On August 12, 2005, the United Bankruptcy Court for the District of Delaware held in Cooper v. Tech Data, (In re Bridgeport Holdings, Inc.) that clear and unambiguous provisions in a disclosure statement and reorganization plan, which specify the category of causes of actions to be preserved and the effect of any recovery, are sufficient to preserve those causes of action for post-confirmation adjudication. Bankruptcy Code Section 1123(b)(3) does not require “specific and unequivocal” identification of all preference claimants.

In Bridgeport Holdings, the Debtors, one of the largest retailers for computer hardware and software in the country, filed a Chapter 11 petition. A liquidating plan was approved, which purported to preserve all Debtors’ preference claims for post-confirmation adjudication by the liquidating trustee. Although there were more than 3000 property transfers within 90 days of bankruptcy, no transfer details were listed in the disclosure statement or plan.

Nearly three months after the plan became effective, the liquidating trustee filed a $19 million preference action against transferee Tech Data. The transferee claimed that res judicata barred the action because it had not been preserved for post-confirmation adjudication. Specifically, the transferee argued that because Debtors only included a general retention clause in their plan and disclosure statement, and did not specifically list each transferee by name and list the preference claim as a future cause of action, the preference claims did not survive plan confirmation.

The Debtors’ disclosure statement and plan defined “Cause of Action” broadly. Namely, it reserved all actions that could have been brought on behalf of the Debtors, including those arising under chapter 5 of the Bankruptcy Code. Both documents also stated that entry of the confirmation order would not waive or release any Cause of Action. Further, the documents provided that on and after the plan’s effective date, “the Liquidating Trust shall be assigned all Causes of Action arising under sections 542, 542, 544, 547 through 551 and 553 of the Bankruptcy Code�” The Liquidating Trustee was given express authorization to “enforce, prosecute, settle or compromise” the Causes of Action.

The disclosure statement put all creditors on notice that they may be targeted for preference complaints. It stated that in deciding whether to vote for the plan, creditors who received payments within 90 days of bankruptcy should consider that the plan preserves all Causes of Action and the Liquidating Trustee is authorized to prosecute such claims. In addition, the disclosure statement explained that actual distributions to certain classes of creditors, which included general unsecured creditors, would depend on prosecution of and recovery from the preserved Causes of Action.

In considering whether the above-referenced language was sufficient, the Court evaluated a significant body of case law related to the specificity of reservation language that is required to preserve causes of action post-confirmation. The Court concluded that case law supported the holding that clear and unambiguous provisions in a disclosure statement and reorganization plan, which specify the category of causes of actions to be preserved and the effect of any recovery, are sufficient to preserve those causes of action for post-confirmation adjudication.

Of note, the Court distinguished cases where the plan included a general reservation clause, and yet facts of pre-petition transfers were known and not disclosed. The Court also distinguished cases where the reservation language merely reserved “all causes of action” without describing any category of cause of action. Further, the Court distinguished a case where the plan and disclosure statement failed to reserve the right to institute post-confirmation proceedings.

The Court also evaluated the holding in Browning v. Levy, 283 F.3d 761 (6th Cir. 2002). Browning held that a general retention clause that identifies categories of causes of action, but fails to name the defendant and factual basis for breach of fiduciary duty and legal malpractice claims is insufficient to preserve those claims. Because the Browning case did not involve preference claims, the Court declined to extend its holding. Instead, the Court held that when reserving preference actions, particularly in large Chapter 11 cases, Bankruptcy Code Section 1123(b)(3) does not require such specificity

The Court also noted that the Bankruptcy Appellate Panel for the Ninth Circuit supports the use of more general reservation language to preserve causes of action. In Alary Corp. v. Sims (In re Associated Vintage Group, Inc.), 283 B.R. 549 (9th Cir. B.A.P. 2002), the court stated that a plan may preserve particular causes of action or categories of causes of action and provide for post-petition litigation of those claims. Further, as in Bridgeport Holdings, the Associated Vintage court noted that not only is it impractical to require that a disclosure statement and plan list all defendants and possible causes of action, such specificity is not required by Bankruptcy Code Section 1123(b)(3).

In sum, Bridgeport Holdings, gives us guidance on what must be included in a disclosure statement and plan in order to preserve preference claims for post-confirmation adjudication:

  1. Do not merely reserve “all causes of action existing in favor of the debtor.” Identify the specific categories of causes of action that are to be preserved (i.e., “preference actions” or “causes of action arising under Section 547”).
  2. To the extent any facts underlying the causes of action are known pre-confirmation, err on the side of making a more detailed reservation. However, note that in larger chapter 11 cases, courts are not inclined to require detailed reservations that identify all parties who may have received preferential transfers.
  3. Expressly reserve the right to adjudicate the preference claim after plan confirmation.
  4. Describe the effect that recovery from the preference claims will have on creditors, particularly general unsecured creditors.
  5. In the disclosure statement, give notice to creditors that if they have received a transfer from the debtor within the 90 days preceding the bankruptcy, they may be the target of preference claims that will survive confirmation.

Written by: Theresa Wardle