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An Estate Release Does Not Preclude Tort Plaintiffs From Pursuing Direct, Particularized Claims Against Released Parties

In re Caribbean Petroleum Corp. et al., No. 10-12553 (KG), 2014 WL 3360563 (Bankr. D. Del. July 9, 2014)

In this Memorandum Opinion, the Honorable Kevin Gross held (i) that the Bankruptcy Court has post-confirmation jurisdiction to decide the extent and scope of releases contained in plans it considers and confirms and that (ii) the release at issue made by the debtors in favor of their former officers and/or directors did not prevent third-party tort claimants from pursuing their claims against such released parties. In reaching its jurisdictional conclusion, the Court relied upon the Third Circuit’s holding in In re Resorts Int’l, Inc., 372 F.3d 154 (3d Cir. 2004), to overcome the fact that the dispute before it involved only non-debtors and had no conceivable effect on the bankruptcy estates. Moreover, in deciding the extent and scope of the estate release, Judge Gross distinguished the Third Circuit’s recent Opinion in In re Emoral, Inc., 740 F.3d 875 (3d Cir. 2014), (analyzed here) to hold that the tort claims asserted against the released parties were personal and thus, not property of the debtors’ estates. Accordingly, the claims could not have been released by the debtors.

As brief background, Caribbean Petroleum Corporation and its affiliated debtors (the “Debtors”) filed their bankruptcy petitions in 2010 following the commencement of numerous tort actions stemming from massive oil tank explosions at the Debtors’ Puerto Rican facility.  In 2011, the Bankruptcy Court confirmed the Debtors’ plan of liquidation (the “Plan”), which provided for the debtors’ release of, among other things, any and all claims and causes of action against Gad and Ram Zeevi (the “Zeevis”), two former officers and/or directors of the debtors (the “Release”).  When the tort plaintiffs sought to pursue claims against the Zeevis in the District Court of Puerto Rico for alter ego liability and liability for wrongful acts (the “Tort Actions”), the Zeevis sought an order from the Bankruptcy Court enforcing the Release.

Jurisdiction of a bankruptcy court post-confirmation narrows.  At first blush, it appeared the Court did not have jurisdiction to determine the applicability of the Release as any decision would affect only non-debtor entities and have no conceivable effect on the administration of the Debtors’ estates.  Indeed, as the Bankruptcy Court recognized, the Third Circuit has cautioned against a bankruptcy court exercising post-confirmation jurisdiction when a debtor lacks interest in a dispute’s outcome.  See Resorts, 372 F.3d at 169.  Nonetheless, the Court in the instance proceeding decided to exercise its jurisdiction over the dispute because it would be required to interpret and grant relief based on terms of the Plan, which it previously considered and confirmed.  In such instances, it is appropriate for a bankruptcy court to exercise post-confirmation jurisdiction.  Id. at 170.

Turning to the extent and scope of the Release, the Court confirmed that the Release may have been properly given to the Zeevis by the Debtors, but that it did not extend to the Tort Actions as they were not causes of action belonging to the estates that could have thus been released by the Debtors.  As the Third Circuit teaches, “for a cause of action to be considered ‘property of the estate,’ the claim must be a general one, with no particularized injury arising from it.  On the other hand, if the claim is specific to the creditor, it is a personal one and is a legal or equitable interest only of the creditor.  A claim for an injury is personal to the creditor if other creditors generally have no interest in that claim.”  In re Emoral, Inc., 740 F.3d 875, 879 (3d Cir. 2014) (quoting Bd. of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 296 (3d. Cir. 2002) (internal quotations omitted)).

While the Zeevis relied heavily upon the Emoral decision as support for the generalized nature of the Tort Actions, the Court did not agree.  As explained in our prior blog post, the Third Circuit in Emoralheld that personal injury causes of action arising from a debtor’s wrongful conduct, but asserted against a non-debtor purchaser pursuant to a state law theory of successor liability, are “generalized claims” belonging to a bankruptcy estate.  The facts supporting this conclusion however were easily distinguished by the Caribbean Petroleum Court.  Whereas the Emoral plaintiffs sought to enforce claims that could have been brought by any of the debtors’ creditors against the purchaser and that were based upon facts arising from the debtors’ sale transaction with the purchaser, the Tort Actions were based upon facts arising from the Zeevis’ actions and were claims that could only be brought by the tort plaintiffs to redress their own injuries.  Accordingly, the Court easily concluded that the actions were personal, not generalized, and allowed them to proceed unaffected by the Plan’s Release.