ROBINSON, Senior District Judge.
Appellants Eldar Brodski Zardinovsky and others (collectively "plaintiffs")
Following confirmation of AGIF's Plan of Arrangement ("Plan") under Canada's Companies' Creditors Arrangement Act (the "CCAA"), plaintiffs purchased units in AGIF between December 16, 2014 and January 22, 2015. On January 22, 2015, pursuant to the Plan's distribution procedure, defendants made distributions to those who held units as of December 15, 2014 — in other words, to those who sold their units to plaintiffs. The complaint alleges that under U.S. securities law, defendants should have made distributions to
AGIF was an income trust based in Canada which owned a group of companies that manufactured and distributed packaged ice.
AGIF held a meeting of unitholders to consider and vote on the Plan, and notice of the meeting was provided to all unitholders. (See A350-401) The Canadian court determined there had been sufficient notice of the meeting to unitholders, as well as sufficient service of documents related to the meeting. (A587, ¶ 3) The Plan was approved by 99.81% of all unitholders who voted, and over 65% of unitholders voted. (A199; A441-43) The Plan and orders contained provisions that released defendants from liability for any actions or omissions related to, arising out of, or connected with the Plan. Each unitholder was deemed to have consented and agreed to all provisions of the Plan, including the releases. (A592, ¶ 19(a)) The Plan, once approved, was binding not only on unitholders but also on their "successors and assigns." (A161, ¶ 1.3) The Canadian court approved and sanctioned the Plan pursuant to the CCAA on September 5, 2014 (the "Sanction Order"). The plan implementation date occurred on January 22, 2015. (A8-9, ¶¶ 39, 45; A584-604) The Sanction Order declared that the terms of the Plan governed the conduct of AGIF and related parties as of the date of signing, and authorized them "to take all steps and actions necessary or appropriate to implement the Plan":
(A589-90, ¶ 12) On September 16, 2014, the bankruptcy court entered an order (A460-66) ("Recognition Order")
The Plan provides detailed procedures for the distribution to unitholders. Section 6.2 limits distributions "to each Registered Unitholder, as of the applicable Unitholder Distribution Record Date." (A168, § 6.2) Section 6.2 of the Plan provided that the monitor would declare a record date that would determine which unitholders were eligible to receive the distribution, and that the transfer agent would pay the distribution to each registered unitholder as of the record date. Specifically, the Plan provided:
(A168, § 6.2) (emphasis added) The Plan further provided that the unitholder distribution record date must be "at least 21 days prior to a contemplated Unitholder Distribution..." (A159, § 1.1)
Section 8.3 of the Plan provides the steps and transactions to be undertaken on the plan implementation date:
(A174, § 8.3) (emphasis added) Schedule "B" to the Plan provides specific instructions as to steps to be taken on the plan implementation date:
(A187, Sch. B) Schedule B of the Plan provides specific instructions as to the last step in the distribution procedures:
(A197, Step 30) Section 8.3 only allows for distributions "in accordance with" the Plan (i.e., § 6.2); Schedule "B" only allows for distributions "in accordance with Section 6.2 of the ... Plan." (A187)
The Sanction Order provides that distributions shall be made in accordance with the CCAA, the Plan, and court orders, under the exclusive authority of the monitor:
(A598-99, ¶ 34 (emphasis added)) Thus, the Sanction Order empowers the monitor to administer and distribute funds to unitholders "without interference from any other Person" including the Arctic Glacier Parties. (Id.) Further, the definition of "Person" includes any "Government Authority" or any agency, regulatory body, officer or instrumentality thereof or any entity, wherever situated or domiciled." (A157, § 1.1) Government Authority is defined as "any government, regulatory or administrative authority ... or other law, rule or regulation-making or enforcing entity having or purporting to have jurisdiction on behalf of any nation...." (A156, § 1.1)
Plaintiffs do not appear to dispute that defendants made the distribution to unitholders in accordance with the Plan. Rather, plaintiffs contend that defendants did not comply with U.S. securities laws, which required making the distribution to plaintiffs, and this contention is central to each of the claims in the complaint. The bankruptcy court set forth a thorough explanation of the relevant statutes and rules in its opinion,
Rule 10b-17 of the Securities and Exchange Act of 1934 establishes an issuer's mandatory set of disclosures if it trades on the OTC market and wishes to make a distribution. (A11, ¶ 56) Notice of a distribution must be given to the Financial Industry Regulatory Authority ("FINRA")
FINRA is authorized by the SEC to adopt and administer the Uniform Practice Code ("UPC"), "the rules and regulations governing [OTC] secondary market securities transactions." THCR/LP, 2006 WL
The
"In terms of entitlement, the
The ex-date generally precedes the record date, in which case the stockholder legally entitled to the dividend is the individual to whom the dividend is sent. THCR/LP, 2006 WL 530148, at *6. On the other hand, if the record date precedes the ex-date, and the security is sold during the period between the two, the seller of the
The FINRA Rules and the Plan's distribution procedures differ in two important respects relevant to the appeal. First, with respect to notification requirements, the Plan and orders make no mention of any obligations to notify FINRA, or to otherwise observe any authority beyond the CCAA and the Plan. (A168, § 6.2; A598, ¶ 34) Indeed, under the Sanction Order, compliance with any outside authority falls within the monitor's discretion, and defendants and the monitor are released from liability for disregard of such authority. (See A598, ¶ 34; A601, ¶ 40) The FINRA Rules, on the other hand, require that the issuer notify FINRA ten days prior to the record date, and "further advise FINRA of, inter alia, the date and amount of the dividend payment, and obtain FINRA's approval." (A14, ¶ 69; Rule 10b-17; Rule 6490)
Second, under the FINRA Rules, the size of the distribution may lead to a different allocation. A dividend payment of 24% or less of the value of the subject security will invoke UPC 11140(b)(1), which provides that "the date designated as the `ex dividend' date shall be the second business day preceding the record date if the record date falls on a business day, or the third business day preceding the record date if the record date falls on a day designated by the Committee as a non-delivery date." UPC 11140(b)(1). Where the dividend is 25% or greater of the value of the subject security, UPC 11140(b)(2) applies, requiring that "the ex-dividend date shall be the first business day following the payable date." UPC 11140(b)(2).
On November 18, 2014, the monitor issued a report
(A563) Due to the three-day processing period for securities sales, only purchasers on or before December 15, 2014, would have been registered unitholders as of the December 18, 2014 record date. (A6-7, ¶ 32) AGIF did not notify FINRA of its planned dividend. As a result, FINRA did not set an ex-date for AGIF units. (A7, ¶¶ 33-34)
Beginning on December 16, 2014, plaintiffs began purchasing AGIF units on the OTC market from the selling unitholders who had acquired their shares prior to confirmation of the Plan. (A10, ¶ 50; A1400-02, ¶¶ 18-19) Plaintiffs continued to purchase units up to and including January 22, 2015. (A10-11, ¶¶ 50-55) The complaint does not allege that plaintiffs were unaware of AGIF's public disclosures. (A1-25; A39, ¶ 5)
On January 9, 2015, another press release announced that AGIF would implement the Plan as soon as possible:
(A569) AGIF issued yet another press release on January 21, 2015, disclosing that the plan implementation date would be the next day, January 22, 2015, and that "unitholders of the Fund as of December 18, 2014 (the `Record Date') were entitled to receive an initial distribution from the Fund pursuant to the Plan of $0.155570 USD per unit of the Fund held on the Record Date." (A44, ¶ 16; A571)
On January 22, 2015, AGIF distributed through a transfer agent $0.155570 USD per unit to the unitholders of record as of December 18, 2014. (A8, ¶¶ 39-40) At this time, AGIF units were trading at approximately $0.20 per unit. (Id., ¶ 40) AGIF did not notify FINRA of the January 22 payable date. (Id., ¶ 39) Given the three-day processing delay, plaintiffs allege that the de facto and unofficial ex-date for the dividend was December 16, 2014 — the day after the last day on which a holder would have had to purchase units in order to receive the dividend. (A6-7, ¶¶ 32-34; A8-9, ¶¶ 41-42) As plaintiffs began purchasing units on December 16, 2014, they did not receive the dividend. (A10, ¶¶ 47, 49-50)
On January 23, 2015, the Investment Industry Regulatory Organization of Canada ("IIROC") imposed a "trading halt" on AGIF units trading on the CSE, listing the reason for the halt as "Pending Company Contact." (A574) FINRA also halted trading of AGIF units on the OTC market, citing Halt Code "U1," which refers to "Foreign Regulatory Halt." (A579) IIROC and FINRA lifted the trading halts on January 28, 2015. (A9, ¶ 44) When trading resumed, the average unit price decreased by 75%, from a closing price of approximately $0.21 per unit on January 22, 2015, to $0.05 per unit. (A9, ¶ 45) The decrease in unit price reflected the loss of the right to a dividend. (Id.)
On October 30, 2015, plaintiffs initiated the adversary proceeding by filing the complaint.
Plaintiffs seek compensatory damages on all counts, reasonable attorney fees and costs, prejudgment interest, punitive and treble damages, and the Plan distribution. (A24)
The court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(1), which provides for appeals of "final judgments orders, and decrees" of the bankruptcy court. 28 U.S.C. § 158(a)(1). The bankruptcy court's dismissal of the adversary proceeding is a final order. (A728-29) When reviewing an order, judgment, or decree on appeal from a bankruptcy court, the appellate court reviews the bankruptcy court's legal determinations de novo, its factual findings for clear error, and its exercise of discretion for abuse thereof. See In re United Healthcare Systems Inc., 396 F.3d 247, 249 (3d Cir. 2005). Where an issue involves mixed questions of law and fact, the appropriate standard is either plenary review or utilization of a mixed standard. See The Hertz Corp. v. ANC Rental Corp. (In re ANC Rental Corp.), 280 B.R. 808, 814 (D. Del. 2002), aff'd In re ANC Rental Corp., 57 Fed.Appx. 912 (3d Cir. 2003).
Plaintiffs assert the following issues on appeal: (i) whether the bankruptcy court erred in holding that the doctrine of res judicata bars plaintiffs' claims, even though the Plan and Orders did not address the legal obligations on which they base their claims; (ii) whether the bankruptcy court erred in holding that the doctrine of res judicata bars plaintiffs' claims, even though the violations of law on which plaintiffs base their claims post-dated the Plan and Orders; and (iii) whether the bankruptcy court erred in holding that the releases contained in the Plan and Orders bar plaintiffs' claims, even though enforcement of the releases would violate the Due Process Clause of the U.S. Constitution. (D.I. 8 at 3)
In opposition to the motion to dismiss, plaintiffs did not dispute that, as a matter of law, defendants were required, under both U.S. and Canadian law, to comply with every aspect of the Plan, including making distributions to unitholders in accordance with the Plan.
The bankruptcy court rejected this argument, determining "the Plan's distribution procedure is an adjudication, and to the extent that there is a conflict between that adjudication and the FINRA Rules, the Plan will supersede." Arctic, 2016 WL 3920855 at *15. Because plaintiffs' claims sought to impose additional duties on defendants based upon FINRA Rules, the bankruptcy court determined plaintiffs' claims must be dismissed. See id. at *16-*17. The bankruptcy court concluded that the imposition of any such additional obligations would conflict with the Plan, which provided "one, and only one" procedure for making distributions. See id. "In other words, when faced with conflicting obligations under the Plan and the FINRA Rules, [d]efendants must follow the former, notwithstanding the latter." Id.
Plaintiffs continue to argue on appeal that defendants failed to comply with additional obligations outside of the Plan's distribution procedures which included disclosures under the FINRA Rules. (See D.I. 8 at 20-21) Plaintiffs argue that there was "nothing in the Plan that eliminated [defendants'] common law and statutory obligations to make" the FINRA disclosures, nor did the Plan establish a "comprehensive scheme delineating exactly what information [defendants] were and were not required to disclose to potential investors," thus the Plan did not preclude the disclosure obligations. (Id. at 22) Conversely, defendants argue that the Plan established an exclusive procedure for distributions and that the bankruptcy court reached the correct conclusion under well settled case law that plaintiffs claims were precluded by the Orders under the doctrine of res judiciata. (See D.I. 10 at 17)
Res judicata "gives dispositive effect to a prior judgment if a particular issue, although not litigated, could have been raised in the earlier proceedings." Bd. of Trs. of Trucking Emps. of N.J. Welfare Fund, Inc. v. Centra, 983 F.2d 495, 504 (3d Cir. 1992). This equitable doctrine requires: "(1) a final judgment on the merits in a prior suit involving (2) the same parties or their privities; and (3) a subsequent suit based on the same cause of action." Id. (citations omitted). For claim preclusion purposes, a plan confirmation order is a final order on the merits. In re Bowen, 174 B.R. 840, 846 (Bankr. S.D. Ga. 1994) ("An order confirming a plan of reorganization possesses all the requisite elements of common law res judicata.")
The court agrees the Plan sets forth an exclusive procedure for distribution to unitholders in section 6.2 (A168), and it is a final order on the merits. See E. Minerals & Chem. Co. v. Mahan, 225 F.3d 330, 334 (3d Cir. 2000). To the extent plaintiffs assert that defendants failed to satisfy their obligations under the Plan, the Plan imposed no obligations on defendants to comply with FINRA Rules or any authority outside the CCAA and court orders. In re Howe, 913 F.2d 1138, 1143 (5th Cir. 1990) (stating it is "well settled that a plan is binding upon all parties once it is confirmed and that all questions that could have been raised pertaining to such plan are res judicata"). To the extent plaintiffs assert that the Plan's distribution procedure omitted important procedures under the FINRA Rules, which defendants were required to undertake, plaintiffs are
Plaintiffs further argue that, in reaching the conclusion that their claims are barred under the doctrine of res judicata, the bankruptcy court overlooked a critical fact: all events on which plaintiffs base their claims occurred after the confirmation of the Plan. (See D.I. 8 at 15) According to plaintiffs, "it is well settled law that the doctrine of res judicata is inapplicable to claims based on post-confirmation acts" and, therefore, the Plan and Orders could not have addressed or resolved plaintiffs' claims. (Id.; D.I. 16 at 2-3) Plaintiffs cite Donaldson and J & K Adrian Bakery in support, but both cases are factually distinguishable and involved unrelated post-confirmation wrongful conduct.
In Donaldson, the bankruptcy court approved a chapter 11 plan requiring two principals of a corporation, who were its sole officers and shareholders, to guarantee payments to taxing authorities for which they were personally liable, along with partial payments on account of unsecured claims. See Donaldson v. Bernstein, 104 F.3d 547, 554 (3d Cir. 1997). After paying the tax obligations, the reorganized debtor failed to make remaining payments as required by the plan, claiming that adverse business conditions caused it to miss its payments. Thereafter, the chapter 11 case was reopened and converted to chapter 7. See id. at 551. The chapter 7 trustee filed an action against defendants alleging that they obtained confirmation of the plan under false pretenses, knowing they would not fund the plan after payment of the tax debts for which they were personally liable, and seeking damages on the basis of post-confirmation breach of fiduciary duty for allegedly having diverted business opportunities and funds from the reorganized debtor to a separate company they owned and controlled. The Donaldson court determined that the action was not barred by the doctrine of res judicata because "claims for post-confirmation acts are not barred by the res judicata effect of the confirmation order." Id. at 555. Unlike this case, however, defendants in Donaldson failed to comply with the terms of the chapter 11 plan. See id. ("[t]he gravamen of the trustee's complaint is that [defendants] breached their fiduciary duty after plan confirmation by failing to comply with [the plan] and by diverting [debtor's] business opportunities).
In J & K Adrian Bakery, the court considered whether to dismiss a complaint asserting claims relating to a chapter 11 debtor's alleged damage to property it occupied under a commercial lease. See J & K Adrian Bakery, LLC v. Dayton Superior Corp. (In re Dayton Superior Corp.),
The doctrine of res judicata is meant to give dispositive effect to a prior judgment of a particular issue, which although not litigated could have been raised in the earlier proceedings. (See id.) Here, the distribution procedure issues were addressed before Plan confirmation and entry of the Orders. Upon confirmation, the Plan's distribution procedure became a final judgment that was binding on all parties and cannot be re-litigated. The cases cited by plaintiffs involve different facts and do not require a different result.
Plaintiffs further argue on appeal that the bankruptcy court erred in ruling that the Plan must supersede the FINRA Rules because there is no conflict between the two. (See D.I. 8 at 16-20) According to plaintiffs, the Plan and FINRA Rules address the same post-confirmation issue — dividend distributions — and the bankruptcy court was required to harmonize them under the Third Circuit's ruling in Karathansis. (See id. at 12) The bankruptcy court considered whether the Plan's distribution procedures could be harmonized with FINRA Rules under plaintiffs' suggested approaches and concluded they could not be harmonized. See Arctic, 2016 WL 3920855 at *15-*17. Plaintiffs argue this holding was in error because nothing in the Plan precluded compliance with FINRA Rules, and defendants could have sought FINRA approval and paid the dividend in accordance with FINRA Rules under two different approaches. First, plaintiffs argue that distribution in separate "tranches" was permissible under the Plan and would have enabled compliance with FINRA. (See id. at 16-17) Plaintiffs further argue that defendants could have made distributions to both the selling unitholders under the Plan and to plaintiffs under the FINRA Rules. (See id. at 19) Despite the fact that some distributions would have been made twice, plaintiffs argue this was not only permissible under the Plan but also required under Third Circuit law. Because compliance with FINRA Rules would conflict with the terms of the Plan and Orders, the court finds no error in the bankruptcy court's conclusion that the two cannot be harmonized and the Plan must supersede.
Defendants' dividend payment amounted to approximately 75% of the value of the subject security. (A8, ¶ 40) In opposition to the motion to dismiss, plaintiffs argued that defendants could have made distributions in "tranches" or separate, smaller distributions (e.g., 24%, 24%, and 3%) without running afoul of the FINRA
Arctic, 2016 WL 3920855 at *15 (internal citations and footnotes omitted). Thus, as the bankruptcy court determined, for distributions of 24% or less, there is no conflict between UPC 11140(b)(1) and the Plan's distribution procedures, as both allocate the distribution to the same unitholders. However, where, as here, the dividend is 25% or greater of the value of the subject security, UPC 11140(b)(2) applies, requiring that "the ex-dividend date shall be the first business day following the payable date." UPC 11140(b)(2). Under subsection (b)(2), the ex-date would be January 23, 2015, the day
In opposition to the motion to dismiss, plaintiffs argued that distribution via multiple smaller tranches was both permissible under the Plan and would have harmonized the Plan with FINRA Rules. (See D.I. 15, 4/19/16 Hr'g. Tr. at 48:7-14; 80:9-13) The bankruptcy court could not reconcile plaintiffs' suggestion with the Plan for several reasons. First, the tranches proposal "places a limitation on the Plan's dividend procedure" whereas "the Plan makes no distinction between small and large dividends" and "[i]ts procedure is clearly intended to apply to any dividend, of whatever size." Arctic, 2016 WL 3920855 at *16. Moreover, the bankruptcy court concluded that "[t]o impose on the Plan FINRA's distinction between small and large dividends is to conclude that the Plan is not comprehensive as to its distribution procedure, even though it indicates that it is." Id. To do so also would have "limit[ed] the Monitor's discretion in making distributions, contrary to the Sanction Order's prohibition of such limitations," thus the bankruptcy court concluded that plaintiffs' tranches proposal did not offer a way to harmonize the Plan. Id.
The court agrees that the Plan permits no limitation on the monitor's discretion, is comprehensive as to its distribution procedure, and does not include a procedure for separate distributions. In accordance with the Sanction Order, the monitor is obligated only to follow the CCAA, the Plan, and the Orders. (A598, ¶ 34 (the monitor or CPS "shall be exclusively authorized and empowered to [make distributions], to the exclusion of all other Persons, including the Arctic Glacier Parties, and without interference from any other Person.")) As the bankruptcy court notes, where the Plan imposes applicable law requirements, it does so explicitly. Arctic, 2016 WL 3920855 at *16 (citing Plan at A170-72, §§ 6.10(a), 6.10(b), 6.11, 6.13). The Plan does not subject the monitor to any applicable law requirements in discharging its obligations under the distribution procedures set forth in section 6.2. (A168) The Plan is also comprehensive. Section 8.3 and Schedule "B" of the Plan provide a sequence of steps that must begin on the plan implementation date — the date on which funds are transferred to pay unitholder distributions. (See A157, § 1.1; A168, § 6.2 (setting forth distribution procedure); A187-A197, Sch. B (listing 29 separate steps for distribution) The Plan's distribution procedure plainly does not contemplate distribution in separate tranches. The Plan requires the monitor to "transfer amounts as determined by the Monitor in accordance with the [Plan] ... from the Unitholders' Distribution Cash Pool ... to the Transfer Agent." (A167-68, §§ 2.6, 6.2) The unitholders' distribution cash pool is defined as "an amount equal to the Available Funds less the amounts used to fund the: (a) Administrative Cost Reserve; (b) Insurance Deductible Reserve; (c) Unresolved Claims Reserve; and (d) Affected Creditors' Distribution Cash Pool." (Id.) These provisions are a mathematical formula with which the monitor was required to comply in order to make the distribution. The explicit language of the Plan permits no modification with respect to either the amount or timing of a distribution. The cases cited by plaintiffs do not require a different conclusion.
In opposition to dismissal, plaintiffs argue that a second way to harmonize the Plan with FINRA Rules was to require distributions under both the Plan and FINRA Rules, even if that results in paying some dividends twice — once to the selling unitholders and once to plaintiffs — and cited the Karathansis case in support. (See A1158-59, ¶¶ 57-60) The bankruptcy court rejected plaintiffs' argument, concluding that a separate distribution to plaintiffs would violate the Plan and Orders. See Arctic, 2016 WL 3920855 at *17. The bankruptcy court observed that paying twice would violate the Sanction Order "by impos[ing] an obligation on the Monitor that the Monitor did not choose." (Id. (citing Sanction Order ¶ 34)) Moreover, "[i]t would constitute an additional step in the Plan's distribution procedure, something the Plan does not allow." (Id. (citing A174, ¶ 8.3; A187, Sch. B))
On appeal, plaintiffs argue that, under Karathansis, the bankruptcy court was required, but failed, to harmonize the Plan with the FINRA Rules which would require distribution to plaintiffs. (See D.I. 8 at 13) Although this would result in making some distributions twice, plaintiffs argue that this was the solution reached in the Karathansis case, which was affirmed by the Third Circuit and is binding authority. (See id.) According to plaintiffs, neither the bankruptcy court nor the defendants identified any substantive difference between AGIF's Plan and the bankruptcy plan at issue in Karathansis, and the bankruptcy court distinguished that case without any basis for doing so. (See id. at 19; D.I. 16 at 9).
Conversely, defendants argue that plaintiffs' proposal would "harm the unitholders who did not trade their units by reducing later distributions" and "subject [defendants] to liability for not following the Plan from unitholders who did not receive their pro rata share." (D.I. 10 at 22-23) Defendants assert that an express purpose of the Plan was "to provide for the distribution of any surplus of the Available Funds to each Unitholder in the amount of their Pro Rata Share." (See A162, § 2.1(c)) The term "Pro Rata Share" is defined in the Plan as "the percentage that the Trust Units held by a Unitholder at the applicable Unitholder Distribution Record Date bears to the aggregate of all Trust Units, calculated as at the applicable Unitholder Distribution Record Date." (A157, § 1.1) According to defendants, "[p]aying a distribution twice would violate these provisions because each unitholder then would not receive its pro rata share as of the applicable record date," which would necessarily subject defendants to liability for failure to comply with the Plan. (See D.I. 10 at 23) Defendants further argue that
In Karathansis, former shareholders claimed they were entitled to receive a distribution under a bankruptcy plan because they held shares on the record date established by the plan, even though they sold their shares before the effective date of the plan. See Karathansis, 2007 WL 1234975 at *1. The debtors disagreed, arguing that under UPC 11140 (the same rule plaintiffs rely on here), distributions must be paid to subsequent purchasers, and not to the holders as of the record date (as required by the plan). See id. at *4. The bankruptcy court in that case ruled that the FINRA Rules trumped the plan and that the dividend should be distributed to the purchasing shareholders. See id. On appeal, the district court reversed the bankruptcy court's ruling, holding that (1) the FINRA Rules did not supersede the plan, and (2) the plan allocated the dividend to selling shareholders and thus the selling shareholders should be paid the dividend. See id. at *8. Karathansis therefore supports the bankruptcy court's ruling that defendants were obligated to make distributions in accordance with the Plan, notwithstanding the FINRA Rules.
Plaintiffs argue that this reading of the Karathansis decision is "incomplete" and that it "disregards the ruling that the FINRA rules and the terms of the Plan had to be harmonized" and that "compliance with both FINRA rules and the Plan was necessary to harmonize the two." (See D.I. 8 at 13-14, n.5) The court disagrees. While the Karathansis court noted that the plan and UPC 11140 could be read in harmony and also "recognize[d] that the net effect of its holding is that the Debtor may have to pay twice," this was only because the debtors in that case had already mistakenly made distributions under the FINRA Rules and were now required to pay according to the "plain and unambiguous" terms of the bankruptcy plan, which controlled.
Under well settled case law, defendants had a duty to comply with the Plan — not the FINRA Rules. See Howe, 913 F.2d at 1143 (it "is well settled that a plan is binding upon all parties once it is confirmed"); see Karathansis, 2007 WL 1234975 at *9 (holding FINRA Rules did not supersede plan). The court agrees with the bankruptcy court's conclusion that the FINRA Rules imposed conflicting obligations on defendants — not "concurrent and additional obligations" — and that the Plan controls. Absent the Plan being procured by fraud, or plaintiffs establishing a due process violation, the doctrine of res judicata bars plaintiffs from now contesting the Plan's distribution procedure, "even if only to argue that the procedure omits important steps that [d]efendants should have been required to take." Arctic, 2016 WL 3920855 at *17. While res judicata is a sufficient basis to affirm the bankruptcy court's dismissal of the complaint, the court will also consider the merits of plaintiffs' appeal of the bankruptcy court's
The Plan and Orders contained broad release provisions shielding defendants from liability for any actions or omissions related to, arising out of, or connected with the Plan.
Section 9.1 of the Plan contains the following broad release:
(A175-76, § 9.1 (emphasis added)) This release is effective as of the plan implementation date (January 22, 2015).
The Canadian court explicitly approved the Plan's broad release provision in the Sanction Order: "[T]he Plan (including without limitation the ... releases set out
(A591, ¶ 16 (emphasis added)) The Sanction Order also specifically released all claims arising out of payment of the distribution:
(A600-01, ¶ 40 (emphasis added)) The Sanction Order further deems each unitholder as having consented to the provisions of the Plan in their entirety, including the releases, and provides that if there is any conflict between the Plan and any other agreement, the Plan shall control:
(A592, ¶ 19 (emphasis added)) Finally, paragraph 29 of the Sanction Order provides an injunction applicable to all "Releasees," which, as defined in § 9.1 of the Plan, includes all defendants:
(A595-96, ¶ 29)
Pursuant to the Recognition Order, the bankruptcy court gave all provisions in the Sanction Order "full force and effect in the United States" and further declared that no liability can arise from AGIF's compliance with the Plan: "Neither the Debtors nor the Monitor shall incur any liability as a result of acting in accordance with the terms of the Plan and this Sanction Recognition Order." (A465, ¶ 9) The Recognition Order further grants defendants a broad release that was substantially the same as the one in the Plan, discharging any claims "whether known or unknown, matured or unmatured" arising out of or "in any way related" to the Plan, the bankruptcy proceedings, or AGIF's business affairs:
(A463-64, ¶ 5)
In opposition to dismissal, plaintiffs argued that the release in paragraph 9 of the Recognition Order, which states that AGIF shall not "incur any liability as a result of acting in accordance with the terms of the Plan and this Sanction Recognition Order," is inapplicable to their claims because plaintiffs "do not seek to hold [d]efendants liable because of any acts
The bankruptcy court determined that the releases contained in the Plan and Orders were sufficiently broad to encompass plaintiffs' claims, which are all "predicated on not having received distributions." See Arctic, 2016 WL 3920855, at *18. In reaching this conclusion, the bankruptcy
In opposition to the motion to dismiss, plaintiffs argued that they were not bound by the releases because their claims arose after the dates that the Plan and Confirmation Orders were entered, and they had no connection to defendants as of those dates. (See A1154-56) The bankruptcy court rejected this argument, holding that the Plan was binding not only on the unitholders who voted to approve the Plan and participated in the bankruptcy proceedings, but also on their "successors and assigns" which include plaintiffs. Arctic, 2016 WL 3920855 at *19. On appeal, plaintiffs argue that the bankruptcy court "erred because it assumed, without undertaking an appropriate analysis, that the [selling unitholders] assigned [to plaintiffs] rights and obligations under the Plan (or that [defendants] somehow succeeded to such rights and obligations)" but "did not explain this or identify a recognized test for what constitutes an assignment." (D.I. 8 at 24) The court disagrees that the bankruptcy court did not undertake an appropriate analysis. In reaching its conclusion that plaintiffs stepped into the shoes of the selling unitholders, and acquired no greater rights than the selling unitholders, the bankruptcy court relied on the KB Toys case, affirmed by the Third Circuit. See Arctic, 2016 WL 3920855 at *20 (citing In re KB Toys, 470 B.R. 331, 343 (Bankr. D. Del. 2012), aff'd, 736 F.3d 247 (3d Cir. 2013)).
In KB Toys, a chapter 11 trustee objected to proofs of claim filed by a purchaser of debtors' trade claims ("ASM") on the ground that the original claimants, from whom ASM purchased its claims, were in possession of avoidable preferences that they had yet to turn over or repay, thus the purchased claims must be disallowed under section 502(d) of the Bankruptcy Code. See KB Toys, 470 B.R. at 331. Under
The bankruptcy court disallowed ASM's claims, concluding that a claims purchaser holding a trade claim is subject to the same section 502(d) challenge as the original claimant: as the bankruptcy court put it, under section 502(d), "[d]isabilities attach to and travel with the claim." Id. at 335. In reaching this conclusion, the bankruptcy court carefully examined the text of the statute and the legislative history of section 502(d), noting that its predecessor, section 57g of the 1898 Bankruptcy Act, dealt with the right of a creditor to share in the debtor's assets within the distributive scheme of the statute, and provided that claims were not allowed until the creditor surrendered the preferential transfers to the estate. Id. at 336. Because section 57g established the basis for allowance or disallowance of particular claims, the legislative history supported a consistent interpretation of its statutory successor, section 502(d), that disabilities travel with claims. See id.
KB Toys, 736 F.3d at 252-53.
While plaintiffs argue on appeal that the bankruptcy court erroneously determined
Plaintiffs' only attempt to distinguish KB Toys appears to hinge entirely on the distinction between a sale and an assignment. Plaintiffs argue that "[a]lthough [plaintiffs] did acquire their units," there was no assignment, because "those units did not come with all of the rights and obligations established by the Plan." (Id. at 26). Because there was no assignment, plaintiffs reason, they are not bound by the releases. Plaintiffs argue that "an assignment does not exist where only part of the assignor's interests in the property is transferred or where an assignor retains control over the fund or the right to receive funds. (See id. at 8, 26) Plaintiffs reason that, if an assignment had occurred, then plaintiffs would have received the distribution on account of the purchased units. (See id. at 23, 26) "Given that the [Selling] Unitholders undeniably retained rights under the Plan after they sold their units, an assignment from such unitholders to [plaintiffs] did not occur." (See id. at 26) Because the original claimants in KB Toys "did not retain contract rights relating to the property" they transferred — i.e., their trade claims — plaintiffs argue that KB Toys has no application here. (See D.I. 8 at 26, n.8)
The bankruptcy court in KB Toys noted that the terms "assignment" and "sale" are not easily distinguishable and that, in the bankruptcy context, "use of the distinction between the two terms has been widely criticized." Id. at 340 (citing criticisms). It further noted that "[t]he Bankruptcy Code does not define `sale' or `assignment,' although the [Bankruptcy] Code definition of `transfer' arguably includes both." Id. at 340.
Plaintiffs further argue that even if they could be regarded as assignees of selling unitholders, plaintiffs' specific claims were never held by the selling unitholders and, thus, as a matter of law, the transferring unitholders could not have bound their assignees by any release. (See D.I. 8 at 26) According to plaintiffs, their claims are based on legal rights independent of, and separate from, the rights that the selling unitholders may have possessed: common law tort claims grounded in defendants' acts of negligence and fraud occurring after Plan confirmation, which resulted in injuries to plaintiffs and not the selling unitholders. (See id.) The court agrees with defendants that this argument fails to recognize that the Plan and Orders bar all claims related to payments and distributions to unitholders by any person. (See D.I. 10 at 30) The Plan specifically bars any claims that
While the bankruptcy court recognized that "there are limits to the types of claims from which defendants can be shielded by a release," it also noted that the only relevant law plaintiffs proffered as being beyond the reach of the releases is the Due Process Clause of the U.S. Constitution. Arctic, 2016 WL 3920855 at *18. A release is ineffective if a plaintiff's due process rights were violated in the confirmation of the plan. See Bowen, 174 B.R. at 844. In opposition to the motion to dismiss, plaintiffs argued that "releases and/or discharges of claims in bankruptcy are unenforceable where, as here, claims arose after the date of the discharge or release and the plaintiffs' interests were not represented in the underlying bankruptcy proceeding." (A1152-53, ¶ 41) Plaintiffs cited the Third Circuit's decision in Chemetron in support. See Jones v. Chemetron, 212 F.3d 199 (3d Cir. 2000). (A1154, ¶ 48) In Chemetron, a plaintiff who was not yet born as of the date of a discharge in bankruptcy asserted personal injury claims based on his mother's exposure to toxic chemicals. Chemetron, 212 F.3d at 200. The Third Circuit held that the discharge did not prevent claimant from pursuing his personal injury claims because
Id. at 210 (citation omitted). The bankruptcy court distinguished that case: "Unlike the Chemetron plaintiff, who was not yet born at the time of the bankruptcy discharge, [p]laintiffs here purchased units from the Selling Unitholders, who were either themselves appropriately noticed of the Plan and release it contained, or were the `successors and assigns' of unitholders who participated in the bankruptcy proceeding." Arctic, 2016 WL 3920855 at *19.
Plaintiffs argue on appeal that the bankruptcy court erred in distinguishing Chemetron, which held that a due process violation occurs when a party whose claims are barred did not have both (i) notice of the plan, and (ii) its interests represented in in connection with the bankruptcy proceedings. (See D.I. 8 at 28-30) According to plaintiffs, the Canadian court should have "appointed [someone] to represent the interests of claimants in the position of the [plaintiffs]" — presumably, purchasers of units on the OTC "Pink" market
The court finds no merit in plaintiffs' attempt to analogize their position with that of the unborn personal injury claimant in Chemetron. The record demonstrates that unitholders received sufficient notice of the meeting, the Plan, and its releases. (See A356-401, ¶¶ 1.7, 5.10; A587, ¶ 3) The Plan was accepted by 99.81% of the unitholders who voted on it. (A218-19) Each unitholder was deemed to have consented and agreed to all of the provisions of the Plan in their entirety." (A592 at ¶ 19; see also A180-81 at ¶ 11.1) The Plan explicitly provides that it is binding not only on the selling unitholders but also on their "successors and assigns." (A161 at § 1.3) The record demonstrates that the selling unitholders received appropriate notice sufficient to satisfy due process and an opportunity to be heard regarding confirmation of the Plan. Unlike the unborn claimant in Chemetron, plaintiffs bought claims from unitholders who had notice of the insolvency proceedings and participated in those proceedings. The complaint does not allege that the due process rights of selling unitholders were violated during the bankruptcy proceedings, nor does it allege that plaintiffs did not have notice of the bankruptcy proceedings or the Plan.
The bankruptcy court correctly concluded that plaintiffs' claims are barred by the doctrine of res judicata and by the releases contained in the Plan and Orders. Based on the foregoing, the court need not consider the additional bases on which defendants assert that dismissal of the adversary proceeding should be affirmed.
For the foregoing reasons, the bankruptcy court's opinion and order are affirmed, and plaintiffs' appeal is denied. An appropriate order shall issue.
SEC Release No. 62434 (July 1, 2010) (footnotes omitted).
Neither Holywell Corp. v. Smith, 503 U.S. 47, 112 S.Ct. 1021, 117 L.Ed.2d 196 (1992), nor Ohio v. Kovacs, 469 U.S. 274, 105 S.Ct. 705, 83 L.Ed.2d 649 (1985), involved the application of any provision of a confirmed plan. In Holywell, the trustee of the estate was required to file tax returns as the assignee of property of the estate despite the fact that the plan was silent about the payment of income tax. See Holywell, 503 U.S. at 47, 112 S.Ct. 1021. In Kovacs, the state filed a complaint seeking a declaration that debtor's obligation to clean up a waste disposal site was not dischargeable in bankruptcy, and the Supreme Court held that the obligation was a "debt" or "liability on a claim" subject to discharge. See Kovacs, 469 U.S. at 274, 105 S.Ct. 705. Plaintiffs cite the following statement by the court: "[W]e do not question that anyone in possession of the site — whether it is [the debtor] or another ... — must comply with the environmental laws of the State of Ohio" (D.I. 8 at 14), but it is unclear how this case supports plaintiffs' position.
(A151, § 1.1).
http://www.otcmarkets.com/marketplaces/otcpink.
