Keith L. Phillips, United States Bankruptcy Judge.
Before the Court is the motion filed on behalf of Defendant Penn Virginia Corporation and its reorganized debtor affiliates (the "Reorganized Debtors")
The Court has subject matter over this adversary proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference from the U.S. District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L) and (O) in which final orders and judgments may be entered by a bankruptcy judge subject to the right of appeal under 28 U.S.C. § 158. This Court has venue pursuant to 28 U.S.C. § 1408.
On May 12, 2016 (the "Petition Date"), the Debtor and ten debtor affiliates (collectively "the Debtors") each filed petitions with the United States Bankruptcy Court for the Eastern District of Virginia (the "Court") under chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 101-1532. The Debtors operated their businesses and managed their properties as debtors in possession pursuant to §§ 1107(a) and 1108 of the Bankruptcy Code. The chapter 11 cases have been consolidated for procedural purposes only and are being jointly administered pursuant to Bankruptcy Rule 1015(b).
On their path to obtaining confirmation of a chapter 11 plan, the Debtors addressed various issues, including those raised by an ad hoc committee of equity security holders (the "Equity Committee" or the "Committee"). The Equity Committee consisted of 18 shareholders who collectively owned in excess of 2.6 million of the approximately 88 million outstanding shares of common stock of Penn Virginia Corporation.
A hearing on the motion to assume the Agreements and the objections thereto
On June 14, 2016, the Equity Committee filed an objection to the Debtors' disclosure statement (the "Disclosure Statement") on the grounds that, among other things, the Debtors' original chapter 11 plan was not confirmable given its lack of clarity regarding the Debtors' asserted loss in value and the treatment of certain third party releases as they affected the holders of equity interests.
The Equity Committee and Debtors agreed to a settlement that included, among other things, the following: (a) the Equity Committee agreed to withdraw and/or not pursue: (i) the Official Equity Committee Motion; (ii) certain document requests; and (iii) any objection to the Debtors' proposed plan; (b) the Debtors agreed to seek confirmation of a second amended plan that removed all members of the Equity Committee from the scope of the plan's third-party releases; and (c) the Debtors and the Ad Hoc Committee of Noteholders agreed to support the allowance of an administrative claim under 11 U.S.C. §§ 503(b)(3)(D) and 503(b)(4) in favor of the Equity Committee's actual and necessary expenses incurred by its counsel in connection with their representation of the Equity Committee (the "Settlement"). The Settlement was memorialized in the term sheet filed on August 2, 2016 [Docket No. 495], which became an additional exhibit to the Debtors' second amended plan.
A hearing on the Disclosure Statement was held on June 27, 2016, at which the Court approved the Disclosure Statement and overruled all unresolved objections thereto.
On July 28, 2016, the Plaintiff filed an objection to the Debtors' first amended chapter 11 plan on grounds similar to those raised by the Equity Committee in its objection to the Disclosure Statement. [Docket No. 492]. In his objection, Plaintiff stated that he and his wife owned 32,300 shares of common stock in Debtor Penn Virginia Corporation. As an equity holder, the Plaintiff objected to the provision that all equity interests would be cancelled and holders of such interests would receive no
At the August 11, 2016, confirmation hearing on the Debtors' second amended plan (the "Plan"), the Court received evidence and heard the argument of the parties, Plaintiff among them, including arguments as to the value of the Debtors' estates and whether there was equity available from which to make distributions to equity shareholders. The Court overruled Plaintiff's objection and ordered confirmation of the Plan. At the confirmation hearing, the Court found specifically that there was "no value here ... that would enable equityholders [sic] to receive anything in a liquidation." (Transcript 105, ll 6-9). On August 11, 2016, the Court entered its order confirming the Plan [Docket No. 581] (the "Confirmation Order") and overruling any remaining objections.
Several conditions had to be met before the Plan could become effective. Section 9.1 of the of the Plan required that, among other things: (i) the Debtors establish a professional fee escrow, which account was to be funded with over $10 million to satisfy professional fees; (ii) the closing of the Backstop Commitment Agreement occur concurrently with the occurrence of the Plan's effective date; (iii) the closing of the Exit Facility occur concurrently with the occurrence of the effective date; (iv) all conditions precedent to the issuance of the new common stock in the Reorganized Debtors occur;
Since the Effective Date, the Reorganized Debtors have objected to and expunged or amended hundreds of claims [Docket Nos. 699, 700, 701, 728, 730, 766, 768, 769, and 770] (the "Omnibus Objections"). They have also incurred substantial fees for professionals related to post-bankruptcy issues. See, e.g., Quarterly Report of Debtor in Possession (the "Operating Report") [Docket No. 782].
The Reorganized Debtors have taken additional steps to consummate the Plan. Among other things, the Plan authorizes certain parties to participate in a rights offering (the "Rights Offering") (as defined in the Plan). Procedures for the Rights Offering (the "Rights Offering Procedures") were approved by the Court in the Disclosure Statement Order [Docket No. 371]. The Plaintiff did not object to the Disclosure Statement or the Rights Offering Procedures. Pursuant to the Rights Offering Procedures, various parties were
In the Complaint, the Plaintiff argues that even though the Court overruled his objections to confirmation of the Plan, the increased value of shares in the Reorganized Debtors after the Effective Date is grounds to set aside the order confirming the Plan. He pleads that the shares in the Reorganized Debtors were originally offered for $3.18 per share but subsequently traded in the open market for amounts between $40 and $52 per share. He asserts that the increase in value is evidence that the Debtors falsely represented the value of those shares during the confirmation proceedings. Citing § 1144 of the Bankruptcy Code, 11 U.S.C. § 1144, which provides that a confirmation order may be revoked "if and only if such order was procured by fraud," Plaintiff requests that the Confirmation Order be revoked and that the Debtors propose a new plan that "reflects the actual value of the Debtor and participation of equity." Alternatively, he prays that the Court modify the Confirmation Order so as to "remedy the unjust enrichment of the Backstop Commitment Parties and the inequitable treatment of equity." Failing that, he requests an award of damages or "such other equitable relief as may be appropriate."
The Reorganized Debtors also argue that the Plaintiff does not "provide any statutory basis, case law or other standard" to support his request for equitable relief, nor does the Plaintiff suggest what that relief might be. They argue that the Plaintiff has had adequate remedies at law, which precludes the award of an equitable remedy.
The Reorganized Debtors further argue that the Plaintiff's request for equitable relief is equitably moot and that the Plaintiff is now estopped from making such a request. They contend that the Plaintiff is, in essence, asking the Court to reconsider the order approving the Rights Offering Procedures.
The standard for a motion to dismiss a complaint under Bankruptcy Rule 7012, Fed. R. Bankr. P. 7012, incorporating Rule 12(b)(6) of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 12(b)(6), is that the factual allegations of the complaint "must be enough to raise a right to relief above the speculative level." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Supreme Court has further instructed that "[w]hile legal conclusions can provide the framework of a complaint, they must be supported by factual allegations." Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In order to withstand a motion to dismiss for failure to state a claim, a complaint must contain "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570, 127 S.Ct. 1955. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).
As a preliminary matter, the Court must determine whether the Complaint was time-barred. Section 1144 of the Bankruptcy Code allows a party in interest to seek revocation of a confirmation order that was procured by fraud, but such a complaint must be filed "at any time before 180 days after the date of the entry of the order of confirmation" (emphasis added). Here, the Complaint was filed on the 180th day following the date of the entry of the Confirmation Order, not before that date. Therefore, based upon the clear language of § 1144, the Complaint is time-barred to the extent that it prays for the revocation of the Confirmation Order, and the Plaintiff may not request and the Court may not grant revocation of the Confirmation Order. See Little v. Amber Hotel Corp. (In re Amber Hotel Corp.), Case No. CV 14-9254 FMO, 2015 WL 5104678, at *2-3 (C.D. Cal. Aug. 31, 2015).
The Plaintiff argues that even if the Court is barred from revoking the Confirmation Order, it nonetheless has the power to award damages for any injuries the Plaintiff may have incurred as a result of the Reorganized Debtors' alleged fraud. Thus, the Court must examine whether the Complaint has successfully stated a cause of action for fraud and whether an award of damages might be permissible, despite the unavailability of relief under § 1144.
Courts have reached varying results when addressing the question of whether the time limit of § 1144 bars a party from seeking other relief based upon a debtor's alleged fraud. The decisions vary because, while "a court is not without power to remedy an injustice created by a fraud in a bankruptcy case," 8 Collier on Bankruptcy ¶ 1144.04[2][a] (Alan N. Resnick & Henry J. Sommer eds., 16
At the outset, the Court notes that the Plaintiff did not object to the Rights Offering Procedures, nor did he contest the order approving the Rights Offering Procedures. That order was entered on June
As previously noted, in determining that the plan satisfied the "fair and equitable" requirement, the Court, after hearing argument and receiving evidence at the confirmation hearing, specifically found that there was "no value here ... that would enable equityholders [sic] to receive anything in a liquidation." (Transcript 105, ll 6-9). The Plaintiff now asks the Court to revisit that finding, arguing that there was, during the confirmation process, a "misrepresentation of the true value of the Debtor's assets and its new stock" because the stock issued pursuant to the Rights Offering was allegedly valued at $3.18 per share but subsequently traded much higher in the open market. Thus, the Plaintiff extrapolates that "[t]he undervaluation of the Company's assets and its new stock materially distorted the Plan and the opportunity for equity to participate in the Plan."
The Court declines to revisit its prior findings as to the value of the Reorganized Debtors or the shares issued pursuant to the Rights Offering. The Plaintiff has not advised the Court that he has new evidence to support his theory that the Confirmation Order was obtained by fraud but rather recites the facts available and presented at the time of confirmation. The only ground for his allegation of fraud is the subsequent rise in value of the stock issued pursuant to the Rights Offering.
The Plaintiff's argument that the rise in the stock prices of the Reorganized Debtors indicates prior fraud is insufficient to withstand a challenge under Rule 12(b)(6). The argument relies on a logical fallacy similar to that of post hoc ergo propter hoc. That logical fallacy erroneously assumes that if an event follows a previous event, the prior caused the latter. Courts have found that the mere temporal relationship of the two events is insufficient to establish causation.
Pursuant to Rule 9(b) of the Federal Rules of Civil Procedure, made applicable here by Rule 7009 of the Federal Rules of Bankruptcy Procedure, a party must "state with particularity the circumstances constituting fraud or mistake." A properly pled allegation of fraud must "describe the time, place, and contents of the false representations, as well as the identity of the person making the representation and what benefit he obtained." Granados v. Bank of America, N.A., No. 1-15-cv-752-GBL, 2015 WL 4994534, at *4 (E.D. Va. Aug. 19, 2015). Here, the Plaintiff does not identify any particular statement or act but relies only on the fallacious assumption that because the rise in stock prices occurred after the confirmation process, the confirmation process must have been tainted by fraud. In making his allegations, the Plaintiff relies on what he terms the "misrepresentation of the actual value of the Debtor." However, that issue has already been addressed at the confirmation hearing, has been ruled upon, has not been appealed, and is therefore final. All that remains upon which Plaintiff bases his allegation of fraud is the subsequent rise in the stock price. This, without more, is not enough to satisfy the requirements of Rule 9 or Rule 12, and the Court cannot find that the Plaintiff has pled sufficient factual content to allow a reasonable inference that the Reorganized Debtors engaged in fraud in the confirmation process, as required by Rule 12(b)(6) and Twombly and Iqbal.
Having found that the Complaint does not satisfy the requirements of either Rule 9 or Rule 12, the Court need not address the issue of whether the Complaint seeks, in the guise of seeking damages for fraud, to circumvent the time bar of § 1144. However, the Court does note that courts awarding damages after § 1144's time bar do so only when the action would not affect the terms of the confirmed plan. In In re Newport Harbor Associates, 589 F.2d 20 (1st Cir. 1978), the First Circuit noted that an untimely action to revoke confirmation under the former Bankruptcy Act could not succeed, but observed that
589 F.2d at 24.
Citing Newport Harbor Associates, the court in Haskell v. Goldman, Sachs & Co.
340 B.R. at 733 (emphasis added). The court in Genesis Health Ventures found that to award damages against the debtor would be merely an attempt to "redivide the pie, to upset the confirmed plan, and to negatively affect innocent parties and creditors." Id. Given the terms of the Plan here at issue and the status of the implementation of those terms, including the issuance of stock, the execution of the Agreements, the extensive postpetition claims resolution process, and the fees and expenses incurred postpetition, as outlined above, it appears incontrovertible that an award of damages would upset the confirmed Plan and affect innocent parties and creditors.
As the Court finds that the Plaintiff is time-barred from seeking revocation of the Plan and has failed to state a claim for fraud, the Reorganized Debtors' Motion to Dismiss will be granted. A separate order will be entered.
