Opinion
Case No. 301-12036, Adv. No. 303-574A.
November 19, 2004
Samuel K. Crocker, Timothy G. Niarhos, Crocker Niarhos, Nashville, TN, Counsel for the Consolidated Debtors acting by and through the Plan Administrator.
Ronald G. Steen, Jr., Robert C. Goodrich, Jr., Stites Harbison PLLC, Nashville, TN, Attorneys for Qwest Communications Corp.
ORDER
For the reasons stated in the memorandum filed contemporaneously herewith, IT IS ORDERED, ADJUDGED and DECREED that the Defendant's motion for summary judgment is DENIED.
MEMORANDUM
The issue on summary judgment is whether this preference action is barred by res judicata or judicial estoppel attendant to confirmation of the plan. This action is not precluded because the Confirmed Plan and Disclosure Statement adequately preserved preference actions for purposes of 11 U.S.C. § 1123(b)(3) and the elements of judicial estoppel are not present.
I. FACTS
Phoenix Restaurant Group, Inc. ("PRG"), a Georgia corporation, resulted from a 1996 merger between Denwest Restaurant Corp. and American Family Restaurants. The principal business of PRG was operating Denny's family style restaurants pursuant to franchise agreements with Advantica Restaurant Group, Inc. (and its predecessors and successors). Throughout the 1990's PRG acquired Denny's locations, and expanded into other restaurant concepts, including Black-Eyed Pea restaurants. In September 2001, PRG operated 96 Denny's restaurants and 91 Black-Eyed Pea restaurants primarily in Florida, Texas, Arizona, Colorado and Oklahoma.
On October 18, 2001, an involuntary Chapter 7 proceeding was filed against PRG in the Middle District of Florida. The involuntary case was transferred to the Middle District of Tennessee by order entered October 29, 2001. On October 31, 2001, PRG moved to convert the involuntary Chapter 7 case to a voluntary Chapter 11. Also on October 31, 2001, five affiliates of PRG — Denam, Inc., Phoenix Foods, Inc., Black-Eyed Pea U.S.A., Inc., Prufrock Restaurants of Kansas, Inc. and Texas BEP, L.P. — filed voluntary Chapter 11 cases in the Middle District of Tennessee. An order converting PRG's case to Chapter 11 was entered November 6, 2001.
The Debtors remained in possession. On April 29, 2002, the Debtors filed a Joint Liquidating Plan of Reorganization and Disclosure Statement. On October 23, 2002, the First Amended Joint Liquidating Plan was confirmed (the "Confirmed Plan").
The Confirmed Plan substantively consolidated the Debtors, and appointed PENTA Advisory Services as Plan Administrator. The Confirmed Plan defined "Bankruptcy Causes of Action" as:
All claims, actions, causes of action . . . arising under the Bankruptcy Code (including, but not limited to, all claims and any avoidance, recovery, subordination or other actions against insiders and/or any other Entities under sections 506, 510, 543, 544, 545, 547, 548, 549, 500 [sic], 551, and 553 of the Bankruptcy Code or otherwise) of the Debtors, the Debtors in Possession, and/or the Post Confirmation Estate (including, but not limited to, those actions identified on Exhibits A, B, and C attached hereto to the extent they constitute Bankruptcy Causes of Action as defined herein) that . . . may be instituted by the Plan Administrator[.]
(Confirmed Plan ¶ 1.15, at 2.)
Article XVI of the Confirmed Plan provided:
16.6 Preservation of Rights of Action:
. . . .
16.6.2 In addition, potential Bankruptcy Causes of Action which may be pursued by the Debtors prior to the effective Date and by the Plan Administrator, on behalf of the Post-Confirmation Estate after the Effective Date, are identified on Exhibits A, B, and C attached hereto and also include, without limitation, the following to the extent they are not set forth on the attached Exhibits:
. . . .
Except for the express waiver of certain claims in the Plan, any and all actual or potential avoidance claims pursuant to any applicable section of the Bankruptcy Code, including, without limitation section 544, 545, 547, 548, 549, 550, 551, 553(b) and/or 724(a) of the Bankruptcy Code, arising from any transaction involving or concerning the Debtors.
. . . .
Certain potential Causes of Action as to which the Debtors are continuing their investigation of the complete nature, factual basis, and/or legal basis are identified on Exhibit C attached hereto and incorporated herein by reference. The Debtors specifically reserve any Causes of Action that may arise from the factual circumstances described on Exhibit C, in addition to any Causes of Action generally described herein.
. . . .
Except as otherwise provided in the Plan or in any contract, instrument, release, indenture or other agreement entered into in connection with the Plan, in accordance with section 1123(b)(3) of the Bankruptcy Code, any claims, rights and Causes of Action that the respective Debtors, or the Post-Confirmation Estate may hold against any Entity, including but not limited to those Bankruptcy Causes of Action . . . shall vest in the Post-Confirmation Estate, and the Plan Administrator, on behalf of the Post-Confirmation Estate, shall retain and may exclusively enforce, as the authorized representative of the Post-Confirmation Estate, any and all such . . . Causes of Action.
(Confirmed Plan ¶ 16.6.2, at 22-3. See also Disclosure Statement ¶ V.E.8, at 62.)
"Causes of Action" is defined in the Plan to include Bankruptcy Causes of Action. Plan at ¶ 1.22.
In support of this provision of the Confirmed Plan, the Disclosure Statement provided under the heading "Preservation of Causes of Action:"
The Debtors are currently investigating whether to pursue potential Causes of Action against other Entities. . . . The investigation has not been completed to date, and under the Plan, the Plan Administrator, . . ., retains all rights on behalf of the Debtors and the Post-Confirmation Estate to commence and pursue any and all Bankruptcy Causes of Action . . . discovered in such an investigation to the extent the Plan Administrator, on behalf of the Post-Confirmation Estate, deems appropriate in his reasonable business judgment.
. . . .
b. In addition, potential Bankruptcy Causes of Action which may be pursued by the Debtors prior to the Effective Date and by the Plan Administrator, on behalf of the Post-Confirmation Estate after the Effective Date, also include, without limitation the following:
. . . .
Except for the express waiver of certain claims in the Plan, any and all actual or potential avoidance claims pursuant to any applicable section of the Bankruptcy Code, including, without limitation sections 544, 545, 547, 548, 549, 550, 551, 553(b) and/or 724(a) of the Bankruptcy Code, arising from any transaction involving or concerning the Debtors.
(Disclosure Statement ¶ V.E.8, at 59-60.)
The Exhibit A referenced in Confirmed Plan ¶ 16.6.2 reasserts the reservation of preference actions "arising from any transaction involving or concerning the Debtors relating to the Persons and Entities set forth in Exhibit A-1 and the specific payments received by such Persons or Entities during the statutory preference period, as identified on Exhibit A-1." (Pl.'s Amd. Resp. Ex. 1.)
The liquidation analysis attached to the Debtors' Disclosure Statement included a line item under "Non-cash Assets" for "Preference Actions," and assigned a value between $0 and $100,000.00 to such actions. The Disclosure Statement noted: "It is impossible to predict with any degree of certainty the range of recoveries available to General Unsecured Claimants due to the speculative nature of the Bankruptcy Causes of Action. . . . Accordingly, recoveries on account of Allowed Unsecured Claims may realistically be as low as zero." (Disclosure Statement ¶ V.C.9.c, at 47.) The Disclosure Statement further explained that proceeds from Bankruptcy Causes of Action "are speculative and uncertain and therefore no value has been assigned to such recoveries. The Debtors and the Post-Confirmation Estate do not intend, and it should not be assumed that because any existing or potential Bankruptcy Causes of Action . . . have not yet been pursued by the Debtors or are not set forth herein, that any such Bankruptcy Causes of action . . . have been waived." (Disclosure Statement ¶ V.E.8.b, at 61.)
The Disclosure Statement explains that the Plan Administrator will be granted authority to pursue Causes of Action, which included Bankruptcy Causes of Action, for the benefit of the estate. (Disclosure Statement ¶ II.A (Description of Property to be Distributed under the Plan), ¶ V.E.3 (Provisions Governing Plan Implementation; Powers and Duties of the Plan Administrator).)
On October 31, 2003, the Plan Administrator filed over 200 adversary proceedings to avoid prepetition transfers as preferential under 11 U.S.C. § 547(b). This action against Qwest Communications Corp. seeks avoidance and recovery of transfers during the preference period totaling $163,458.06. Qwest raises several defenses but seeks summary judgment only with respect to whether res judicata or judicial estoppel bar this preference action.
II. Analysis
A. Summary Judgment Standard
Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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." FED.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Booker v. Brown Williamson Tobacco Co., Inc., 879 F.2d 1304, 1310 (6th Cir. 1989). The court is not to "`weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.'" Browning v. Levy, 283 F.3d 761, 769 (6th Cir. 2002) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986)). "A genuine issue for trial exists only when there is sufficient `evidence on which the jury could reasonably find for the plaintiff.'" Id. (quoting Liberty Lobby, 477 U.S. at 252).
The moving party bears the initial burden of showing that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. at 325. The burden then shifts to the nonmoving party to produce evidence that would support a finding in its favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250-52, 106 S. Ct. 2505, 2511-12, 91 L. Ed. 2d 202 (1986). All inferences are drawn in the light most favorable to the nonmoving party. Spradlin v. Jarvis (In re Tri-City Turf Club, Inc.), 323 F.3d 439, 442 (6th Cir. 2003) (citations omitted). The party opposing a motion for summary judgment, however, "`may not rest upon mere allegations or denials of his pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial.' The party opposing the motion must `do more than simply show that there is some metaphysical doubt as to the material facts.'" In re Tri-City Turf Club, Inc., 323 F.3d at 442-43 (internal citations and quotations omitted). See also Liberty Lobby, Inc., 477 U.S. at 248; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). "`If after reviewing the record as a whole a rational factfinder could not find for the nonmoving party, summary judgment is appropriate.'" Braithwaite v. Timken Co., 258 F.3d 488, 493 (6th Cir. 2001) (quoting Ercegovich v. Goodyear Tire Rubber Co., 154 F.3d 344, 349 (6th Cir. 1998)).
B. Res Judicata and Judicial Estoppel
Qwest adopted the summary judgment motion filed by Proficient Food Company (Adv. Pro. No. 03-568) on the issues of res judicata and judicial estoppel. Qwest characterizes the Plan and Disclosure Statement provisions referenced above as "general" and "blanket" retention clauses that are insufficient to protect this preference action from the res judicata effect of confirmation. Qwest contends that preservation of this cause of action required Debtors to state the factual basis for this preference claim or to name Qwest as a defendant before confirmation. Qwest argues that Debtors "were coy about the magnitude of preference actions they would bring, and the identity of the defendants, in the First Amended Disclosure Statement. . . . [T]he First Amended Disclosure Statement was close to silent, and thereby inconsistent with what would actually transpire post-confirmation." Qwest claims that this preference action is inconsistent with the Confirmed Plan and Disclosure Statement and, without specific evidentiary support, that Debtors have obtained an unfair advantage over preference defendants.
Proficient Food Company's Memorandum of Law in Support of its Motion for Summary Judgment, at 27-8.
Plaintiff responds that the preference retention provisions of the Confirmed Plan and Disclosure Statement satisfy the standard established by this court's recent decision in Elk Horn Coal Co., LLC v. Conveyor Manufacturing Supply, Inc. (In re Pen Holdings, Inc.), ___ B.R. ___, 2004 Bankr. Lexis 1499, 2004 WL 2525863 (Bankr. M.D. Tenn. Sept. 17, 2004).
As explained in Pen Holdings, confirmation of a Chapter 11 plan can be preclusive of trustee or debtor-in-possession avoidance actions on principles of res judicata. Preclusion can be prevented by providing in the plan for the preservation of avoidance actions. This power of preservation is codified in 11 U.S.C. § 1123(b)(3). The issue addressed in Pen Holdings and raised here is whether the language of the Confirmed Plan is sufficient to overcome the res judicata effect of confirmation with respect to this preference action.
11 U.S.C. § 1123(b)(3) provides:
(b) Subject to subsection (a) of this section, a plan may —
. . . .
(3) provide for —
(A) the settlement or adjustment of any claim or interest belonging to the debtor to the estate; or
(B) the retention and enforcement by the debtor, by the trustee, or by a representatives of the estate appointed for such purpose, of any such claim or interest.
In Pen Holdings, after reviewing the history of 11 U.S.C. § 1123(b)(3), this court concluded that "the notice at issue in § 1123(b)(3) is not notice to potential defendants, it is notice to creditors generally that there are assets yet to be liquidated that are being preserved for prosecution by the reorganized debtor or its designee." Pen Holdings, 2004 Bankr. Lexis 1499, at *14. Considering Sixth Circuit precedent, in the context of the history of § 1123(b)(3) and acknowledging conflicting lower court decisions, this court determined that the Sixth Circuit has
not establish[ed] a general rule that naming each defendant or stating the factual basis for each cause of action are the only ways to preserve a cause of action at confirmation of a Chapter 11 plan. Read in the context of its history, § 1123(b)(3) protects the estate from loss of potential assets. It is not designed to protect defendants from unexpected lawsuits. The words sufficient to satisfy § 1123(b)(3) must be measured in the context of each case and the particular claims at issue: Did the reservation allow creditors to identify and evaluate the assets potentially available for distribution?
Id. at *23.
Application of this standard yields a clearer case than Pen Holdings. As detailed above, the Confirmed Plan, Disclosure Statement and exhibits repeatedly reserve Bankruptcy Causes of Action, defined to include preference actions under § 547. The references to preference litigation are not concealed as retention of jurisdiction provisions, are not ambiguously worded and specifically reference § 1123(b)(3) of the Code. That preference actions would be assets of the Post-Confirmation Estate, to be investigated and prosecuted by the Plan Administrator, is plainly set forth in the Confirmed Plan and Disclosure Statement. Potential preference recovery — admittedly speculative — was included in the liquidation analysis. Debtors went further than a general reservation of preference actions and attached exhibits to the Disclosure Statement and Confirmed Plan that listed, to the extent then possible, creditors to whom payments were made during the preference period. Qwest was named among the hundreds of creditors that received payments during the preference period in the exhibits to the Confirmed Plan. Creditors were able to identify and evaluate the estate's assets — including preference actions under § 547 — through the disclosures and reservations contained in the Confirmed Plan and Disclosure Statement.
Judicial estoppel does not add muscle to Defendant's preclusion argument. "The doctrine of judicial estoppel bars a party from (1) asserting a position that is contrary to one that the party has asserted under oath in a prior proceeding, where (2) the prior court adopted the contrary position `either as a preliminary matter or as part of a final disposition.'" Browning v. Levy, 283 F.3d at 775 (quoting Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218 (6th Cir. 1990)). The doctrine "is utilized in order to preserve `the integrity of the courts by preventing a party from abusing the judicial process through cynical gamesmanship.'" Id. at 776 (quoting Teledyne Indus., Inc. v. NLRB, 911 F.2d at 1218).
Defendant's judicial estoppel argument starts with the unsupportable proposition that the Disclosure Statement failed to identify preference actions as assets of the estate that might be prosecuted after confirmation, then spins that mischaracterization into the predicate for this "inconsistent" action against Qwest. As explained above, the Confirmed Plan and Disclosure Statement quite adequately identify and preserve preference actions for investigation and litigation by the Plan Administrator after confirmation. Indeed, even taken alone, the Disclosure Statement clearly stated that the Debtors had not completed the preference analysis, and that the Plan Administrator would evaluate preferences and had authority to pursue preference actions after confirmation. This adversary proceeding is not inconsistent with the Disclosure Statement; it is the incarnation of exactly what the Confirmed Plan and Disclosure Statement foretold. Defendant's judicial estoppel argument fails on summary judgment because there is no inconsistent preconfirmation position on which to bottom the theory.
III. Conclusion
Qwest Communications' Motion for Summary Judgment will be denied by separate order.