Preserving The Debtor's Estate's Post-Confirmation Right To Prosecute a Pre-Confirmation Claim

by Leslie Treff

Excerpt:

To preserve the estate's post-confirmation right to prosecute a pre-confirmation claim, the confirmation plan and disclosure statement must meet the specificity requirements of the circuit in which the plan will be scrutinized. In addition, the party must have standing to prosecute such claim.

A bankruptcy court's order confirming a Chapter 11 plan prevents the assertion of any claims that could have been, but were not, raised prior to confirmation. The Bankruptcy Code provides for an exception, contained in 11 U.S.C. 1123(b)(3)(B) [an annotated version of this statute is available to lexis.com subscribers], in that the confirmation plan may provide for "the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest."

Exactly what must be contained in the plan to preserve the right to prosecute any such claims is not spelled out either in the Subsection itself or in the Legislative History, which states only that "the plan ... may propose retention and enforcement of [any] claim or interest by the debtor or by an agent appointed for that purpose." However, all courts have held that the language must be sufficient to give notice to the creditors "of any potential causes of action that might enlarge the estate and that could be used to increase payment to the creditors. ... Only then are creditors in a position to seek a share of any such recoveries, contingent though they may be, and to have the mechanics of the preference-sharing spelled out in the plan. Creditors are in no position to do so if they are not on notice that the debtor retains the power to pursue recovery."

Standing

When courts have approached cases in which parties have attempted to assert the estate's post-confirmation rights to prosecute pre-confirmation claims, they look first to who, if anyone, has the right to prosecute pre-petition claims. To fulfill the requirements of Section 1123(b)(3)(B), "a party other than the debtor or the trustee that seeks to enforce a claim must show (1) that it has been appointed, and (2) that it is a representative of the estate." [footnotes omitted]

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Leslie Treff has been practicing commercial law in New York for 23 years. A specialist in the areas of debtor/creditor law, bankruptcy, and insurance coverage litigation, she is currently a Special Master and senior court attorney at the Supreme Court, New York County, Civil Branch. Ms. Treff has held committee chairmanships at both the Bar Association of the City of New York and New York County Lawyer's Association, and is a regular contributor to Lexis Nexis/Matthew Bender bankruptcy and debtor-creditor law treatises.