In re Paramount Plastics, Inc., Bankruptcy No. 93-03857. Adv. No. A93-09803.
| Decision Date | 09 September 1994 |
| Docket Number | Bankruptcy No. 93-03857. Adv. No. A93-09803. |
| Citation | 172 BR 331 |
| Court | U.S. Bankruptcy Court — Western District of Washington |
| Parties | In re PARAMOUNT PLASTICS, INC., Debtor. PARAMOUNT PLASTICS, INC., Plaintiff, v. POLYMERLAND, INC., Defendant. |
Wanda J.R. Nuxoll, Weinstein, Fischer, Riley, Erickson & Wolf, P.S., Seattle, WA, for Paramount.
Stuart P. Kastner, Montgomery, Purdue, Blankinship & Austin, Seattle, WA, for Polymerland.
This matter is before the Court on the defendant's motion for summary judgment of dismissal of the plaintiff's preference action. The primary issue, one of first impression in this District, is whether the debtor may pursue preference claims postconfirmation, where the plan contains no reservation of rights or retention of jurisdiction to prosecute such actions.
The debtor filed this Chapter 11 case on May 18, 1993. On its Statement of Affairs, the debtor listed payments to the defendant and a number of other creditors within the 90-day preference period. The debtor proposed an amended plan providing that creditors would be paid from the debtor's future net profits. Neither the plan nor the disclosure statement makes any reference to potential preference actions or avoidance actions generally, either in the description of creditor treatment, the means for implementing the plan, or the liquidation analysis. The jurisdictional paragraph provides that the Court retains jurisdiction to:
Shortly before the confirmation hearing, the debtor, the creditors' committee, and their respective counsel met and discussed a number of matters, including preferences. Neither the defendant nor its counsel attended the meeting. The amended plan was overwhelmingly accepted by creditors, including the defendant, and it was confirmed on August 27, 1993. The order confirming the plan does not contain any provision for the retention of jurisdiction, or any mention of preference actions.
Following confirmation, the debtor filed a number of preference actions, including the one now before the Court. Ultimately the debtor defaulted on its obligations under the plan, and its secured lender foreclosed on its collateral. The creditors' committee filed an action to revoke confirmation and to lay claim to the preference recoveries. The debtor, committee, and the secured creditor resolved the matter by stipulating that a specific portion of the preference recoveries would be paid to the committee for distribution to unsecured creditors and the committee's counsel.
In support of its motion for summary judgment, the defendant asserts that the plaintiff's action must fail for lack of standing. As a corollary, the defendant contends that the complaint should be dismissed, since any recoveries will not inure to the benefit of the estate. In addition, the defendant asserts res judicata, equitable estoppel, and judicial estoppel. All of these theories center on the failure of the plan and disclosure statement to give notice of the debtor's intent to pursue preference actions, to direct the disposition of proceeds from such actions for the benefit of creditors, or to provide for the retention of jurisdiction for such purpose.
The Court granted the defendant's motion for summary judgment of dismissal on the basis that the debtor lacks standing as a matter of law, and it did not reach the substance of the defendant's other theories. Thereafter the debtor moved for reconsideration, alleging, in addition to facts already presented, that Polymerland's counsel conferred with counsel for the creditors' committee both before and after the meeting between the committee, the debtor, and their respective counsel. According to the affidavit of counsel for the committee, he communicated to the debtor the defendant's concerns and obtained certain concessions regarding the proposed treatment of unsecured creditors. After the meeting, he informed the defendant's counsel of his discussion with the debtor. Allegedly relying on this information and changes made in the plan, the defendant changed its vote to an acceptance. See Northrup Affidavit at p. 3.
To prevail on a motion for summary judgment, the moving party must show by reference to pleadings, discovery, admissions, and affidavits, if any, that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(a), (c), F.R.Civ.P.; Rule 7056, F.R.Bankr.P. If the moving party meets its burden, the burden of production then shifts to the nonmoving party, who must produce by admissible evidence "specific facts showing that there is a genuine issue for trial." FRCP 56(e). The moving party is entitled to a judgment as a matter of law if the nonmoving party has failed to make a sufficient showing on an essential element of its case with respect to which it has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
Section 547(b) of the Bankruptcy Code provides the basis for a trustee's power to avoid preferential transfers. Pursuant to § 550(a), any recoveries resulting from avoided transfers are held for the benefit of the estate. Section 1107(a) confers on a debtor-in-possession the rights and powers of a trustee, including the power to prosecute avoidance actions on behalf of the estate. After confirmation of a plan, the ability of the trustee, the debtor, or other representative of the estate to enforce a claim once held by the estate is limited to that which has been retained in the plan. This is the import of § 1123(b)(3), which states that a plan may provide for:
The statutory scheme and case law establish two conditions for a debtor's postconfirmation prosecution of avoidance actions. First, any recoveries must benefit the estate under § 550. Second, pursuant to § 1123(b)(3)(B), the plan must expressly retain the right to pursue such actions.
No legal dispute exists regarding the first element, although there is a factual dispute whether it has been met in this case. First, the plan provided for payment to creditors out of profits; hence the defendant asserts that any preference recoveries would ultimately inure to the benefit of the debtor. However, since the debtor was unable to perform its obligations under the plan, a portion of the recoveries was in fact set aside for unsecured creditors and administrative claimants pursuant to the postconfirmation stipulation. It is not necessary to decide whether the plan or the stipulation provided sufficient benefit to creditors to satisfy this element, for the reason that the debtor cannot satisfy the second requirement of standing, i.e., the specific retention of preference actions in the plan.
Concerning the requirement of § 1123(b)(3)(B), this Court adopts the conclusion reached in In re Mako, Inc., 120 B.R. 203, 209 (Bankr.E.D.Okl.1990), in which the Court stated as follows:
Because the confirmation of a Chapter 11 Plan dissolves the bankruptcy estate and the rights and powers created under the Bankruptcy Code, the retention provision of § 1123(b)(3)(B) requires specific and unequivocal language of reservation. Without this language, the avoidance powers of the Trustee stemming from the Bankruptcy Code at §§ 544, 546, 547, 548, 549 and 550 perish and become unenforceable.
Cases that are in accord with Mako include In re Harstad, 155 B.R. 500 (Bankr. D.Minn.1993), and In re Mickey's Enterprises, Inc., 165 B.R. 188, 193 (Bankr.W.D.Tex. 1994) (). In both cases, the Courts expressed concern that, absent "specific and unequivocal" retention language in the plan, creditors lack sufficient information regarding their benefits and potential liabilities to cast an intelligent vote. Harstad, 155 B.R. at 509. The debtor attempts to distinguish Harstad on the basis that Paramount's creditors were made aware of it's intention to pursue preferences by virtue of the Statement of Affairs and the discussion with the committee shortly before the confirmation hearing. The Court rejects this argument, as it ignores § 1125, which requires the disclosure of "adequate information" to allow a claimant to make an informed judgment about the plan. 11 U.S.C. § 1125(a)(1). As stated by the Court in Mickey's Enterprises, "Under these circumstances, the Defendant was entitled to adequate information of what the Debtor's Plan provided with regard to it so it could make an informed decision as to how to react to the Debtor's Plan." Emphasis in original. 165 B.R. at 193.
The debtor has cited several cases which it characterizes as disagreeing with Harstad. In re Jennings, 46 B.R. 167 (Bankr.E.D.Pa. 1985), does contain dicta to the effect that a debtor has no duty to disclose its intention to prosecute preference actions, and further that a general reservation of jurisdiction is sufficient. A review of the facts of the case reveals that the debtor-in-possession had commenced the preference action prior to confirmation. The plan provided for retention of jurisdiction for purposes of "the determination of all questions and disputes regarding title to the assets of the estate, and determination of all causes of action, controversies, disputes, or conflicts, whether or not subject to action pending as of the...
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