If a confirmed plan contains an injunction preventing creditors from suing the debtor’s insurers, actual knowledge of the chapter 11 case isn’t enough.

Actual notice of the plan, the disclosure statement and the proposed injunction are required, for reasons explained by Delaware Bankruptcy Judge Laurie Selber Silverstein on March 11.

The Boy Scouts’ Injunction

The creditor allegedly suffered sexual abuse as a Boy Scout. Before the chapter 11 filing by the Boy Scouts of America, the plaintiff had sued the BSA, the local council and his alleged abuser. Also before the BSA bankruptcy, the creditor had settled with the BSA and the local council, but not with the alleged abuser.

The insurers for the BSA and the local council refused to defend the alleged abuser, who did not settle. Instead, the alleged abuser and the creditor stipulated before trial that the creditor would collect any judgment only from the insurers. The alleged abuser also assigned his claims against the insurers to the creditor.

Following a trial that also took place before the BSA bankruptcy, the state court entered a $120 million judgment in favor of the creditor against the alleged abuser.

After the BSA chapter 11 filing, the creditor sued the insurers, alleging they were liable for the $120 million judgment. The insurers and the BSA filed suggestions of bankruptcy. The creditor, the BSA and the insurers stipulated to staying the creditor’s suit against the insurers until the bankruptcy court ruled on the applicability of the automatic stay.

Later, the bankruptcy court confirmed the BSA’s chapter 11 plan. It included an injunction barring suits against the BSA’s insurers. The creditor didn’t object.

However, the BSA never gave actual notice to the creditor about the bar date, the disclosure statement, the confirmation hearing or the proposed insurance injunction.

Following the effective date of the plan, the trust created by the plan filed a motion asking the bankruptcy court to enforce the insurance injunction by barring the creditor from continuing to sue the insurers in an effort to collect the $120 million judgment. Naturally, the creditor opposed. (We shall refer to the debtor rather than the BSA’s trust.)

Preliminary Issues

Before considering the merits, Judge Silverstein dealt with jurisdictional and procedural issues. She ruled that there was subject matter jurisdiction and that issue preclusion did not foreclose either party, because the issues in state court were not being relitigated in bankruptcy court.

Judge Silverstein hinted that she could have dismissed the motion for the debtor’s failure to obtain personal jurisdiction over the creditor. Why? Because the debtor had served the motion on the creditor’s attorney, not the creditor himself.

Judge Silverstein overstepped the question of personal jurisdiction to focus on the merits. Had the creditor won a motion to dismiss for lack of personal jurisdiction, the debtor would have served new papers properly, and the same question would have returned to Judge Silverstein.

Improper Notice About the Insurance Injunction

The creditor conceded that the “plain language” of the plan and the insurance injunction would bar him from suing the insurers. However, Judge Silverstein cited the Supreme Court for the proposition that a creditor “is not bound by [the injunction] if he did not receive constitutionally sufficient notice.”

The debtor contended that the creditor had received sufficient notice of the bankruptcy and the bar date by virtue of extensive notice by publication. Also, the creditor knew about the bankruptcy at least when the debtor and the insurers filed their suggestions of bankruptcy in state court. The suggestions of bankruptcy demonstrated that the debtor knew the creditor was a creditor long before confirmation.

Judge Silverstein said that the facts about knowledge “beg the question” of the notice to which the creditor was entitled. In that regard, the creditor was not a creditor of the debtor because he had settled before the BSA’s bankruptcy. Furthermore, the creditor was a “known” creditor, and the debtor gave him no notice about the chapter 11 case.

In the Third Circuit, Judge Silverstein said that “the law is clear” that known “creditors are entitled to actual notice.” She said that “publication notice will not suffice.”

If the debtor wanted the plan and insurance injunction to bind the creditor, Judge Silverstein held that “due process required that Debtor send [the creditor] notice of the confirmation hearing and a copy of the disclosure statement and plan.”

The Rules Require Actual Notice

Judge Silverstein buttressed her conclusion about due process by also holding that notice to the creditor was “not sufficient” under the Bankruptcy Rules. She said that Rule 2002(b) requires notice before a creditor is obliged to object to confirmation or a disclosure statement. Similarly, Rule 3017(d) requires service of the plan and disclosure statement along with notice of the confirmation hearing.

Judge Silverstein said that the rules “cannot be sidestepped simply because a party-in-interest is a non-creditor if its rights are impacted by the plan.” But she wasn’t through with the debtor’s procedural shortcomings when applied to the creditor.

Judge Silverstein quoted Rule 3016(c) for saying that a plan and disclosure statement must use “specific and conspicuous” language, like bold italic text, regarding any injunctions that are not effected by the Bankruptcy Code. She said that a non-creditor “cannot be given any less notice” than “the notice that must be accorded to parties when a third-party injunction is requested.”

Judge Silverstein denied the debtor’s motion to enjoin the creditor’s suit against the insurers, saying that the creditor’s “actual knowledge of the bankruptcy case does not satisfy the requirements of constitutional due process.”