Further isolating the Fifth Circuit, the Sixth Circuit held that a debtor can preserve a claim for prosecution after confirmation of a chapter 11 plan with the barest description of the suit.
Before bankruptcy, the debtor was in arbitration with a creditor. The arbitration was stayed by the chapter 11 filing.
Laying out the debtor’s assets and liabilities, the disclosure statement listed the arbitration as one of the assets and said the value was unknown. Giving the creditor’s name and mentioning where the arbitration was pending, the disclosure statement said the reorganized debtor would pursue the arbitration after confirmation.
Following confirmation, the defendant argued that further prosecution of the arbitration was barred by res judicata. To preserve the claim, the defendant contended that the disclosure statement should have given more detail about the arbitration and laid out the factual basis before the debtor’s claim would survive confirmation.
On summary judgment, the bankruptcy court ruled in favor of the debtor and held that the arbitration could proceed. The district court upheld the bankruptcy court, and Circuit Judge Amul Thapar affirmed in an opinion on Dec. 5.
Governing authority in the Sixth Circuit is Browning v. Levy, 283 F.3d 761 (6th Cir. 2002), Judge Thapar said. Browning held that a general reservation of rights is insufficient.
Judge Thapar interpreted Browning as requiring enough information so creditors could identify the claims and evaluate whether the claims could provide additional value for distribution. He rejection the notion that Browning contains “stringent requirements” that include “the factual basis for each (potential) cause of action.”
The disclosure statement was sufficient. “If creditors wanted more information, they could have objected to the reservation (or plan) and asked the bankruptcy court to require a more fulsome description,” Judge Thapar said.
On the other end of the spectrum, then-Chief Circuit Judge Edith H. Jones held in In re United Operating LLC, 540 F.3d 351 (5th Cir. 2008), that a lawsuit must be described specifically and unequivocally before plan confirmation to survive emergence from chapter 11. The Fifth Circuit ostensibly narrowed United Operating in Spicer v. Laguna Madre Oil & Gas II LLC (In re Texas Wyoming Drilling Inc.), 647 F.3d 547 (5th Cir. 2011), where Circuit Judge Edith Brown Clement 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.”
One day, perhaps, the Fifth Circuit will further limit United Operating in light of opinions like Judge Thapar’s.
Further isolating the Fifth Circuit, the Sixth Circuit held that a debtor can preserve a claim for prosecution after confirmation of a chapter 11 plan with the barest description of the suit.