Smack-Down Of A Straitjacket

Postconfirmation liquidation and litigation trusts have become an important mechanism in a chapter 11 bankruptcy estate's arsenal, allowing for the resolution of claims and interests without needlessly delaying confirmation in the interim. The specter of postconfirmation litigation may seem unremarkable. Section 1123(b)(3)(B) of the Bankruptcy Code states that a plan may provide for retention or enforcement by the reorganized debtor, the trustee, or a representative of the estate of any claim or interest belonging to the estate. However, the provision does not specify the manner in which the retention of any such claims or interests should be drafted and disclosed to other parties - leaving to the courts the question of the level of specificity and detail required. A recent decision handed down by a Texas bankruptcy court, In re MPF Holdings US LLC, 443 B.R. 736 (Bankr. S.D. Tex. 2011), suggested that in that district at least, the level of specificity and detail required is high. However, in In re Matter of Texas Wyoming Drilling, Inc., 647 F.3d 547 (5th Cir. 2011), the Fifth Circuit issued an opinion clarifying that debtors in that circuit, which includes the Southern District of Texas, are not straitjacketed in this regard after all.

Background: The Three Approaches

Decisions on this issue have been varied, with some courts requiring only broad, categorical language; others adopting a more nuanced, middle-of-the-road approach; and still others mandating a precise reservation provision. The first group of courts, exemplified by the Seventh Circuit's ruling in P.A. Bergner & Co. v. Bank One (In re P.A. Bergner & Co.), 140 F.3d 1111 (7th Cir. 1998), and, more recently, the court's decision in In re Kimball Hill, Inc., 449 B.R. 767 (Bankr. N.D. Ill. 2011), requires only broad, categorical language. The second group, attempting to find a middle ground, focuses on the particular plan language and the history of the case itself. See, e.g., Elk Horn Coal Co., LLC v. Conveyor Mfg. & Supply, Inc. (In re Pen Holdings, Inc.), 316 B.R. 495 (Bankr. M.D. Tenn. 1994). In Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating, LLC), 540 F.3d 351 (5th Cir. 2008), the Fifth Circuit placed itself in the third camp, requiring that the plan "expressly retain the right to pursue such causes of action" and that the language doing so be "specific and unequivocal." Relaxation of the Fifth Circuit Standard? Since the United Operating ruling was handed...