In a controversial opinion known as United Operating, the Fifth Circuit held that a chapter 11 plan or disclosure statement must specifically and unequivocally reserve lawsuits for prosecution after confirmation. Bankruptcy Judge Jeff Bohm in Houston held that a defendant who is neither a creditor nor a shareholder cannot raise the defense when sued after confirmation.
After the plan was confirmed and the chapter 11 case was closed, the defendant in a state court lawsuit filed a motion to reopen the bankruptcy, interpret the plan, and compel the creditors’ trustee to dismiss the suit because the underlying claim was not adequately reserved in the plan.
According to Judge Bohm, the plan did not reserve the right to sue the defendant in language that would pass muster under the Fifth Circuit’s 2008 and 2011 cases known as United Operating and Texas Wyoming, respectively. Judge Bohm nevertheless refused to reopen the case, and had he done so, the judge went on to say that the defendant could not raise the defense because it was neither a creditor nor a shareholder.
Adopting the reasoning of Bankruptcy Judge Elizabeth W. Manger of New Orleans in a 2013 case called Gulf States Long Term Acute Care of Covington, Judge Bohm said that “if the claim is against a nonvoting, nonclaimant, disclosure of the claim is not critical to the vote on confirmation because a third-party noncreditor is not involved in the administration of the case.”
In short, Judge Bohn said that the plan “did not need to expressly reserve the claims now being prosecuted” because the defendant was neither a creditor nor a shareholder.
In United Operating, then-Chief Circuit Judge Edith H. Jones held that a lawsuit must be described specifically and unequivocally before plan confirmation to survive after emergence from chapter 11.
In Texas Wyoming, the plan and the explanatory disclosure statement said a trustee for creditors could sue shareholders for fraudulent transfers and recovery of dividends. In that case, Circuit Judge Edith Brown Clement narrowed United Operating by holding that the description of the suit was sufficient to survive confirmation of the plan. She said that United Operating “never held that intended defendants must be named in the plan.” She said the disclosure statement “did identify the prospective defendants as various prepetition shareholders.”
Judge Clement’s opinion was also important because it resolved a split among lower courts by saying that the disclosure statement, not just the plan, can be consulted to determine whether there is sufficient identification of a suit to be filed after bankruptcy.