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GOLDIN ASSOC. v. DONALDSON

United States District Court, S.D. New York


May 20, 2004.

GOLDIN ASSOCIATES, L.L.C., LIQUIDATING TRUSTEE of the WORLDWIDE DIRECT LIQUIDATING TRUST, on behalf of the SMARTALK TELESERVICES, INC. bankruptcy estate, Plaintiff, -against- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, DONALDSON, LUFKIN & JENRETTE, INC. GLOBAL RETAIL PARTNERS, L.P., DLJ DIVERSIFIED PARTNERS, L.P., DLJ DIVERSIFIED PARTNERS-A, L.P., GRP PARTNERS, L.P., GLOBAL RETAIL PARTNERS FUNDING, INC., DLJ FIRST ESC, L.P., DLJ ESC-II, L.P., KENNETH A. VILIEU, LINDA FAYNE LEVINSON, VICTOR GRILLO, JR., VICTOR GRILLO, SR., LLOYD LAPIDUS, RAYMOND WYSOCKI, Defendants

The opinion of the court was delivered by: WILLIAM PAULEY, District Judge

MEMORANDUM AND ORDER

This action arises out of the Chapter 11 bankruptcy proceedings of SMTK Expedite, Inc., formerly known as SmarTalk Teleservices, Inc. ("SmarTalk." or the "Debtor"). Presently before this Court is defendants' motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure.*fn1 Defendants contend that the claims by plaintiff Goldin Associates, L.L.C., Liquidating Trustee for the Worldwide Direct Liquidating Trust on behalf of the SmarTalk Bankruptcy Estate, are barred by the doctrine of res judicata since SmarTalk failed to reserve those claims in its plan of liquidation. For the following reasons, defendants' motion is denied.

  BACKGROUND

  The facts relevant to this motion are largely undisputed.*fn2 In January 1999, SmarTalk filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. (Plaintiff's Memorandum of Law in Opposition to Defendants' Motion for Summary Judgment ("Pl. Mem.") at 3.) Thereafter, in April 2000, SmarTalk's Official Committee of Unsecured Creditors (the "Committee") commenced this action against defendants in the United States District Court for the Central District of California.*fn3 (Defendants' Statement Pursuant to Local Rule 56.1 ("Def. 56.1 Stint.") ¶ 5; Plaintiff's Statement Pursuant to Local Rule 56.1 ("Pl. 56.1 Stmt.") ¶ 5.) In the spring of 2000, SmarTalk and the Committee filed SmarTalk's Second Amended Consolidated Liquidating Chapter 11 Plan (the "Plan") with the Bankruptcy Court. (Def. 56.1 Stmt. ¶ 2; Pl. 56.1 Stmt. ¶ 2.) At the same time, they also filed a Disclosure Statement concerning the Plan (the "Disclosure Statement"). (Def. 56.1 Stmt. ¶ 3; Pl. 56.1 Stmt. ¶ 3; Affidavit of Hal Neier, dated February 20, 2004 ("Neier Aff.") Ex. 1.) The Bankruptcy Court confirmed the Plan on June 7, 2001. (Def. 56.1 Stmt. ¶ 4; Pl. 56.1 Stmt. ¶ 4.)

  The Plan does not include an express reservation of claims against defendants in this action. Instead, it contains a general reservation clause, which seeks to preserve in pertinent part:

All claims, rights, defenses, offsets, recoupments, causes of action, actions in equity, or otherwise, whether arising under the Bankruptcy Code or federal, state, or common law, which constitute property of the Estates . . . (including without limitation the Fletcher Adversary [proceeding]).
(Aufses Aff. Ex. A: SmarTalk Bankruptcy Plan § 15.2.) Nevertheless, SmarTalk specifically identified its pending claims against defendants in the Disclosure Statement filed with the Plan. (Neier Aff. Ex. 1, at 35-37.) Specifically, under a heading titled "Claims By and Against Donaldson, Lufkin & Jenrette And Related Entities, Including Former Shareholders of WWD," the Disclosure Statement provided, inter alia:
By authority of the Transfer Order, on April 14, 2000, the Committee filed on behalf of the Estates an Original Complaint (the "DLJ Complaint") in the United States District Court for the Central District of California against the following entities: DLJSC, DLJ, Global Retail Partners, L.P., DLJ Diversified Partners, L.P., DLJ Diversified Partners-A, L.P., GRP Partners, L.P., Global Retail Partners Funding, Inc., DLJ First ESC, L.P., DLJ ESC-II, L.P., Kenneth A. Vilieu, Linda Fayne Levison (collectively, the "DLJ Defendants") and Victor Grille, Jr., Lloyd Lapidus, Raymond Wysocki, and Victor Grillo, Sr. (collectively, the "WWD Defendants").
The DLJ Complaint asserts claims arising out of the relationship between [SmarTalk] and the defendants in connection with the WWD transaction. . . .
The Committee seeks relief on behalf of the Estates against all defendants, jointly and severally, for: actual and consequential damages caused by the defendants' alleged wrongful acts; damages resulting from violations of California Code Section 310, including the return of the value of the shares the defendants received at the time the WWD transaction was consummated; punitive damages for fraud and other wrongful conduct of the defendants; equitable relief in the form of voidable transactions; attorneys' fees as applicable by law; pre-and post-judgment interest on damages; costs of court; and all other relief as just.
(Neier Aff. Ex. 1 at 35-36.) On May 13, 2000, the Bankruptcy Court concluded that the Disclosure Statement contained "adequate information" within the meaning of Section 1125 of the Bankruptcy Code, 11 U.S.C. § 1125 (2000), and approved dissemination of the Plan and Disclosure Statement to SmarTalk's creditors.*fn4 (Neier Aff. Ex. 2 at 2-3: Disclosure Statement Approval Order.) On May 30, 2000, SmarTalk's creditors, including defendants, were served with the Plan and the Disclosure Statement. (Neier Aff. Ex. 3 at 2, Ex. 4 at 6-7, 9.) Defendants filed objections to the Plan in July 2000. (Neier Aff. Exs. 5-6.)

  DISCUSSION

 I. Summary Judgment Standard

  Courts may grant summary judgment only if "there is no genuine issue as to any material fact" and "the moving party is entitled to summary judgment as a matter of law." Fed.R.Civ.P. 56(c). The movant bears the burden of establishing that no genuine issues of material fact exist. Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986); accord McLee v. Chrysler Corp., 109 F.3d 130, 134 (2d Cir. 1997). Once the movant satisfies this requirement, the burden shifts to the nonmoving party "to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. The court is required to resolve any ambiguities and to make all reasonable inferences in favor of the nonmoving party. Flanigan v. Gen. Elec. Co., 242 F.3d 78, 83 (2d Cir. 2001). A genuine issue of material fact exists when "a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

 II. Preservation of Claims

  Under Section 1141(a) of the Bankruptcy Code, "the provisions of a confirmed plan bind the debtor" and all other parties to a bankruptcy proceeding. See 11 U.S.C. § 1141(a) (2000). A confirmed plan, therefore, constitutes a final judgment on the merits entitled to preclusive effect under the doctrine of res judicata. See, e.g., Sure-Snap Corp. v. State St. Bank & Trust Co., 948 F.2d 869, 872-73 (2d Cir. 1991) (order confirming plan of reorganization has preclusive effect under res judicata); accord In re Am. Preferred Prescription, Inc., 266 B.R. 273, 277 (Bankr. E.D.N.Y. 2000); In re Friedberg, No. 94 Civ. 1569 (JFK), 1995 WL 733636, at *2 (S.D.N.Y. Dec. 12, 1995). Accordingly, a debtor is precluded from asserting any claims post-confirmation that are not preserved in its plan. See In re I. Appel Corp., No. 03 Civ. 2355 (VM), 300 B.R. 564, 566 (S.D.N.Y. Oct. 20, 2003) (citing D & K Props. Crystal Lake v. Mut. Life Ins. Co. of New York, 112 F.3d 257, 259 (7th Cir. 1997)). However, where the right to pursue litigation is reserved in a plan, res judicata will not prevent a debtor from subsequently pursuing those claims. See In re Am. Preferred Prescription, 266 B.R. at 277.

  A majority of courts have held that, for this exception to apply, the reservation must identify with some specificity what claims it intends to preserve and against whom those claims are asserted.*fn5 See Browning v. Levy, 283 F.3d 761, 774 (6th Cir. 2002) ("[A] general reservation of rights [in a plan] does not suffice to avoid res judicata."); D & K, 112 F.3d at 261 ("A blanket reservation that seeks to reserve all causes of action reserves nothing."); In re Kelley, 199 B.R. 698, 704 (9th Cir. BAP 1996) ("[E]ven a blanket reservation by the debtor resserving `all causes of action which the debtor may choose to institute' has been held insufficient to prevent the application of res judicata to a specific action.") (internal quotations omitted).

  Although the Bankruptcy Code speaks in terms of reservations in the plan,*fn6 a debtor can preserve its right to litigate claims in either the plan or the disclosure statement. See, e.g., In re Kelley, 199 B.R. at 704 ("[I]f the debtor fails to mention the cause of action in either his schedules, disclosure statement, or plan, then he will be precluded from asserting it postconfirmation."); In re I. Appel, 300 B.R. at 570 ("The combination of the blanket reservation of claims in the Plan and the reference to potential claims against the [defendants] in the Disclosure Statement was sufficient to provide adequate notice to the creditors, the [defendants], the trustee, and the bankruptcy court that the Debtor had potential outstanding claims against the [defendants]."); In re Arizona Fast Foods LLC, 299 B.R. 589, 594-95 (Bankr. D. Ariz. 2003) ("If a disclosure statement and/or plan of reorganization expressly reserves an action for later adjudication, the doctrine of res judicata does not apply."), In re Ampace, 279 B.R. at 161 ("Both the Disclosure Statement and Plan contain a clear statement of the Trust's retention of the right to pursue Avoidance Actions post-confirmation. Therefore, Defendant knew or should have known that the Trustee could have commenced the instant action post-confirmation and as such, Defendant cannot now claim that such action is barred."); In re County of Orange, 219 B.R. 543, 564 (Bankr. C.D. Cal. 1997) (res judicata does not bar defense expressly reserved in disclosure statement).

  The proposition that a debtor can preserve its post-confirmation claims in the plan or disclosure statement is supported by the rule that a confirmed plan includes "all documents which were confirmed together to form the contract." In re Sugarhouse Realty, Inc., 192 B.R. 355, 363 (Bankr. E.D. Pa. 1996); see also This Is Me, Inc. v. Taylor, 157 F.3d 139, 143 (2d Cir. 1998) (citing contract law principle that documents forming part of same transaction are to be read together); Krgblin Refrigerated Xpress, Inc. v. Pitterich, 805 F.2d 96, 107 (3d Cir. 1986) ("It is a general rule of contract law that where two writings are executed at the same time and are intertwined by the same subject matter, they should be construed together and interpreted as a whole."). For example, in In re Sugarhouse Realty, the bankruptcy court determined that the confirmed plan included the plan of reorganization itself, the agreement of sale, as well as the disclosure statement, including its attachments. 192 B.R. at 363. The disclosure statement and the plan should be read conjunctively so that a debtor's general reservation of claims in its plan includes a specific reservation in its disclosure statement. See This Is Me, 157 F.3d at 143; In re Sugarhouse Realty, 192 B.R. at 363; see also In re I. Appel, 300 B.R. at 570 (stating that combination of general reservation clause in the plan and more specific reference to potential claims in disclosure statement provided sufficient notice to creditors and defendants).

  That a plan and disclosure statement should be read with reference to one another is buttressed by the well-established policy that a debtor must give creditors reasonable notice of the plan's contents. See In re I. Appel, 300 B.R. at 570 ("The question is whether the Plan and the Disclosure Statement as written provided adequate notice to enable creditors to make an informed judgment about the Plan."); see also In re Goodman Bros. Steel Drum Co., Inc., 247 B.R. 604, 610 (Bankr. E.D.N.Y. 2000) (holding disclosure statement sufficient to give notice as "the creditors are required to have a copy of the disclosure statement served on them" at the time they receive the plan); F.R.Bankr.P. 3017(d) (providing that upon court's approval of disclosure statement, both the plan and disclosure statement must be served on "all creditors and equity security holders"). Here, defendants contend that plaintiff's claims are barred by res judicata because: (1) the Plan contains only a general reservation, which fails to identify any specific parties or causes of action; and (2) the Disclosure Statement is without legal effect. Defendants' arguments are without merit. The Disclosure Statement and the Plan were executed and filed with the Bankruptcy Court at the same time and the Plan was included within the Disclosure Statement. (Def. 56.1 Stmt. ¶ 3; Pl. 56.1 Stmt. ¶ 3; Aufses Aff. ¶ 4 Ex. C; Neier Aff. Ex. 1.) The Memorandum Opinion confirming the Plan also makes explicit reference to the Disclosure Statement. (Aufses Aff. ¶ 4 Ex. C; Neier Aff. Ex. 1.) As noted, the Plan and Disclosure Statement must be viewed together in considering defendants' res judicata claim. See This Is Me, 157 F.3d at 143; Kroblin, 805 F.2d at 107); In re Sugarhouse Realty, 192 B.R. at 363 (all portions of confirmed plan or contract must be construed together).

  When read conjunctively with the Disclosure Statement, the Plan clearly expresses SmarTalk's intent to preserve its claims against defendants in this action. Although the reservation clause in the Plan is a blanket one, and thus insufficient alone to preserve the Debtor's claims, see, e.g., Browning, 283 F.3d at 774, the Disclosure Statement details the specific causes of action SmarTalk was pursuing against both the WWD and DLJ defendants at the time of confirmation. (Neier Aff. Ex. 1 at 35-36.) Both the Plan and the Disclosure Statement were served contemporaneously on all creditors including defendants prior to the Bankruptcy Court's confirmation. (Neier Aff. Ex. 3 at 2, Ex. 4 at 6, 7, 9.) Defendants therefore cannot — and do not — argue that these documents did not provide them with sufficient notice to make an informed decision about the Plan. See, e.g., In re I Appel, 300 B.R. at 570 ("The Plan indicated that the Debtor was reserving all causes of action, and the Disclosure Statement indicated that the Debtor was investigating potential claims against [defendants]."); In re Goodman Bros., 247 B.R. at 610 (notice in disclosure statement of actions debtor intends to pursue post-confirmation provides sufficient notice to creditors since disclosure statement must be provided along with plan pursuant to Section 1125(b) of the Bankruptcy Code).

  Defendants' reliance on Browning, 283 F.3d 761, D & K, 112 F.3d 257, and In re Kelley, 199 B.R. 698, for the proposition that absent an express reservation in the Plan itself, res judicata bars plaintiff's claims is misplaced. Those cases stand for the unremarkable proposition that a blanket reservation of claims in a reorganization plan alone is insufficient to preserve a debtor's post-petition claims. Browning, 283 F.3d at 774 (general reservation does not defeat application of res judicata); D & K, 112 F.3d at 261 (failure to identify specific claim results in preclusion of claims post-confirmation); In re Kelley, 199 B.R. at 704 (same). Moreover, those authorities are inapposite to the present case, where the Plan contains only a general reservation but the Disclosure Statement contains a lengthy and detailed summary of the claims the debtor intends to preserve. Accordingly, the Browning line of cases does not support defendants' position.

  Defendants also contend that under In re Bridgepoint Nurseries, Inc., "a disclosure statement is not a binding contract and has no res judicata or collateral estoppel effect on the court and cannot bind the parties." 190 B.R. 215, 222 (D.N.J. 1996). Bridgepoint is not persuasive. First, that decision is factually distinguishable from the present action. In Bridgepoint, a claimant sought to enforce rents allegedly owed by the debtor based on a footnote in the disclosure statement that the claimant intended to pursue an action for use and occupancy. 190 B.R. at 222. Thus, the Bridgepoint court was not confronted with a situation in which a debtor was seeking to assert claims based on a general reservation in its plan along with a specific reservation in its disclosure statement. Second, Bridgepoint's analysis rests in part on the plain language of Section 1141(a) of the Bankruptcy Code, which states that "the provisions of a confirmed plan bind the debtor" and other parties. 11 U.S.C. § 1141(a); see also Bridgepoint, 190 B.R. at 223 ("The complete absence of any reference to the binding nature of a disclosure statement can only be interpreted to mean that Congress intended confirmed reorganization plans, and not disclosure statements to be binding."). However, similar reasoning was rejected in In re Goodman Brothers, which noted that the Bankruptcy Code does not support the proposition that a disclosure statement is without legal effect. 247 B.R. at 610-11. To the contrary, the Goodman Brothers court noted that the Bankruptcy Code stresses the importance of information in disclosure statements. 247 B.R. at 610-11. This Court agrees with the reasoning in Goodman Brothers. Finally, Bridgepoint is bereft of case law supporting its conclusion that disclosure statements are without binding effect. It is also contrary to the weight of authority that debtors can preserve post-petition claims in either the plan or the disclosure statement. See, e.g., In re Kelley, 199 B.R. at 704; In re I. Appel, 300 B.R. at 570; In re Arizona Fast Foods, 299 B.R. at 594-95.

  Accordingly, this Court holds that plaintiff's claims were adequately preserved and are not barred by the doctrine of res judicata. CONCLUSION

  For the foregoing reasons, defendants' motion for summary judgment dismissing the Second Amended Complaint on grounds of res judicata is denied.


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