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Post-Confirmation Purchasers of Shares Be Aware: Third Circuit Holds Shares are Subject to the Plan, Including Its Releases
In this precedential Opinion, the Third Circuit Court of Appeals affirmed the decisions of the Delaware Bankruptcy and District courts holding that post-confirmation purchasers of shares are bound by the plan, including its releases and res judicata effect, where the purchasers had notice of the bankruptcy proceedings and the plan and where the sellers of the shares were represented in the bankruptcy proceedings. In such a case, said the Court, purchasers are held, “like all buyers, to the terms of their bargain.” Op. at 164.
The debtors (“Arctic Glacier”), with operations in Canada and the United States, filed for bankruptcy in Canada under the Companies Creditors’ Arrangement Act. They later filed and received recognition in the United States under chapter 15 of the Bankruptcy Code. Through the recognition proceeding, the Canadian reorganization Plan (the “Plan”) received full effect in the United States. The Plan provided, among other things, for the sale of Arctic Glacier’s assets and the subsequent distribution of the proceeds to creditors giving lowest priority to shareholders. The Plan provided the Monitor (a Canadian official with some powers similar to those of a trustee under the Bankruptcy Code) with great flexibility as to the timing and the amount of distributions to creditors. In accordance with the Plan, the Monitor sold Arctic Glacier’s assets and paid the creditors in full. Shortly thereafter, the Monitor announced that it would make a distribution to shareholders, but it specified neither the amount nor the timing of the distribution. Notably, the Plan did not implement the rules of the Financial Industry Regulatory Authority (“FINRA”), and the Monitor did not notify FINRA of the upcoming distribution.
The Plan, among other things, contained broad releases that insulated Arctic Glacier and its officers from any claim “in any way related to, or arising out of or in connection with” the bankruptcy. Id. The only exceptions were for claims for gross negligence or willful misconduct and for claims whose release was not “permitted by applicable law.” Id.
The Brodskis (the “Appellants”), post-confirmation, purchased more than 12,600,000 Arctic Glacier shares between December 16 and January 22. On January 21, the Monitor announced that it will make a distribution that would amount to roughly 75% of the share price to “shareholders as of December 18.” The Appellants did not receive a distribution. They brought suit against Arctic Glacier and four of its officers claiming that they were entitled to a distribution and asserting, among other things, claims for breach of fiduciary duties and fraud. The Appellants further argued that under the FINRA rules, they would have been entitled to a distribution. The Bankruptcy Court granted Arctic Glacier’s motion to dismiss the complaint and held that the releases and res judicata barred the suit. The District Court affirmed and this appeal followed.
As an initial matter, the Court held that confirmed plans are res judicata, explaining that “[w]hen a bankruptcy court enters a confirmation order, it renders a final judgment” which “bars all challenges to the plan that could have been raised.” Id. at 166. The Court disagreed with the Appellants’ argument that a plan can never insulate a debtor for post-confirmation acts and rejected their reliance and broad reading of a single sentence the United States Supreme Court articulated in Holywell Corp. v. Smith, namely “[w]e do not see how [a confirmed plan] can bind the United States or any other creditor with respect to post[-]confirmation claims.” 503 U.S. 47, 58 (1992). The Court held that Holywell’s facts, language, and logic do not apply to acts that occur post-confirmation in connection with carrying out a bankruptcy plan. The Court explained that after all “a debtor can implement its plan only after the bankruptcy court confirms it” and “confirmed plans can bar liability for post-confirmation acts.” Id. at 167.
Next, the Court briefly held that nothing in the Plan required the Monitor to pay a distribution to the Appellants. More specifically, the Court held that FINRA’s rules were neither incorporated nor contemplated under the Plan and that, even if FINRA’s rules imposed obligations on Arctic Glacier, they “did not arise from the Plan” and “suits to redress FINRA violations must overcome the Plan’s releases of liability.” Id.
With respect to the releases, the Court held that the “Plan’s releases were res judicata as to the initial shareholders” and that the Appellants, when they purchased the shares, “stepped into [the initial shareholders’] shoes.” Id. at 164, 167. Consequently, the Court held that “any nonbankruptcy claims based on the [Appellants’] ownership are subject to the Plan and must overcome its releases.” Id. at 167. Interestingly, the Appellants neither asserted claims for gross negligence or willful misconduct nor did they argue that the releases conflicted with an otherwise applicable law (such as FINRA) in order to overcome the releases. Instead, the Appellants claimed that they were not “transferees” and that the Due Process Clause prohibited applying the releases to them. The Court quickly rejected both arguments, explaining that “[b]uyers are transferees” who “assume the same limitations as the transferor[s].” Id. at 168. Importantly, the Court emphasized that the Appellants were on notice of the Plan at the time they purchased the shares and that “[d]ue process does not limit plans’ effects on those who had notice and representation.” Id.