
DECISION AND ORDER
11-MC-838 (ADS)
---------------------------------------------------------X
BERNICE FUTTER, ILEANA FUTTER,
JAMES FUTTER, DAVID KORKHAM and
LYN GAYLORD,
Petitioners,
-againstTODD E. DUFFY, TRUSTEE FOR THE
FUTTER LUMBER CORPORATION
LIQUIDATION TRUST,
Respondent.
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APPEARANCES:
MORITT HOCK & HAMROFF LLP
Attorneys for the Petitioners
400 Garden City Plaza
Suite 202
Garden City, New York 11530
By:
Leslie A. Berkoff, Esq.
Lee J. Mendelsohn, Esq.
Theresa A. Driscoll, Esq., of Counsel
ANDERSON KILL & OLICK, P.C.
Attorneys for the Respondent
1251 Avenue of the Americas
New York, New York 10020
By:
Todd E. Duffy, Esq.
Dennis J. Nolan, Esq., of Counsel
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SPATT, District Judge.
The Petitioners Bernice Futter, Ileana Futter, James Futter, David Korkham and Lyn
Gaylord, (collectively, the “Petitioners” or the “Defendants”), seek leave to file an interlocutory
appeal from a decision of the Bankruptcy Court (Dorothy D.T. Eisenberg, J.), denying their
motion to dismiss an adversary proceeding commenced by the Respondent, Todd E. Duffy, as
trustee for the Futter Lumber Corporation Liquidation Trust. For the reasons that follow, the
Court denies leave to file an interlocutory appeal.
I. BACKGROUND
A. The Bankruptcy and Chapter 11 Reorganization Plan
The Debtor, Futter Lumber Corporation (“Futter”), was a lumber wholesaler and
distributor. The corporation was privately held and owned by Bernard Futter; Bernice Futter, his
wife; Bernard Futter as Trustee f/b/o the Bernard Futter Trust; and Kenneth Futter as Trustee of
the Ileana Futter Trust, the David Futter Trust, and the James Futter Trust. On May 8, 2009, an
involuntary petition was filed under Chapter 7 of the Bankruptcy Code against the Debtor in the
Bankruptcy Court. It was subsequently converted to one under Chapter 11 on June 11, 2009.
The Debtor had three non-debtor affiliates — Futter Trading LLC, Futter West LLC, and
Global Wood LLC (collectively, the “Affiliates”). The ownership interests in the Affiliates were
held by Bernard Futter and his children, David Futter, James Futter, and Ileana Futter. As
explained in greater detail in the Bankruptcy Court’s Order, the Affiliates owed the Debtor
approximately $4.5 million in receivables related to services and financial accommodations.
After winding down the businesses, the Affiliates held approximately $1.3 million, which was
turned over by the Affiliates to the Debtor to help fund the Debtor’s liquidating Chapter 11
reorganization plan (the “Plan”).
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On June 9, 2010, the Debtor’s Plan was confirmed by the Bankruptcy Court. Article 8.4
of the Plan provided for general releases whereby creditors agreed to release, waive or discharge
all claims and causes of action based on any act, omission, transaction or other occurrence
involving the Debtor in connection with, or in contemplation of, the bankruptcy case that such
creditor has or may have against the Debtor and the bankruptcy estate, the officers and directors
of the Debtor, the Creditors Committee and each member thereof, and the professionals retained
by them. In addition, specific releases were given to Bernard Futter and Kenneth Futter in the
Plan. As part of the consideration for the specific releases given in favor of these two
individuals, the general unsecured claim of Bernard Futter was reduced by $114,300 and allowed
in the amount of $1,418,695, and the general unsecured claim of Kenneth Futter was reduced by
$35,700 and allowed in the amount of $444,300 (the “Settlement”). (Plan, at 24.)
Pursuant to the confirmed Plan, a liquidation trust was established with the Respondent as
Liquidation Trustee. It was created to administer and reduce to cash all of the Debtor’s property,
rights and interest; to resolve all claims and causes of action; and to make distributions for the
benefit of holders of allowed claims against the Debtor. A liquidation trust agreement was
entered into post-confirmation between the Debtor’s bankruptcy estate and the Trustee, which
stated that all of the Debtor’s “Causes of Action” were to be fully preserved and retained
exclusively by the Liquidation Trust. Pursuant to Article 1.1 of the Plan, “Causes of Action”
were defined to mean “any and all rights or claims that the Debtor has or may have against any
third party including, without limitation, all Avoidance Actions . . . .” (Plan, at 5.) “Avoidance
Actions” included “any claim, right or causes of action under Chapter 5 of the Bankruptcy Code;
all fraudulent conveyance and fraudulent transfer laws; all non-bankruptcy laws vesting in
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creditors rights to avoid, rescind, or recover on account of transfers; all preference laws and the
New York Debtor & Creditor Law.” (Id., at 4.)
The Bankruptcy Court also approved the disclosure statement (the “Disclosure
Statement”), finding that it provided the creditors with sufficient information as to the Plan as
required under the Bankruptcy Code. The Disclosure Statement provided as follows:
Review of Certain Claims and Causes of Action
During the pendency of the Chapter 11 case, at the Committee’s request, the
Debtor provided the Committee’s financial advisors with full access to its books
and records…the Committee’s financial advisors were provided, among other
things, documents relating to i) the Affiliates; ii) claims held by insiders; iii)
payments to insiders and iv) loans made by insiders to the Debtor. . . .
The analysis by the Committee's financial advisors enabled them to evaluate and
consider potential claims against the Affiliates and claims against the insiders, and
eventually in reaching an agreement with the Debtor regarding the contribution of
funds from the Affiliates and the reductions in the claims of Bernard and Kenneth
Futter.
In an effort to resolve any potential claims and causes of action against the
Affiliates or the insiders on a consensual basis, the Debtor's [P]rincipals agreed
under the Plan to (a) cause the Debtor’s estate to receive approximately $1.3
million held by the Affiliates … to fund distribution under the Plan . . . .
(Disclosure Statement, at pp. 12-13 (emphasis added).) The meaning of this provision of
the disclosure statement is in dispute. The Respondent asserts that this is only in
reference to the Settlement described above and in particular, that the $1.3 million was
consideration for the release of claims only as to Bernard and Kenneth Futter. However,
the Petitioners interpret the term “insiders” more broadly and claim that it includes causes
of action as against them as well, because under the Bankruptcy Code, they were either
an officer, or a relative of a director or officer, of the Debtor at the time of the Debtor’s
bankruptcy. See 11 U.S.C. § 101(31).
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The Disclosure Statement also contained language regarding the preservation of
causes of action by the Liquidating Trustee, now the Respondent. In particular, it stated
that:
Identified in the Debtor’s Statement of Financial Affairs at question 3(a) is a nonexclusive list of certain potential Causes of Action, which are expressly identified
and preserved for possible prosecution on and after the Effective Date. The
failure to list any potential or existing claims or Causes of Action is not intended
to and shall not limit the rights of the Liquidation Trustee to pursue any claims or
Causes of Action not listed or identified. The Confirmation Order shall not bar
the Liquidation Trustee, on behalf of the Liquidation Trust, by res judicata,
collateral estoppel, or otherwise from collecting, prosecuting, or defending any
matter or Cause(s) of Action.
(Disclosure Statement, p. 23 (emphasis added).)
The final Disclosure Statement was the end result of a process of several negotiations,
amendments, and Bankruptcy Court hearings. According to the Petitioners, it was amended to
address the Bankruptcy Court’s two concerns relating to (1) the resolution of claims against
Affiliates and insiders; and (2) to provide a detailed description of the claims by and against
insiders and the resolution of such claims. According to the Respondent, the negotiations as to
the Plan primarily concerned only the recovery of the $4.5 million intercompany receivable, as
well as relinquishing the causes of action specifically as to Bernard Futter and Kenneth Futter.
In fact, the Respondent alleges that the sentence concerning resolution of potential causes of
action against the insiders was added after the Bankruptcy Court hearings and revisions, and that
a broadly based release as against all insiders had never been discussed.
B. The Adversary Proceeding and the Motion to Dismiss
On May 9, 2011, the Trustee commenced an adversary proceeding against the current
Petitioners, in their capacity as “insiders” of the Debtor under the Bankruptcy Code. See 11
U.S.C. § 101(31) (“The term ‘insider’ includes — . . . (i) director of the debtor; (ii) officer of the
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debtor; . . .or (vi) relative of a general partner, director, officer, or person in control of the
debtor”). The Defendants in the adversary proceeding, now the current Petitioners, are: Bernice
Futter, an owner of the Debtor; James Futter and Ileana Futter, equity owners of the Affiliates; as
well as Lyn Gaylord and David Kirkham.
Specifically, the Trustee sought a money judgment under the Bankruptcy Code and New
York Debtor and Creditor Law for damages resulting from, or relating to, certain alleged
preferential transfers in the aggregate sum of $355,977.96 and fraudulent conveyances in the
aggregate sum of $745,365.73 from the Debtor to or for the benefit of the Petitioners. In
addition, the Trustee sought to (a) disallow any claims made by the Petitioners against the
Debtor’s bankruptcy estate under 11 U.S.C. § 502 until they paid the Trustee the amount of the
alleged transfers; (b) subordinate their claims; and (c) re-characterize their claims as equity.
On July 8, 2011, the Petitioners filed a motion to dismiss the adversary proceeding
pursuant to (1) Rule 12(b)(6) of the Federal Rules of Civil Procedure, as made applicable by
Bankruptcy Rule 7012, for failure to state a claim for which relief can be granted; and (2) the
doctrine of res judicata (the “Motion to Dismiss”). For reasons not relevant here, the only
questions addressed by the Bankruptcy Court and currently at issue are (1) whether the Trustee’s
Complaint failed to state a claim for relief because such actions were not specifically reserved in
the Plan; and (2) whether a reading of the Plan and the Disclosure Statement shows that the
doctrine of res judicata applies.
On November 8, 2011, the Bankruptcy Court issued an Order in which it found that (1)
there is no ambiguity in the Plan and the Trust Agreement, and to the extent there is any conflict
with the Disclosure Statement, the terms of the Plan controls, (2) the Trustee’s causes of action
against the Petitioners were specifically reserved and the Petitioners had adequate notice of such
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reservation of the causes of action, and (3) the Disclosure Statement is consistent with the Plan in
that there was no prior resolution or waiver of the causes of action brought by the Trustee in the
adversary proceeding, so that the Petitioners were never expressly granted a release from such
causes of action. Accordingly, the Motion to Dismiss the Trustee’s Complaint was denied by the
Bankruptcy Court. See generally In re Futter Lumber Corp., Bankr. No. 09-73291-478, Adv. No.
11-9055-478, 2011 WL 5417094, at *11 (Bankr. E.D.N.Y. Nov. 8, 2011).
On December 9, 2011, the Petitioners filed a motion with this Court for leave to appeal
the Bankruptcy Court’s Order denying their Motion to Dismiss the Trustee’s Complaint.
II. DISCUSSION
A. Legal Standard to Grant an Interlocutory Appeal from a Bankruptcy Court Order
“Under Section 158(a)(3), a district court has discretionary appellate jurisdiction over an
interlocutory order of a bankruptcy court.” In re Kassover, 343 F.3d 91, 94 (2d Cir. 2003); see
In re Cutter, No. 05 Civ. 5527, 2006 WL 2482674, at *3 (E.D.N.Y. Aug. 29, 2006) (stating that,
while neither § 158 nor the Bankruptcy Rules “provides guidelines for determining whether a
district court should grant leave to appeal, . . . most district courts in the Second Circuit have
applied the analogous standard for certifying an interlocutory appeal from a district court order,
set forth in 28 U.S.C. § 1292(b)”) (citations omitted). “In determining whether to grant leave to
appeal an interlocutory order from the bankruptcy court, the Court will apply the standard set
forth in 28 U.S.C. § 1292(b), which is the standard used by the court of appeals to determine
whether to entertain interlocutory appeals from the district court.” Traversa v. Educ. Credit
Mgmt. Corp., 386 B.R. 386, 388 (Bankr. D. Conn. 2008).
Thus, in deciding whether to grant leave to appeal from an interlocutory bankruptcy court
order, a district court should consider whether: (1) “such order involves a controlling question of
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law,” (2) “as to which there is substantial ground for difference of opinion” and (3) “an
immediate appeal from the order may materially advance the ultimate termination of the
litigation.” 28 U.S.C. § 1292(b); see Yerushalmi v. Shibolelth, 405 B.R. 44 (Bankr. E.D.N.Y.
2009). “Section 1292(b)’s legislative history reveals that although that law was designed as a
means to make an interlocutory appeal available, it is a rare exception to the final judgment rule
that generally prohibits piecemeal appeals.” Koehler v. Bank of Bermuda Ltd., 101 F.3d 863,
865 (2d Cir. 1996). Furthermore, all three requirements set forth in section 1292(b) must be met
for a Court to grant leave to appeal. See N. Fork Bank v. Abelson, 207 B.R. 382, 390 (Bankr.
E.D.N.Y. 1997) (denying leave to appeal where there was a controlling issue of law, the
determination of which would materially advance the litigation, but the moving party failed to
show substantial grounds for difference of opinion).
B. As to Whether an Interlocutory Appeal Should Be Granted
1. Controlling Question of Law
“To establish that an order contains a controlling question of law, it must be shown that
either (1) reversal of the bankruptcy court’s order would terminate the action, or (2)
determination of the issue on appeal would materially affect the outcome of the litigation.”
N. Fork Bank, 207 B.R. at 389. This articulation of the standard speaks to the “controlling”
aspect, and is one which the Petitioners undoubtedly meet. If this Court were to grant the
interlocutory appeal and potentially reverse the Bankruptcy Court Order, it would result in
dismissal of the Complaint and thereby terminate the adversary action.
However, the more complicated issue is whether there is a controlling question of law,
notwithstanding its controlling features. “[T]he ‘question of law’ must refer to a ‘pure’ question
of law that the reviewing court ‘could decide quickly and cleanly without having to study the
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record.’” In re Worldcom, Inc., No. 03 Misc. 47, 2003 WL 21498904, at *10 (S.D.N.Y. June 30,
2003) (quoting Ahrenholz v. Bd. of Trs. of Univ. of Illinois, 219 F.3d 674, 676–77 (7th Cir.
2000)). A determination that must be made “in equity or good conscience” cannot be
characterized as a question of law that could be “decided quickly and cleanly without having to
study the record.” Enron Corp. v. Springfield Assocs., L.L.C. (“Enron/Springfield”), No. 01 Civ.
16034, 2006 WL 2548592, at *4 (S.D.N.Y. Sept. 5, 2006) (quoting In re Worldcom, 2003 WL
21498904, at *10). Moreover, “where a ‘legal’ issue is ‘essentially fact based in nature’
interlocutory appeal is not appropriate.” In re Complete Retreats, LLC, No. 07 Misc. 152, 2008
WL 220752, at *2 (D. Conn. Jan. 23, 2008) (quoting Brown v. City of Oneonta, N.Y., 858 F.
Supp. 340, 349 (N.D.N.Y. 1994), rev’d on other grounds by, 106 F.3d 1125 (2d Cir. 1997)). “A
factual determination by the Bankruptcy Court is accorded deferential review by this Court and
is not a question of law as to which an immediate interlocutory appeal is appropriate under
§ 1292(b).” In re Perry H. Koplik & Sons, Inc., 377 B.R. 69, 75 (Bankr. S.D.N.Y. 2007).
For example, “though the question of whether to stay a proceeding on the basis of
international comity, pending the outcome of another case, is fairly considered a ‘legal’
question,” courts tend to deny leave to file an interlocutory appeal challenging the bankruptcy
court’s finding because the resolution of the issue “requires a heavily fact-based analysis.” In re
Complete Retreats, LLC, 2008 WL 220752, at *3; see also In re Lehman Bros. Holdings, Inc.,
422 B.R. 403, 407 (Bankr. S.D.N.Y. 2009) (“This Court cannot review the Bankruptcy Court’s
determination regarding comity without performing the same careful study of the record, the
relationships of the parties and the British action performed by the Bankruptcy Court, and thus
cannot conclude that the appeal presents a controlling question of law.”); In re Perry H. Koplik &
Sons, Inc., 377 B.R. at 74 (“Rather, the instant motion presents a question as to whether the
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Bankruptcy Court properly evaluated admissible evidence presented in determining that comity
should not be granted to the Indonesian legal proceedings.”).
The instant motion for an interlocutory appeal presents, in part, questions of contract
interpretation. In particular, it raises the precise issue of whether the Plan and Disclosure
Statement specifically reserved the Trustee’s causes of action in the adversary proceeding.
“Such issues [of contract interpretation] ordinarily present questions of law for the court to
decide.” O’Brien v. Argo Partners, Inc., 736 F. Supp. 2d 528, 534 (E.D.N.Y. 2010). For
instance, if the Plan and Disclosure Statement contain terms that are clear and unambiguous, and
“reasonable people could not disagree as to the meaning of the text, the contract’s interpretation
is a question of law to be answered by the court.” Sage Realty Corp. v. Jugobanka, D.D., No. 95
Civ. 0323, 1998 WL 702272, at *4 (S.D.N.Y. Oct. 8, 1998). Moreover, “[r]esolution of the issue
of whether an ambiguity exists, sufficient to allow consideration of extrinsic evidence, presents a
question of law for the court.” O’Brien, 736 F. Supp. 2d at 535. In addition, “[a]pplication of
the principles of res judicata presents a question of law to be reviewed de novo.” In re Scott
Cable Commc’ns., 259 B.R. 536, 542 (Bankr. D. Conn. 2001).
On the other hand, a resolution of this interlocutory appeal would also necessarily involve
determinations that are heavily fact-based. For example, to determine whether the Petitioners
had adequate notice of the reservation of the Trustee’s causes of action against them, would
necessarily involve a fact-specific inquiry into the particular Plan and Disclosure Statement to
determine whether it possessed adequate information. See In re Worldcom, Inc., 2003 WL
21498904, at *10 (“the approval of a disclosure statement, rather than involving a controlling
question of law . . . involves a fact-specific inquiry into the particular plan to determine whether
it possesses ‘adequate information’ under § 1125.”) (internal quotations omitted); In re
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Ionosphere, 179 B.R. at 29 (“‘The determination of what is adequate information is subjective
and made on a case by case basis. This determination is largely within the discretion of the
bankruptcy court.’”) (quoting Texas Extrusion, 844 F.2d at 1157); see also In re Copy Crafters
Quickprint, Inc., 92 B.R. 973, 979 (Bankr. N.D.N.Y. 1988) (“What constitutes adequate
information is to be determined on a case-specific basis under a flexible standard that can
promote the policy of Chapter 11 towards fair settlement through a negotiation process between
informed interested parties.”).
Moreover, it would likely be necessary for this Court to examine the record, the lengthy
history leading to the Settlement, and the hearing transcripts, in order to ultimately determine
which parties gave consideration and received releases under the Plan, and determine exactly
what the Settlement involved in order to properly assess applicability of res judicata. The Court
agrees with the Respondent that resolving these issues cannot be done “quickly and cleanly
without studying the record.” WorldCom, 2006 WL 3592954, at *2 (citations omitted). This
conclusion is further bolstered by the fact that the Bankruptcy Order at issue contained a
thorough examination of the relevant facts and bankruptcy history, including the multiple oral
arguments heard by Judge Eisenberg. See In re Futter Lumber Corp., 2011 WL 5417094, at *4
(“After due consideration of all of the arguments of the parties and the relevant documents at
issue, the Court finds that the Defendants’ Motion to Dismiss should be denied for the reasons
set forth below.”); id., at *3 (“At a hearing on the Motion to Dismiss held on August 16, 2011 . .
.”); id. (“on September 20, 2011, the Court heard . . . additional arguments on the Motion to
Dismiss”).
“Since the issues to be appealed cannot be determined solely by interpreting the plain
language of the Plan, but rather require an examination of other pleadings and exhibits, they are
11
not pure legal questions of contract construction appropriate for interlocutory review.” In re
Cross Media Marketing Corp., Nos. 03-13901, 07-878, 2007 WL 2743577, at *2 (S.D.N.Y. Sept.
19, 2007).
Therefore, the Court finds that whether the Bankruptcy Court properly denied the
Petitioner’s Motion to Dismiss cannot properly be considered a controlling issue of law
appropriate for interlocutory appeal.
2. Substantial Ground For Difference of Opinion
Even if a controlling issue of law existed, a court should only grant leave to file an
interlocutory appeal where “the case law shows there to be a substantial ground for difference of
opinion with respect to the controlling question.” In re Pappas, 207 B.R. 379, 381 (2d Cir.
1997). “Substantial ground for difference of opinion exists where ‘(1) there is conflicting
authority on the issue, or (2) the issue is particularly difficult and of first impression for the
Second Circuit.’” Coudert Bros., 447 B.R. at 712 (quoting Enron, 2006 WL 2548592, at *4).
However, “the mere presence of a disputed issue that is a question of first impression, standing
alone, is insufficient to demonstrate a substantial ground for difference of opinion.” In re Flor,
79 F.3d at 284. “At least some precedent that bears on the matter, however thin, may establish a
substantial ground for dispute.” Secs. Investor Protection Corp. v. Bernanrd L. Madoff
Investment Secs. LLC, No. 11 Misc. 285, 2011 WL 6057927, at *5 (S.D.N.Y. Dec. 6, 2011).
Further, “[m]erely claiming that the bankruptcy court’s decision was incorrect is insufficient to
establish substantial ground for difference of opinion.” Ellsworth, et al v. Myers, et al (In re
Cross Media Marketing Corporation), No. 07 Civ. 878, 2007 WL 2743577, at *2 (S.D.N.Y.
Sept.19, 2007) (citing Estevez–Yalcin v. Children's Vill., No. 01 Civ. 8784, 2006 WL 3420833,
at *4 (S.D.N.Y. Nov. 27, 2006)).
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As an initial matter, neither side disputes and it is beyond contention, that a confirmed
plan of reorganization constitutes a final judgment on the merits that is entitled to preclusive
effect under the doctrine of res judicata. See Sure–Snap Corp. v. State St. Bank & Trust Co.,
948 F.2d 869 (2d Cir. 1991) (noting that an order confirming a plan of reorganization has
preclusive effect under res judicata ); In re Justice Oaks II, Ltd., 898 F.2d 1544, 1550 (11th Cir.
1990) (“This issue has been settled for some time: a bankruptcy court’s order confirming a plan
of reorganization is given the same effect as any district court’s final judgment on the merits.”).
Accordingly, as a general matter, a debtor is precluded from asserting any claims postconfirmation that are not preserved in its plan. See In re I. Appel Corp., 300 B.R. 564, 567
(Bankr. S.D.N.Y. 2003) (citing D & K Props. Crystal Lake v. Mut. Life Ins. Co. of New York,
112 F.3d 257, 259 (7th Cir. 1997) (explaining that “confirmed plans of reorganization are
binding on all parties, and issues that could have been raised pertaining to such plans are barred
by res judicata”)).
However, it is also undisputed that where the right to pursue litigation is reserved in a
plan or disclosure statement, res judicata will not prevent a debtor from subsequently pursuing
those claims. See Tracar, S.A. v. Silverman (In re American Preferred Prescription, Inc.), 266
B.R. 273, 277 (E.D.N.Y. 2000) (“The case law, however, recognizes an exception to the res
judicata bar where the debtor has reserved the right to object to claims in a plan.”). The parties’
dispute focuses on how much detail a plan or disclosure statement must contain to accomplish
reservation and enable a post-confirmation trustee or reorganized debtor to prosecute claims
against creditors, thus precluding applicability of the res judicata doctrine. The Petitioners
contend that the majority of the courts to have addressed the issue have held that a debtor may
preserve the right to commence litigation against creditors in the plan or disclosure statement in
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order to defeat the res judicata bar that attaches to a bankruptcy court’s order confirming a
reorganization plan, but that such preservation must be specific and unequivocal. According to
the Petitioners, the Bankruptcy Court found that the doctrine of res judicata did not stop a debtor
or trustee from pursuing claims post-confirmation against third parties even though the claims
were not specifically and unequivocally preserved in the Plan or Disclosure Statement. Thus, the
Petitioners assert that there is a substantial ground for a difference of opinion as to this finding.
On the other hand, the Respondent disputes this characterization of the Bankruptcy Court’s
holding and contends that the court did find that the Disclosure Statement specifically and
unequivocally preserved the Trustee’s current claims in the adversary proceeding, assuming that
is the appropriate standard in this circuit. Thus, the Respondent asserts that the Petitioners’
dispute is merely with the Bankruptcy Court’s application of the law to the facts, rather than the
governing legal standard
The degree of reservation specificity required to escape the res judicata bar varies among
courts. See In re MPF Holding US LLC, 443 B.R. 736 (Bankr. S.D. Tex. 2011) (“Courts have
differed on how specific the reservation provision in a plan must be.”); In re Goodman Bros.
Steel Drum Co., Inc., 247 B.R. 604, 607 (Bankr. E.D.N.Y. 2000) (“Case law is divided on how
specific language of retention and enforcement must be”); 7 Lawrence P. King, Collier on
Bankruptcy ¶ 1123.02[3][b], at 1123–23 (Alan N. Resnick & Henry J. Sommer eds., 15th rev.
ed. 2008) (noting disagreement over the specificity required to preserve claims).
Generally speaking, three approaches have developed to address this precise issue. A
minority of courts have held that broad, categorical language in the plan or disclosure statement
is sufficient to preserve subsequent causes of action. See, e.g., Kmart Corp. v. Intercraft Co. (In
re Kmart Corp.), 310 B.R. 107, 124 (Bankr. N.D. Ill. 2004) (“[A] categorical reservation can
14
effectively avoid the res judicata bar.”); In re Ampace Corp., 279 B.R. 145, 156–62 (Bankr. D.
Del. 2002) (detailing arguments from competing lines of cases and then holding that “a
subsequent action is not barred by a prior confirmation hearing under the doctrine of res judicata
where the disclosure statement and plan contain a general reservation of the right to pursue
preference actions post-confirmation.”) (emphasis in original); In re Worldwide Direct, Inc., 280
B.R. 819, 823 (Bankr. D. Del. 2002) (rejecting specificity requirement and allowing a more
general reservation of claims because “it is simply impractical and unwarranted to require a
debtor to provide in excruciating detail all of the possible defenses or objections which the estate
may have to every single claim being treated in the plan”); P.A. Bergner & Co. v. Bank One (In
re P.A. Bergner & Co.), 140 F.3d 1111, 1117 (7th Cir. 1998) (“[W]hile there might be some
logic in requiring ‘specific and unequivocal’ language to preserve claims belonging to the estate .
. . the statute itself contains no such requirement.”); In re Weidel, 208 B.R. 848, 853 (Bankr.
M.D.N.C. 1997) (“(“The sound rationale expressed by these courts is that under § 1141(a)
debtors and creditors are bound by the terms of the plan and a general reservation of the right to
object is a valid and binding plan provision.”) (collecting cases).
In the First Circuit for example, “categorical reservations are sufficient, so long as the
language used identifies the categories with enough detail to put creditors on notice.” In re Felt
Mfg. Co., Inc., 402 B.R. 502, 517 (Bankr. D. N.H. 2009). As noted by a district court in this
circuit,“[a]lthough a minority of courts, including some in this Circuit, have held that a blanket
reservation of rights survives a res judicata challenge, their rationale was generally based on the
practicalities of shepherding large Chapter 11 cases to confirmation.” In re Porter, 382 B.R. 29,
40 (Bankr. D. Vt. 2008).
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A second approach that some courts have taken is a more middle-ground approach, which
varies with the circumstances of the bankruptcy case and the plan’s language. See, e.g., In re
Associated Vintage Group, Inc., 283 B.R. 549, 563–64 (B.A.P. 9th Cir. 2002) (rejecting exact
specificity requirements and instead adopting a more flexible, case-by-case approach to
determining the degree of specificity required in a plan of reorganization); Elk Horn Coal Co.,
LLC v. Conveyor Mfg. & Supply, Inc. (In re Pen Holdings, Inc.), 316 B.R. 495, 504 (Bankr.
M.D. Tenn. 2004) (stating that the reservation provision in a plan must be evaluated within the
context of each case and in relation to the particular claims at issue).
Finally, a majority of courts that have approached the question have done so more
strictly, requiring that a reservation provision have some degree of specificity. See, e.g., Dynasty
Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351, 355 (5th Cir.
2008) (“For a debtor to preserve a claim, the plan must expressly retain the right to pursue such
actions . . . . The reservation must be specific and unequivocal.”) (internal citations omitted);
Browning v. Levy, 283 F.3d 761, 775 (6th Cir. 2002) (“[A] general reservation of rights does not
suffice to avoid res judicata.”); In re Kelley, 199 B.R. 698, 704 (B.A.P. 9th Cir. 1996) (“[e]ven a
blanket reservation by the debtor reserving ‘all causes of action which the debtor may choose to
institute’ has been held insufficient to prevent the application of res judicata to a specific
action.”) (quoting In re Hooker Investments, 162 B.R. 426, 433 (Bankr. S.D.N.Y. 1993)); D & K
Props. Crystal Lake v. Mutual Life Ins. Co. of New York, No. 95 Civ. 4974, 1996 WL 224517,
at *4 (N.D. Ill. May 1, 1996) (“[A] blanket reservation of rights is insufficient to overcome the
res judicata bar to the institution of a post-confirmation lawsuit imposed by a confirmed
bankruptcy plan.”), aff’d, 112 F.3d 257, 261 (7th Cir. 1997) (“To avoid res judicata the
reservation of a cause of action must be both express, as in writing, and express, as in
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specifically identified.”). See also American Preferred, 266 B.R. at 277 (explaining that many
courts have held that to avoid res judicata, “the plan must expressly reserve the right to pursue
that particular claim post-confirmation and that a blanket reservation allowing for an objection
to any claim is insufficient”) (emphasis in original); In re Hooker Invs., Inc., 162 B.R. 426, 433–
34 (Bankr. S.D.N.Y. 1993) (discussing relevant case law and finding that “[e]ach of these
decisions either expressly or impliedly recognizes that whereas a blanket reservation would not
be enough to escape the res judicata bar, an express reservation would”).
The Second Circuit itself has yet to expressly embrace any of the above three approaches.
See In re Porter, 382 B.R. at 40 (noting that as of 2008, the Second Circuit had yet to rule on
whether reservation of rights language must be specific in Chapter 11 plans). Some district
courts have interpreted the Second Circuit’s decision in Sure–Snap Corporation v. State St. Bank
& Trust Company, 948 F.2d 869 (2d Cir. 1991), as “impliedly recogniz[ing] that should such an
exception to res judicata exist, the right to bring the subsequent litigation must be specifically
reserved in the confirmed plan.” See, e.g., American Preferred, 266 B.R. at 278; see also D & K
Props. Crystal Lake v. Mutual Life Ins. Co. of New York, No. 95 C 4974, 1996 WL 224517, at
*4 (N.D. Ill. May 1, 1996), aff’d, 112 F.3d 257 (7th Cir.1997) (interpreting Sure–Snap to imply
that, to escape the res judicata bar, the right to bring post-confirmation litigation must be
expressly reserved in the confirmed plan).
However, this inferred strict approach has not been explicitly adopted by the Second
Circuit, and district and bankruptcy courts within the Second Circuit have not uniformly
followed this interpretation of Sure-Snap. For example, in Katz v. I.A. Alliance Corp. (In re I.
Appel Corp.), 300 B.R. 564, 570 (S.D.N.Y. 2003), the district court found that a general
reservation of the right to litigate post-confirmation claims was acceptable because it was
17
persuaded that in large Chapter 11 bankruptcies “the investigation and decision to pursue every
possible claim of a debtor can take several years,” and that “allowing a debtor to include a
general reservation . . . expedites the process of confirming a plan of reorganization.” 300 B.R. at
569. The Appel Court further stated that “[i]t is neither reasonable nor practical to expect a
debtor to identify in its plan of reorganization or disclosure schedules every outstanding claim it
intends to pursue with the degree of specificity that the Katzes would require.” Id. Moreover, in
In re Perry H. Koplik & Sons, Inc., 357 B.R. 231 (Bankr. S.D.N.Y. 2006), another district court
in this circuit found “that a debtor’s plan of reorganization may reserve postconfirmation claims
in general terms,” and thus the court’s jurisdiction over postconfirmation claims was expressly
reserved by broad language. The court further stated that “[i]t is neither reasonable nor practical
to expect a debtor to identify in its plan of reorganization or disclosure schedules every
outstanding claim it intends to pursue with the degree of specificity that the [defendants] would
require.”)). Id.
However, the different articulations as to the degree of specificity required to escape the
res judicata bar in this circuit does not, as the Petitioners contend, satisfy the second prong for an
interlocutory bankruptcy appeal. This is because the rationale relied upon by Judge Eisenberg
would suffice under any of the varying approaches, and thus the disagreement as to the
appropriate standard is irrelevant. While there would potentially be a disputed question if the
Bankruptcy Court’s decision was based merely upon a blanket reservation provision, this is a
mischaracterization of the Order. Rather, Judge Eisenberg found that the Trustee’s causes of
action were reserved because “[a]lthough the Plan contains a general reservation of causes of
action post-confirmation, the Disclosure Statement expressly identifies certain preferential
payments received by the Defendants as potential Causes of Action reserved for possible
18
prosecution post-confirmation notwithstanding any defenses of res judicata or collateral
estoppel.” 2011 WL 5417094, at *7. In particular, the Order noted that the Disclosure Statement
provided, in part, as follows:
Identified in the Debtor’s Statement of Financial Affairs at question 3(a) is a nonexclusive list of certain potential Causes of Action, which are expressly identified
and preserved for possible prosecution on and after the Effective Date. The
failure to list any potential or existing claims or Clauses of Action is not intended
to and shall not limit the rights of the Liquidation Trustee to pursue any claims or
Causes of Action not listed or identified.
Question 3(a) of the Debtor’s Statement of Financial Affairs listed payments made by the Debtor
to most of the Petitioners within the one year period prior to the Petition Date. Therefore, the
Bankruptcy Court found that:
Creditors voting on the Plan, including the Defendants to the extent they hold
claims as creditors, were clearly given notice in the Disclosure Statement of the
transfer to the Liquidation Trust of any pending and potential causes of action, in
particular, actions against the insiders for payments received from the Debtor as
set forth in question 3 of the Debtor’s Statement of Financial Affairs, and that the
Trustee may be pursuing these causes of action. The Disclosure Statement is
consistent with the language in the Plan and Trust Agreement showing that one of
the principal purposes of the Liquidation Trust is to resolve, liquidate and realize
upon the Debtor’s assets, including causes of action, post-confirmation.
Therefore, the Bankruptcy Court found that the causes of action asserted in the adversary
proceeding were expressly reserved in the Disclosure Statement. There is no substantial ground
for dispute that even if a blanket reservation in the plan itself is insufficient, if the disclosure
statement expressly reserves causes of action, then there is no res judicata bar. See Goldin
Associates, L.L.C. v. Donaldson, Lufkin & Jenrette Securities Corp., No. 00 Civ. 8688, 2004
WL 1119652, *4 (S.D.N.Y. May 20, 2004) (finding that the specific reservation of the right to
litigate claims post-confirmation can be in the plan or the disclosure statement so long as the
defendants had notice). In fact, in affirming the Appel decision, the Second Circuit did so on the
ground that the disclosure statement adequately informed the creditors that specified claims
19
would not be part of the bankruptcy estate and thus res judicata did not apply. In re I. Appel
Corp., 104 Fed. App’x. 199 (2d Cir. 2004). In particular, the Second Circuit noted that because a
reservation of rights in a Chapter 11 plan is read in conjunction with the disclosure statement, if
the latter provides more specificity, that will suffice to overcome the res judicata bar.
The Petitioners’ remaining arguments, including that the language in the disclosure
statement was equivocal, still do not warrant an interlocutory appeal. Any contentions with
regard to the Bankruptcy Court’s finding that the Disclosure Statement expressly reserved the
Trustee’s causes of action is a heavily fact-based question and it appears that the Petitioners “are
merely quibbling with this Court's application of the facts to the law, not with the underlying
legal rule, which is necessary if this Court is to certify an immediate appeal.” Estevez-Yalcin v.
The Children’s Village, No. 01 Civ. 8784, 2006 WL 3420833, at *4 (S.D.N.Y. Nov. 27, 2006).
Therefore, in light of the precise ground upon which the Bankruptcy Court’s decision
rested, there is no ground for dispute as to the law but only as to the application of the law to the
underlying facts. See Goldin, 2004 WL 1119652, at *4 (“When read conjunctively with the
Disclosure Statement, the Plan clearly expresses SmarTalk’s intent to preserve its claims against
defendants in this action. Although the reservation clause in the Plan is a blanket one, and thus
insufficient alone to preserve the Debtor’s claims, . . . the Disclosure Statement details the
specific causes of action SmarTalk was pursuing against both the WWD and DLJ defendants at
the time of confirmation.”); In re I Appel, 300 B.R. at 570 (“The Plan indicated that the Debtor
was reserving all causes of action, and the Disclosure Statement indicated that the Debtor was
investigating potential claims against [defendants].”); In re Goodman Bros., 247 B.R. at 610
(noting that notice in a disclosure statement of actions debtor intends to pursue post-confirmation
20
provides sufficient notice to creditors since disclosure statement must be provided along with
plan pursuant to Section 1125(b) of the Bankruptcy Code).
Therefore, the motion for an interlocutory appeal is denied because there is not a
controlling question of law and the Bankruptcy Court’s finding is not an issue about which there
is a substantial ground for disagreement. Accordingly, the Court need not address issues of
judicial economy — whether an immediate appeal on that issue could materially advance the
ultimate termination of this litigation — or whether exceptional circumstances that would justify
a departure from the basic policy of postponing appellate review until after the entry of a final
judgment exist in this case. Thaler v. Estate of Arbore ( In re Poseidon Pool & Spa Recreational,
Inc.), 443 B.R. 271, 275 (E.D.N.Y. 2010) (“[A]ll three requirements set forth in section 1292(b)
must be met for a Court to grant leave to appeal.”).
III. CONCLUSION
“Courts should construe the requirements for certification strictly and only exceptional
circumstances will justify certification.” Green v. City of New York, No. 05 Civ. 0429, 2006
WL 3335051, at *2 (E.D.N.Y. Oct. 23, 2006). The Court finds that the determination by Judge
Eisenberg does not constitute the appropriate circumstances for an interlocutory appeal in that it
does not demonstrate the requisite elements needed to overcome the general aversion to
piecemeal litigation. See In re AroChem Corp., 176 F.3d 610, 619 (2d Cir. 1999).
For the above stated reasons, it is hereby
ORDERED, that the Petitioners’ request for leave to file an interlocutory appeal from the
November 8, 2011 Bankruptcy Order is denied.
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SO ORDERED.
Dated: Central Islip, New York
March 24, 2012
___/s/ Arthur D. Spatt_______
ARTHUR D. SPATT
United States District Judge
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