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.
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
(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
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
(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
(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.)
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
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
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.
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.