In drafting a bankruptcy plan, causes of action often appear to be an overlooked step-child. Type A bankruptcy lawyers like us spend hours carefully drafting or dissecting the language on assets, liabilities, potential preferences, plan effective dates, and the like, while spending very little time fleshing out and providing for causes of action held by the estate. While the debtor is required to list causes of action on its schedules and § 1123(b)(3)(B)
allows the plan to provide for the retention and enforcement of these causes of action, more often than not, the plan simply provides that the debtor will retain these causes of action, they are not pursued, and they simply die a natural death by means of a statute of limitation.
Sometimes, however, a cause of action is litigated post-bankruptcy and an enterprising defense lawyer will assert that the bankruptcy plan is res judicata. When the judge agrees and dismisses the case with prejudice, the reorganized debtor looks to the bankruptcy lawyer and asks “did you screw up?” Not a good place to be.
Res Judicata in the Bankruptcy Context
With care, this potential pitfall can be avoided. But first, some discussion of the doctrine of res judicata is necessary to understand the issue.