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Legal Claims as Assets in Chapter 11

Legal Claims as Assets in Chapter 11

December 12, 2017
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By: Dean Langdon

It’s not unusual for a company in financial distress to be involved in some sort of litigation, with claims being asserted back and forth between one or more parties. One of the benefits of filing bankruptcy is the automatic stay, which stops prosecution of most legal actions and efforts to collect debts.  But what happens if the debtor company was pursuing legal claims against others before filing bankruptcy?  A Chapter 11 bankruptcy normally leaves a business and business owners in charge of running the company.  And in a true reorganization, the company reorganizes and retains most or all of its assets, including claims against others.  The Bankruptcy Code permits a plan of reorganization to provide for keeping and prosecuting claims the company has, either for itself, or through a trustee or other representative, in order to benefit creditors. In some jurisdictions, in order to preserve such claims, they must be specifically described in a plan of reorganization and/or accompanying disclosure statement.  The Bankruptcy Code doesn’t specify how a plan should provide for the keeping and prosecution of claims, and courts have some up with varying standards.  Some of these are more favorable to the targets of claims, while others are more favorable to debtors.

In Nestle Waters North America, Inc. v. Mountain Glacier, LLC (In re Mountain Glacier, LLC), the Sixth Circuit Court of Appeals affirmed the courts below which held Mountain Glacier properly preserved a counterclaim against Nestle Waters in its plan of reorganization. The disclosure statement specifically described the claim which was involved in a stayed arbitration, and the plan provided the claim would be transferred to the reorganized debtor. Looking at the definition of a “claim” and the plain language of 11 U.S.C. Sec. 1123(b)(3) the Court of Appeals did not require the specificity Nestle sought – naming each defendant and stating the factual basis of the claim – and declined to impose a higher standard. Relying on Browning v. Levy, 283 F.3d 761 (6th Cir. 2002), the Court found it sufficient if a reservation of claims enables creditors to a) identify the claim(s) at issue, and b) evaluate if such claims might be additional assets for distribution. As an aside, the Court also found no import to the fact that “causes of action” in the “Retention of Claims” section of the plan was not capitalized as it was in the “Transfer of Assets” section of the plan, finding that including the term in the “Transfer of Assets” section was sufficient.

This is reassuring for Chapter 11 debtors’ counsel, who seek clarity on how much information and detail must be included in a plan and disclosure statement in order to preserve a claim for prosecution by a reorganized debtor or liquidating trust. In the Sixth Circuit, it is sufficient to provide a brief description of the claim and who it is against in order to preserve it for future prosecution.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy, complex litigation, and estate planning. For more information about chapter 9 or DelCotto Law Group, please call (859) 231-5800 or email info@dlgfirm.com.