Browning v. Prostok
| Decision Date | 27 May 2005 |
| Docket Number | No. 03-0784.,03-0784. |
| Citation | 165 S.W.3d 336 |
| Parties | Peter C. BROWNING, et al., Petitioners, v. Jeff P. PROSTOK, et al., Respondents. |
| Court | Texas Supreme Court |
Karos, Bell Nunnally & Martin Pllc, Samara L. Kline, Baker Botts L.L.P., Bryant C. Boren Jr., Baker & Botts L.L.P., Dallas, Joe R. Greenhill, Bob Shannon, Baker Botts LLP, Austin, for for petitioners.
Roger Townsend, Jennifer R. Tillison, Alexander Dubose Jones & Townsend, LLP, James R. Moriarty, Patrick Kevin Leyendecker, Moriarty & Leyendecker, Richard Frankel, Stephen M. Hackerman, Hackerman Frankel, Houston, J. Robert Arnett II, Sopuch, Arnett, Higgins & Gaubert, L.L.P., Patrick J. Neligan Jr., Neligan Tarpley Andrews & Foley, L.L.P., Dallas, Craig Howard Averch, White & Case LLP, Los Angeles, CA, William Powers Jr., Austin, for respondents.
Michael P. Lynn, Russell James DePalma, Lynn Tillotson & Pinker, LLP, Basheer Youssef Ghorayeb, Rodriguez Law Firm, P.C., Dallas, Susanna J. Gray, Fried Frank Harris Shriver & Jacobson, New York, NY, for TCW Asset Management Company, TCW Group Inc., TCW Special Credits, Trust Company of the West
Thomas M. Fulkerson, Clements O'Neill Pierce Wilson & Fulkerson, Houston, for NGC Asbestos Disease and Property Damage Trust.
C. Rodney Acker, Ellen Bush Sessions, Jenkens & Gilchrist, P.C., Dallas, for Donaldson, Lufkin & Jenrette Securites Corp.
Kathy D. Patrick, Andrew L. Pickens, Jeffry Joe Cotner, Jeffrey C. Kubin, Gibbs & Bruns, L.L.P., Houston, for Fidelity Management & Research Company.
William D. Sims Jr., Michael Lawrence Raiff, Vinson & Elkins, L.L.P., Dallas, for Water Street Corporation Recovery Fund I, L.P.
Marvin S. Sloman, James A. Ellis Jr., Stephen A. Goodwin, Carrington Coleman Sloman & Blumenthal, L.L.P., Dallas, Sheldon Raab, Barry Sher, John Dellaportas, Fried Frank Harris Shriver & Jacobson, New York, NY, for Houlihan Lokey Howard & Zukin Capital.
This dispute arises out of highly contentious bankruptcy proceedings. During the bankruptcy proceedings, a committee representing bond and trade unsecured creditors vigorously disputed the valuation of the debtor as presented by the debtor's management. The committee sought to replace the debtor's management with a bankruptcy trustee, based in part on allegations of intentional undervaluation of the debtor. In addition, the committee objected to the debtor's plan of reorganization, again raising allegations of intentional undervaluation. Over two years after the bankruptcy court entered its order confirming the reorganization plan proposed by the debtor, a class of bondholders brought this suit. The class of bondholders alleges that the officers and directors breached their fiduciary duties by intentionally undervaluing the debtor during the bankruptcy proceedings. The trial court granted summary judgment against the class and entered a take-nothing judgment. We consider whether the class claims, based on conduct occurring during bankruptcy proceedings, can be maintained in state court years after the bankruptcy court's final order confirming the debtor's reorganization plan. We conclude that the claims cannot.
On October 28, 1990, National Gypsum Company and its parent holding company, Aancor Holdings (collectively National Gypsum), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. The United States Bankruptcy Court for the Northern District of Texas, Dallas Division, consolidated and jointly administered the cases.
National Gypsum had three classes of publicly traded debt: 1) senior notes, 2) senior debentures, and 3) junior bonds. The senior notes and senior debentures were held by several entities known collectively as the Senior Bondholders. The junior bonds were held by persons and entities referred to as Junior Bondholders, and include Jeff Prostok and the class members he represents. In addition, there were parties holding actual or potential claims against National Gypsum arising from personal injury and property damage related to asbestos products, the Asbestos Claimants. This case stems from conflicts that arose during the bankruptcy proceedings between the Junior Bondholders and Asbestos Claimants, on one side, and the Senior Bondholders and National Gypsum management, on the other.
During the bankruptcy proceedings, National Gypsum operated as debtor-in-possession under the Bankruptcy Code.1 In November 1990, the United States trustee appointed a committee of bond and trade unsecured creditors (the BT Committee) to serve as a statutory creditors' committee in the Chapter 11 proceedings.2 Section 1104 of the Bankruptcy Code authorizes the bankruptcy court to replace a debtor-in-possession with an appointed trustee upon a determination that it would be in the best interest of the debtor's stakeholders or upon a determination of "cause, including fraud, dishonesty, incompetence, or gross management." 11 U.S.C. § 1104(a).3 In January 1992, the BT Committee moved to replace National Gypsum's management with a bankruptcy trustee for the National Gypsum estate. The BT Committee claimed, among other things, that National Gypsum management had intentionally undervalued National Gypsum by "understat[ing] all its forecasts to hide its objective views of the company." After a two-day hearing on the motion in March 1992, the bankruptcy court held that the BT Committee did not meet its burden on this issue and denied the BT Committee's motion.
National Gypsum submitted a plan of reorganization to the bankruptcy court based on a $350 million valuation of National Gypsum. As part of National Gypsum's proposed plan, a second corporate entity, a new National Gypsum Company (New NGC), would receive National Gypsum's operating assets and ongoing business. The plan provided that the officers and directors of National Gypsum would remain as the initial management of New NGC. New NGC stock would be largely owned by the Senior Bondholders, with Junior Bondholders receiving warrants to acquire New NGC stock.
However, the BT Committee was not satisfied with the plan and proposed a competing plan based on a $630 million valuation of National Gypsum. In November 1992, the BT Committee filed its objections to National Gypsum's plan of reorganization. The BT Committee alleged that National Gypsum's "[m]anagement knowingly misrepresented [National Gypsum's] future business prospects and value." The BT Committee explained that:
[i]n exchange for greater than 100% recovery and control of the reorganized company's board of directors, certain post petition acquirors of Senior Notes ... publicly accepted the [National Gypsum] Plan, including its management-entrenchment and enrichment provisions. Hence, management deceived [National Gypsum's] creditors with a misrepresentation of the value of the company to coax a small creditor faction into supporting its plan and opposing the BT Plan.
Confirmation proceedings on the competing plans of reorganization began in December 1992. At the conclusion of the valuation phase of the proceedings, the bankruptcy court concluded that the BT Committee plan could not be confirmed because it failed to prove the value of National Gypsum as of the effective date of the plan of reorganization. The order confirming the National Gypsum reorganization plan was entered on March 9, 1993 and was effective as of July 1, 1993.
An interested party may contest a bankruptcy confirmation order within 180 days after its entry on the basis that it was procured by fraud. 11 U.S.C. § 1144. The 180-day period expired on September 9, 1993. No interested party requested that the order be set aside within the 180-day period or otherwise appealed the confirmation order. In October 1993, New NGC announced a new cost-savings plan that allegedly resulted in an annual reduction of expenses of $30 to $40 million dollars.
Prostok, individually and on behalf of all other Junior Bondholders, filed the current case in state court in October 1995 against the former officers and directors of National Gypsum (Officers and Directors) and their financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation (DLJ).4 Prostok amended his petition to add one of the Senior Bondholders, TCW.5 Prostok sued for breach of fiduciary duties, fraud and constructive fraud, and civil conspiracy against all the defendants. Prostok also brought claims against DLJ and the Officers and Directors for gross negligence, and alternative claims against TCW and DLJ for participating, aiding, assisting, and/or inducing breach of fiduciary duties.
Prostok alleges that during the course of the bankruptcy proceedings, the Senior Bondholders, the Officers and Directors, and their financial advisors intentionally undervalued National Gypsum by concealing a plan to dramatically reduce the company's operating expenses. Specifically, Prostok alleges that the Officers and Directors represented that National Gypsum was worth $300 to $375 million, based on management's "best estimate and intention of how the company would operate once out of bankruptcy," though the Officers and Directors were fully aware of the cost-savings plan later announced in October 1993. Prostok alleges that this cost-savings plan resulted in an increase in the market value of New NGC's outstanding stock from $350 million to almost $1 billion. According to Prostok, had the Officers and Directors disclosed the plan to cut expenses to the bankruptcy court, the value assigned to National Gypsum would have been higher, and the distribution to the Junior Bondholders would have been greater. Prostok...
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