In re I. Appel Corp.

• Decision Date: 20 October 2003
• Docket Number: No. 03 Civ. 2355(VM).,03 Civ. 2355(VM).
• Citation: 300 B.R. 564
• Parties: In re I. APPEL CORPORATION, Debtor. Norman Katz and Stephen Katz, Appellants, v. I.A. Alliance Corp., et al., Appellee.
• Court: U.S. District Court — Southern District of New York

300 B.R. 564

In re I. APPEL CORPORATION, Debtor.

Norman Katz and Stephen Katz, Appellants, v. I.A. Alliance Corp., et al., Appellee.

No. 03 Civ. 2355(VM).

United States District Court, S.D. New York.

October 20, 2003.

DECISION AND ORDER

MARRERO, District Judge.

I. INTRODUCTION

Appellants Norman Katz and Stephen Katz, the defendants in several litigations brought by a reorganized debtor and its assignee, appeal a decision from the bankruptcy court granting the debtor's motion to reopen its plan of reorganization. The debtor sought to amend its schedule of assets and liabilities so as to list the claims at issue in the litigations. Because the bankruptcy court did not abuse its discretion in granting the motion to reopen the case, this Court affirms the ruling of the bankruptcy court.

II. FACTS

I. Appel Corporation (the "Debtor") filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York in April 1997. The bankruptcy court approved the Debtor's Disclosure Statement in February 1998 and the First Amended Plan of Reorganization in May 1998. The bankruptcy court issued a final decree and closed the case in November 1999.

Norman Katz was an officer and 50 percent shareholder of the Debtor from 1976 until 1996. His son Stephen Katz was also an officer of the Debtor. In July 1996 Norman Katz sold his shares of the Debtor to Herbert Feinberg ("Feinberg"), the other 50 percent shareholder.

In January 1999 Feinberg, as assignee of the Debtor, brought claims in this Court against Stephen Katz alleging conversion and misappropriation of assets of the Debtor over a span of many years before 1996.¹ In November 1999, before the bankruptcy case was closed, the Debtor filed an arbitration action against Norman Katz regarding Katz's alleged obligation to pay litigation expenses under a purchase agreement between Norman Katz, Feinberg, and the Debtor.² In 2001 Feinberg, again acting as assignee of the Debtor, brought another action in this Court against Norman and Stephen Katz asserting claims for misappropriations that caused harm to the Debtor's creditors.³

The Debtor's Schedule of Assets and Liabilities in the bankruptcy case, filed in April 1997, did not list any of these claims against the Katzes. Schedule B, entitled "Personal Property," required the Debtor to list at item 20 "contingent and unliquidated claims of every nature." The Debtor identified claims against two other parties but did not list any claims or potential claims against the Katzes.

The Debtor's First Amended Disclosure Statement in the bankruptcy case, filed in January 1998, stated that:

The Debtor's special litigation counsel ... is investigating certain pre-petition acts or omissions of Katz which may give rise to claims by the Debtor against [Norman] Katz and his son Steven [sic]. Mr. Katz and his son were responsible pre-petition for inventory control and accounting for inventory of the Debtor.

(First Amended Disclosure Statement of Debtor at 42, attached as Tab 2, Exhibit B of Appendix to Appellants' Initial Brief ("Disclosure Statement").)

The Katzes moved to dismiss all three actions on the grounds that the Debtor had failed to preserve the claims because it had not listed them on its Schedule of Assets and Liabilities. In September 2002, an arbitration panel granted Norman Katz's motion to strike the arbitration on the grounds that the Debtor lacked standing to pursue the claim because it had failed to identify it in its schedule of assets.⁴

In December 2002, the Debtor moved to reopen the Chapter 11 bankruptcy pursuant to 11 U.S.C. § 350(b)⁵ and Rule 5010 of the Federal Rules of Bankruptcy Procedure.⁶ The Debtor sought to amend its Schedule of Assets and Liabilities to identify specifically its claims against the Katzes.

The bankruptcy court (Drain, J.) granted the Debtor's motion in January 2003. The Katzes appeal from that ruling.

III. DISCUSSION

A. STANDARD OF REVIEW

A district court has jurisdiction to hear appeals of final judgments, orders or decrees from the bankruptcy court under 28 U.S.C. § 158(a)(1). This Court reviews an equitable determination by the bankruptcy court for abuse of discretion. See Mendelsohn v. Ozer, 241 B.R. 503, 506 (E.D.N.Y.1997). A "bankruptcy court's decision whether to reopen debtor's case is committed to the sound discretion of the bankruptcy court." Horizon Aviation of Virginia, Inc. v. Alexander, 296 B.R. 380, 382 (E.D.Va.2003); see also Lawrence King, ed., 9 COLLIER ON BANKRUPTCY § 5010.01 (15th ed.2003). Accordingly, the Court will review the decision at issue here for abuse of discretion.

B. THE BANKRUPTCY COURT'S RULING

Under 11 U.S.C. § 1123(b)(3), a plan of reorganization "may ... provide for (A) the settlement or adjustment of any claim or interest belonging to the debtor or to the estate; or (B) the retention and enforcement by the debtor ... of any such claim or interest." The confirmation of a bankruptcy plan of reorganization must be accorded res judicata effect.⁷ Consequently, the confirmation of a plan of reorganization prevents the subsequent assertion of any claim not preserved in the plan as required by § 1123(b)(3).⁸

1. Identification of Claims

The Katzes argue that the Debtor's confirmed plan did not sufficiently preserve any of the three claims that it or Feinberg are now bringing against them. They argue that the bankruptcy court erred in granting the Debtor's motion to reopen the bankruptcy case to amend the Schedule of Assets and Liabilities by itemizing the Debtor's claims against the Katzes. The Debtor responds that the Plan and the First Amended Disclosure Statement adequately preserved its right to litigate the claims against the Katzes. The Debtor argues that the bankruptcy court properly exercised its discretion in granting its motion to reopen the case and amend the schedules.

Section 8.02(ii) of the Debtor's First Amended Plan of Reorganization provides:

In order to fund the payments to creditors under this Plan, reorganized I. Appel shall retain all rights to any claims or causes of actions which I. Appel and/or its creditors held as of the Petition Date or which arose or could arise during the Bankruptcy Case, whether pursuant to the recovery provisions of Sections 542 through 554 of the Bankruptcy Code or under applicable federal or state law, except under Section 547 of the Bankruptcy Code.

(Debtor's First Amended Plan of Reorganization at 34, attached as Tab 2, Exhibit C of Appendix to Appellants' Initial Brief (the "Plan").)

As noted above, the Debtor's First Amended Disclosure Statement reveals that the Debtor's special litigation counsel was "investigating certain pre-petition acts or omissions" of Norman Katz "which may give rise to claims by the Debtor" against the Katzes. (Disclosure Statement at 42.) The Disclosure Statement indicated that "Mr. Katz and his son were responsible pre-petition for inventory control and accounting for inventory of the Debtor." (Disclosure Statement at 42.)

The Katzes argue that once a plan of reorganization has been confirmed, a claim belonging to the debtor may be brought only "if those specific causes of action are properly preserved in a plan of reorganization." (Appellants' Initial Brief at 17 (emphasis added).) The Katzes rely on a line of cases holding that a general clause in a plan of reorganization reserving to the debtor all potential claims is not sufficient to preserve a claim and avoid the preclusive effect of the confirmed plan, and instead that a plan must specifically reserve particular claims.⁹ In In re Kelley, for example, the Ninth Circuit's Bankruptcy Appellate Panel explained that "[i]f a confirmed plan expressly reserves the right to litigate a specific cause of action after confirmation, then res judicata does not apply."¹⁰ The court compared that situation to one in which the debtor "fails to mention the cause of action in either his schedules, disclosure statement, or plan, [and thus would] be precluded from affirming it postconfirmation."¹¹

The Debtor responds with a second line of cases that reject the specificity requirements described in Kelley and conclude instead that a more general reservation of claims in a plan or disclosure statement is sufficient to avoid res judicata.¹² In In re Ampace, for example, the bankruptcy court examined a plan of reorganization containing a general reservation clause preserving all avoidance actions.¹³ The court declined to follow the cases requiring a plan to specifically reserve a particular claim in order to avoid the application of res judicata to that claim. The court reasoned that it is "impractical and unnecessary" to require a disclosure statement or plan or reorganization to list with specificity every outstanding claim before the plan can be confirmed, and explained that allowing a debtor to include a general reservation of the right to litigate claims post-confirmation expedites the process of confirming a plan of reorganization.¹⁴ Among the considerations that weighed in the court's decision was that in large bankruptcies the investigation and decision to pursue every possible claim of a debtor can take several years, and that all relevant parties in the case before it had an opportunity to review and object to the plan of reorganization and disclosure statement before they were confirmed.¹⁵ On these grounds, the court concluded that the parties should be bound by the terms of the plan.¹⁶

This court finds the Ampace line of cases more persuasive. It is neither reasonable nor practical to expect a debtor to identify in its plan of reorganization or disclosure schedules every outstanding claim it intends to pursue with the degree of specificity that the Katzes would require. As other courts reaching this conclusion have noted, mandating a specific description of every claim the debtor intends to pursue could entail months or years...