As a general rule, a bankruptcy reorganization plan will include provisions reserving the debtor's right to object to claims or to bring causes of action following the entry of an order on confirmation. This reservation of rights is authorized by 11 U.S.C. §1123(b)(3)(B), which provides that:

(b) Subject to subsection (a) of this section, a plan may—

(3) provide for—

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(B) the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest...

But just how specific must the reservation of rights be under §1123(b)(3)(B)? The plain language of this section provides little guidance, and as a result, courts are split on this issue.

Two schools of thought have emerged on the subject: those courts that require the reservation language to be express and specific and those courts that require the reservation language to be express and general.¹ Language is express and specific if the reservation of rights is in writing and is specific as to the nature of the claim. D & K Properties Crystal Lake v. Mutual Life Insur. Co. of New York, 112 F.3d 257, 261 (7th Cir. 1997). Language is express and general if the reservation of rights is in writing and reserves the right to bring claims without identifying the nature of the claims. Id.

Express and Specific Language Requirement

The case most often cited for the proposition that the reservation of rights language must be express and specific is In re Mickey's Enterprises Inc. v. Saturday Sales Inc., (In re Mickey's Enterprises Inc.), 165 B.R. 188 (Bankr. W.D. Tex. 1994). In Mickey's, a debtor commenced a post-confirmation preference action against a defendant-creditor after the bar date for filing claims had passed. The debtor's disclosure statement and reorganization plan each contained a general retention clause with regard to preferences, which provided:

All causes of action...are preserved and retained for enforcement by the reorganized debtor whether or not commenced prior to the effective date. The causes of action retained include, without limitation:...(ii) all preference claims pursuant to §546 of the Bankruptcy Code....

Id. at 191.

The defendant-creditor, who had not filed a proof of claim, argued that the action was barred by confirmation of the debtor's plan under the doctrine of res judicata. Id. at 192.² In response, the debtor argued that the defense of res judicata was not available because the defendant's claim was not specifically treated in the plan, and therefore res judicata did not apply.

In ruling in favor of the defendant, the Mickey's court found that the reason the defendant had not filed a proof of claim was because the debtor's statement of financial affairs, disclosure statement and plan failed to adequately disclose any potential claims or causes of action against the defendant. Id. at 193. Rather, the documents only included "a general retention clause, which failed to specifically identify any §547 causes of action [against the defendant]." Id. at 193. "[C]learly [the court said], any bankruptcy litigation that the plan proponent is planning on bringing against a known creditor with known claims who has a right to be involved in the confirmation process and who can still timely file claims should be fully disclosed." Id. Cf. D & K Properties, 112 F.3d at 259 (7th Cir. 1997) (res judicata does not apply when a cause of action has been expressly reserved in a reorganization plan).

As a result of its findings, the Mickey's court concluded that the debtor's disclosure statement was inadequate to preserve any claims against the defendant. Id. at 194. However, the Mickey's court cautioned that its ruling did not mean "that as a general rule, [the debtor] must litigate and resolve all §547 causes of action prior to confirmation or be forever barred. What it did mean, however, was that a debtor "must disclose those claims that are likely." Id., quoting Westland Oil Development Corp. v. MCorp Management Solutions Inc. v. Federal Deposit Insurance Corp., 157 B.R. 100, 103 (Bankr. S.D. Tex. 1993).

The Mickey's holding has been cited and/or followed by numerous courts. See e.g. D & K Properties, supra, 112 F.3d at 260 (post-petition breach-of-contract action barred by res judicata where confirmed plan only contained blanket reservation lacking the specificity needed to reserve cause of action); In re Am Preferred Prescription Inc., 266 B.R. 273, 279 (Bankr. E.D.N.Y. 2000) (general reservation in plan insufficient to escape the res judicata bar); Matter of Huntsville Small Engines Inc., 228 B.R. 9, 13 (Bankr. N.D. Ala. 1998) (finding preference action precluded by plan confirmation under doctrine of res judicata where plan and disclosure statement only contained general reservation clause); In re Kelley, 199 B.R. 698, 704 (9th Cir. BAP 1996) (debtors did not properly reserve their rights because the plan and disclosure statement did not mention any specific claims or imminent lawsuits against the lender, but instead provided for full payment of the debt); In re Holly's Inc., 172 B.R. 545, 546 n. 26 (Bankr. W.D. Mich. 1994), aff'd., 178 B.R. 711 (W.D. Mich. 1995) (creditors might vote differently on a plan that provides for post-confirmation challenges to their claims, and therefore specificity is required).

These holdings, however, are not the definitive word on the subject. There are a number of courts that do not require the specificity dictated by Mickey's.

Express and General Language Requirement

Courts that decline to follow the specificity requirement of Mickey's do so for a variety of reasons. Some courts distinguish Mickey's based on the type of action the debtor is seeking to file following confirmation. For example, the court in Bleu Room Experience Inc., 304 B.R. 309 (Bankr. E.D. Mich. 2004), found that "in the context of objections to claims, specifically objections to the dollar amount of a claim, the requirements of 11 U.S.C. §1123(b) (3)(B) are satisfied so long as the debtor's reorganization plan reserves the right to object to claims. Id. at 314. The court rationalized that notice is less of an issue regarding claims than it is with avoidance actions because "once a creditor submits to the jurisdiction of the bankruptcy court by filing a claim, the creditor is on notice that the debtor has an absolute right to object to the claim." Id. at 315.

Other courts rationalize that the inherent delay, which would be accompanied with a requirement that there be a specific reservation of rights, is reason enough to validate a general reservation provision. See In re Weidel, 208 B.R. 848, 853 (Bankr. M.D.N.C. 1997) (to require the debtor to expend the time and effort to evaluate all claims filed in the case before the start of the confirmation process would lead to serious delays in the filing and confirmation of a plan, which is not in anyone's best interest).

The case that provides the most comprehensive rationale for validating general reservations clauses is Cohen v. TIC Financial Systems (In re Ampace Corp.), 279 B.R. 145 (Bankr. D. Del. 2002). In this case, the debtor's plan and disclosure statement provided that:

all avoidance actions, all claims relating to post-petition transactions under §549 of the Bankruptcy Code, all transfers recoverable under §550 of the Bankruptcy Code, all causes of action against any person on account of indebtedness and any other causes of action in favor of the debtors are hereby preserved and retained for enforcement subsequent to the effective date exclusively by Ampace Liquidating Trust.

Id. at 147-48.

The court found that there were several reasons for departing from the Mickey's holding as it applied to avoidance actions. First, the court found that there was nothing in 11 U.S.C. §523(b)(3)(B) that required the debtor to specify in the plan that it was retaining causes of action. The language only provides that the debtor may retain certain causes of action. Id. at 158. This argument, however, implies that if the debtor fails to include a reservation of claims in its plan, the debtor may still be permitted to pursue claims because the retention language is not mandatory. The court does not address how it would treat a res judicata defense in such cases.

The second and clearly stronger argument posited by the Ampace court focused on the plain language of the §1123. The court noted that nothing in the plain language of the statute requires that the reservation provision contain specific and unequivocal language to preserve claims. Id. See, also, A. Bergner & Co. v. Bank One, Milwaukee, N.A., (Matter of P.A. Bergner & Co.), 140 F.3d 1111, 1117 (7th Cir. 1998)³ (while there might be some logic in requiring specific and unequivocal language to preserve claims that have never been raised, the statute contains no such requirement).

Still another rationale used by the Ampace court to depart from Mickey's was that the "confirmation process is expedited by allowing debtors to include a general reservation of their right to pursue certain causes of action at a later date." Id. at 159, citing Weidel, 208 B.R. at 853. The court believed that it was impractical, if not impossible, for the debtor to list every defendant against whom the debtor intended to bring an avoidance action.⁴ Id.

The final rationale the Ampace court relied on in its departure from Mickey's was the fact that the confirmed plan acted as a binding contract between the debtor and creditors and parties in interest. Because no party objected at the time of confirmation to the general reservation provision, and because all parties had notice of the plan contents, creditors and parties in interest were bound by the plan terms.⁵ Id. at 160. In other words, creditors and parties in interest were precluded from objecting to the general reservation provision after confirmation because the plan provisions were now binding on all parties.⁶

The Ampace court concluded that it rejected the rationale of Mickey's and similar cases and would instead adopt the holding of other courts, which find that "a subsequent action is not barred by a prior confirmation hearing under the doctrine of res judicata where the disclosure statement and plan contain a general reservation of the right to pursue preference actions post-confirmation." Id. at 161, citing Weidel, 208 B.R. at 853-54; Envirodyne Indus. Inc. v. Conn. Mutual Life Co. (In re Envirodyne Indus. Inc.), 174 B.R. 986, 991 (Bankr. N.D. Ill. 1994); In re Outdoor Sports Headquarters Inc., 168 B.R. 177, 183 (Bankr. S.D. Ohio 1994).

Where Does This Leave Us?

One of the underlying concerns of the Mickey's court and its progeny is the apparent "sandbagging" that may go on if a debtor is allowed to use general reservation-of-rights language in its plan. This specific issue was most recently addressed by the Ninth Circuit Bankruptcy Appellate Panel in The Alary Corp. v. Charles E. Sims (In re Associated Vintage Group Inc.), 283 B.R. 549 (9th Cir. BAP 2002). In this case, the court rejected a res judicata claim and found that the general reservation-of-rights provision had preserved the estate's right to pursue a preference action.⁷ Id. at 563.

The court acknowledged that there are concerns "that general reservations invite sharp practices that lure creditors into a sense of complacency when they otherwise would have contested plan confirmation." Id. at 564. However, the court found that such "sandbagging is better addressed by doctrines of equitable and judicial estoppel." Id.

Based on the Associated Vintage holding and the others cited herein, we can glean some general principles that may alleviate the confusion regarding the specificity needed, or lack thereof, under 11 U.S.C. §1123(b)(3)(B):

1. If the debtor knows of a specific claim or cause of action prior to confirmation and fails to disclose this information in the plan and disclosure statement, courts may bar the action on the principle of res judicata or estoppel.
2. A general reservation-of-rights provision is probably acceptable where the case is too complex for the plan proponent to have determined every claim or cause of action prior to confirmation, provided the plan language identifies the types of claims or causes of action being preserved and the plan proponent discloses any known claims or causes of action.
3. A specific reservation-of-rights provision is probably required for known claims or causes of action that are pending or could be brought prior to confirmation.
4. A court's decision to require specificity in the reservation language is dependent on the facts of each case. And the lesson to debtors' counsel and plan proponents is this: When in doubt, disclose, disclose, disclose!

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   Footnotes

   ¹ Obviously, if there is no express reservation in the plan, irrespective of the specificity, the debtor will not have reserved such rights. Return to article

   ² Res judicata precludes parties "from relitigating issues that were or could have been raised in [the previous] action." Allen v. McCurry, 449 U.S. 90, 94 (1980). Return to article

   ³ This case arises out of the same circuit as D & K Properties, supra, 112 F.3d at 260, which held that a blanket reservation lacked the specificity needed to reserve a cause of action for breach of contract. The P.A. Bergner case can be distinguished from D & K Properties as the preference action challenged in P.A. Bergner was already pending at the time the plan containing the general reservation of rights to prosecute pending adversary proceedings was confirmed. Return to article

   ⁴ In particular, the court recognized the impossibility of this task in the context of the exceedingly large and complex cases being filed recently. Id. at 159. Return to article

   ⁵ This is actually the reverse of the res judicata argument proffered by the Mickey's court. Return to article

   ⁶ The defendant in D & K unsuccessfully asserted a similar contract argument, stating that the court's decision to ignore the general reservation provision creates a nullity in the plan and violates the rules of construction respecting contracts. D & K, supra, at 262. Return to article

   ⁷ The court noted that its present holding was not inconsistent with Kelley, supra. While the court found that the reservation of rights in the Kelley plan was insufficiently vague in the context of the facts of that case, the holding was not intended to be a blanket prohibition on general reservation provisions. Rather, the general reservation provisions should be examined on a case-by-case basis. Associated Vintage, 283 B.R. at 563-64. Return to article