• General Retention Clause in Chapter 11 Plan Preserves Debtors' Right to Bring Post-Confirmation Preference Litigation
  • March 1, 2005
  • Law Firm: Weil, Gotshal & Manges LLP - Houston Office
  • The United States Bankruptcy Court for the Middle District of Tennessee, in Elk Horn Coal Co., LLC v. Conveyor Mfg. & Supply, Inc. (In re Pen Holdings, Inc.), considered whether language in a debtor's confirmed chapter 11 plan was sufficient to preserve preference claims for prosecution after confirmation. The bankruptcy court concluded that, although it was a close case, the language contained in the plan of reorganization and disclosure statement adequately identified preference actions as causes of action to be preserved for postconfirmation prosecution.

    Preservation of Claims Under the Bankruptcy Code

    As a general rule, confirmation of a chapter 11 plan has a res judicata effect with respect to causes of action that were part of the debtor's bankruptcy estate. That is, any disposition of causes of action pursuant to a confirmed chapter 11 plan is final and cannot be re-litigated with respect to any issues that were raised or could have been raised in connection with the confirmation proceedings. In the context of section 547 of the Bankruptcy Code, which addresses preferential transfers to creditors,1 this means that any potential action against a creditor to recover a prepetition preferential transfer is a cause of action held by the debtor that could have been raised before plan confirmation. Failure to prosecute or preserve such preference actions prior to confirmation could preclude recovery of any such transfers for the benefit of the debtor's estate.

    In large and complex chapter 11 cases it is not always practical or possible to litigate all preference actions prior to confirmation of a chapter 11 plan. Thus, debtors-in-possession or trustees in bankruptcy can use the provisions of section 1123(b)(3) of the Bankruptcy Code to preserve their right to bring such actions following plan confirmation. Section 1123(b)(3)(B) states that a plan may provide for the retention and enforcement by the debtor, the trustee, or a representative of the estate of any claim or interest belonging to the debtor or the bankruptcy estate.

    In recent years, there has been considerable disagreement among the courts as to what degree of specificity is required in a plan or disclosure statement in order to preserve a debtor's right to commence preference actions and other causes of action on a post-confirmation basis. Some courts have stated that a blanket reservation of "all causes of action" is insufficient and, therefore, confirmation of a chapter 11 plan bars a debtor from bringing post-confirmation litigation. Other courts have found that general reservations such as "all causes of action including all avoidance powers pursuant to section 547" are sufficient to preserve the right to commence preference litigation following plan confirmation.

    Factual Background

    Pen Holdings, Inc. and five related entities (the "Debtors") filed petitions for relief under chapter 11 of the Bankruptcy Code in January 2002. The Debtors filed Schedules of Assets and Liabilities and Statements of Financial Affairs which listed more than 700 payments to creditors made in the 90 days prior to filing totaling more than $160 million.

    A plan of reorganization for the Debtors was confirmed. The plan defined "Avoidance Actions" to include, among other things, "all preference claims pursuant to Section 547" of the Bankruptcy Code. The plan further provided:

    "From and after the Confirmation Date, to the extent not otherwise adjudicated or settled prior to or as part of the Plan, all rights and/or claims of the Post Confirmation Debtors relating to Avoidance Actions are hereby preserved, retained and may be pursued by [the reorganized debtor]."

    In addition, the disclosure statement accompanying the plan of reorganization indicated that the Debtors owned "other assets" including potential avoidance actions. The liquidation analysis attached to the disclosure statement did not list a separate line item for avoidance actions, but did include a line item for "other assets" valued at $924,000.

    After confirmation, the reorganized Debtors filed 173 lawsuits to avoid various preferential transfers. Various defendants in these proceedings sought to dismiss the preference lawsuits arguing that the res judicata effect of the Debtors' confirmed chapter 11 plan precluded the bringing of the preference suits because a more express identification of the suits was required to preserve the Debtors' right to prosecute the suits after confirmation. The Debtors argued that section 1123(b)(3) of the Bankruptcy Code was satisfied with the language used in the disclosure statement and plan identifying preference actions to be preserved.

    The Bankruptcy Court's Decision

    Because the Bankruptcy Code is silent as to what language is necessary or sufficient to preserve causes of action under section 1123(b)(3), the bankruptcy court reviewed the legislative history of the statute. A key conclusion that the court reached is that the purpose behind the language of section 1123(b)(3) is preservation of a debtor's causes of action for the benefit of creditors, not to put specific potential defendants on notice of the reserved claims and causes of action. The statutory intent was to inform creditors of the estate of the existence of assets still to be liquidated that are being preserved for prosecution by the reorganized debtor or its representative.

    The bankruptcy court discussed at length the disagreement among the courts as to what language is sufficient to preserve various types of causes of action. In one leading case discussed by the bankruptcy court, Browning v. Levy, 283 F.3d 761 (6th Cir. 2002), the United States Court of Appeals for the Sixth Circuit concluded that "[r]es judicata does not apply where a claim is expressly reserved by the litigant by the early bankruptcy proceeding . . . . But a general reservation of rights does not suffice to avoid res judicata." Browning, however, was not in the context of preference litigation but in the context of a breach of duty claim and malpractice. The bankruptcy court also noted that a Seventh Circuit decision, in the context of preference actions, concluded that specific language to preserve claims was not required by the Bankruptcy Code.

    After discussing decisions from other circuits, the bankruptcy court concluded that "Browning does not establish a general rule that naming each defendant or stating the factual basis for each cause of action are the only ways to preserve a cause of action at confirmation of a Chapter 11 plan." In determining what is required to preserve a cause of action, the court noted that section 1123(b)(3) protects the estate from the loss of potential assets; it does not protect defendants from unexpected lawsuits. Thus, the court stated that the specific language sufficient to satisfy section 1123(b)(3) "must be measured in the context of each case and the particular claims at issue: Did the reservation allow creditors to identify and evaluate the assets potentially available for distribution?"

    The court found that the language used in the Debtors' plan was "a close case," but ultimately decided that it was sufficient. The plan defined "Avoidance Actions" and expressly included them as retained causes of action that may be pursued by the reorganized Debtor. The court indicated that it would have been preferable if the liquidation analysis had contained a line item setting forth what the Debtors believed would be recoverable from the $160 million of potential preference payments listed in their Statements of Financial Affairs. Perhaps most reassuring for debtors, the court recognized the impracticability, especially in larger cases, of identifying by name in a plan or disclosure statement every entity that may have received a preferential payment from a debtor. The courtfound that this is not the common practice in chapter 11 cases and that nothing in section 1123(b)(3) suggests that such a high degree of specificity is required. Accordingly, the bankruptcy court held that the general reservation of causes of action, including preference claims under section 547, was sufficient to overcome the res judicata effect of the Debtors' confirmed plan of reorganization, thereby allowing the Debtors to pursue over 170 post-confirmation preference actions for the benefit of the estate's creditors.


    The specific language necessary to adequately preserve preference and other avoidance actions for post-confirmation prosecution by a debtor will likely vary depending on the facts and circumstances of the case, as well as the particular jurisdiction. Debtors should pay particular attention to the judicial precedents in their jurisdiction when drafting chapter 11 plans and disclosure statements. What seems clear in light of Pen Holdings is that a very general reservation clause (e.g., "all causes of action") without more, is probably insufficient, but it is also unnecessary and impractical to list every potential preference or other avoidance action defendant. Moreover, the legislative history of section 1123(b)(3) supports the view that such a detailed listing in unnecessary because that provision is not designed to put potential defendants on notice of reserved causes of action.

    1 The elements of a preferential transfer are: (i) a transfer of property, (ii) on account of pre-existing debt, (iii) made to or for the benefit of a creditor, (iv) during the 90 days before commencement of a chapter 11 case (one year for insiders), (v) while the debtor was insolvent and (vi) that enabled the creditor to receive more than it would receive in a hypothetical chapter 7 liquidation.

    Elk Horn Coal Co., LLC v. Conveyor Mfg. & Supply, Inc., et al. (In re Pen Holdings, Inc.), 316 B.R. 495 (Bankr. M.D. Tenn. 2004).
    Browning v. Levy, 283 F.3d 761 (6th Cir. 2002).