Crescent Res. Litigation Trust v. Burr (In re Crescent Res., LLC)

463 B.R. 423

In re CRESCENT RESOURCES, LLC, Debtor.Crescent Resources Litigation Trust, by and Dan Bensimon, Trustee, Plaintiff,

v.Edward E. Burr, Defendant.

Bankruptcy No. 09–11507–CAG.

Adversary No. 11–01013–CAG.

United States Bankruptcy Court, W.D. Texas, Austin Division.

July 22, 2011.

Eric J. Taube, Mark Curtis Taylor, Hohmann Taube & Summers, LLP, Austin, TX, Marcia L. Goldstein, New York, NY, Martin A. Sosland, Michelle V. Larson, Rebecca A. Thomas, Weil Gotshal & Manges LLP, Dallas, TX, for Debtor.

David Erwin Dunham, Isabelle M. Antongiorgi, Miguel S. Rodriguez, Taylor Dunham, LLP, Austin, TX, for Plaintiff.

Deborah D. Williamson, Cox Smith Matthews Incorporated, San Antonio, TX, for Defendant.

Memorandum Opinion Regarding Burr's Motion to Dismiss

CRAIG A. GARGOTTA, Bankruptcy Judge.

Crescent Resources, LLC, Crescent Holdings, LLC, and their affiliated debtors and debtors in possession (collectively “Crescent Resources,” “Crescent,” or “Debtors”), filed a petition under Chapter 11 of the Bankruptcy Code on June 10, 2009. Prior to filing for bankruptcy, Crescent was a real estate development and management organization which developed, owned, leased, managed, and sold real estate since 1969. On December 20, 2010, this Court signed the Order Confirming Debtors' Revised Second Amended Joint Plan of Reorganization (Case No. 09–11507, docket no. 1534).

On February 16, 2011, the Crescent Resources Litigation Trust (the “Trust”) filed an adversary complaint against Edward E. Burr (Case No. 11–01013–CAG). The complaint states that Mr. Burr was the manager and co-owner of LandMar Group LLC (“LandMar”) until November 19, 2007. Mr. Burr was also an officer of Crescent. LandMar is a debtor in this Court and a subsidiary of Crescent. The complaint seeks to avoid three alleged transfers arising out of two transactions between Mr. Burr and Crescent and LandMar. The first transaction in the complaint alleges that in April 2007, LandMar Group borrowed money from Crescent so that LandMar could give Burr $1.925 million to cover Burr's personal income tax liabilities (the “April 2007 Tax Transfer”). The second transaction allegedly occurred in November 2007 and consisted of an employment separation agreement between Crescent and Mr. Burr, whereby Burr's employment was terminated and his 20% interest in LandMar was conveyed to Crescent in exchange for $4.5 million in cash plus the forgiveness of over $71 million debt owed to Crescent (the “November 2007 Transfers”). The complaint alleges three counts. Count 1 seeks to avoid the November 2007 Transfer pursuant to Sections 548 and 550 of the Bankruptcy Code. Count 2 seeks to avoid the November 2007 Transfer pursuant to state fraudulent transfer law and Sections 544 and 550 of the Bankruptcy Code. Count 3 seeks to avoid the April 2007 Tax Transfer under state fraudulent transfer law and Sections 544 and 550 of the Bankruptcy Code.

On April 14, 2011, Burr filed a Motion to Dismiss and Brief in Support (docket no. 6). The Trust filed its Response to Defendant's Motion to Dismiss on May 9, 2011 (docket no. 13). On May 19, 2011, Defendant filed a Reply in Support of Motion to Dismiss (docket no. 15).

On May 20, 2011, the Court heard oral arguments on the Motion to Dismiss. The Court has reviewed the briefs of the Trust and Burr, and has considered the arguments and evidence of counsel. Based on the foregoing, the Court finds that Burr's Motion to Dismiss should be denied in part and granted in part.

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O) on which this Court can enter a final judgment. This matter is referred to the Court under the District's Standing Order of Reference. Venue is proper under 28 U.S.C. §§ 1408 and 1409. The following represents the Court's findings of fact and conclusions of law made pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.

Issues

After the hearing, several issues were taken under advisement: (A) does the Plan of Reorganization “specifically and unequivocally” retain the causes of action alleged in the Complaint and (B) does the Complaint state facts sufficient to satisfy the heightened pleading standards required by Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), F.R.C.P. 9(b) and 12(b). The Court will discuss each issue in turn.

A. Does the Plan of Reorganization “Specifically and Unequivocally” Retain the Causes of Action Alleged in the Complaint

In Dynasty Oil & Gas, LLC v. Citizens Bank (In re United Operating), the Fifth Circuit discussed how, during a Chapter 11 case, a debtor, operating as a debtor-in-possession, has most of the powers of a bankruptcy trustee to pursue claims on behalf of the estate. 540 F.3d 351, 355 (5th Cir.2008) (citing 11 U.S.C. § 1107(a)). Once a plan is confirmed, the debtor loses its status as debtor-in-possession, and the debtor's authority to pursue claims as though it were a trustee also expires. Id. (citing 11 U.S.C. § 1101(1); Ice Cream Liquidation, Inc. v. Calip Dairies, Inc. (In re Ice Cream Liquidation, Inc.), 319 B.R. 324, 333 (Bankr.D.Conn.2005); In re Grinstead, 75 B.R. 2, 3 (Bankr.D.Minn.1985)). However, Section 1123(b)(3) allows a reorganized debtor to bring a post-confirmation action if the debtor preserves its standing to bring such a claim, but only if the plan of reorganization expressly provides for the claim's “retention and enforcement by the debtor.” Id. (quoting 11 U.S.C. § 1123(b)(3)(B)). Once the plan is confirmed, “the ability of the [debtor] to enforce a claim once held by the estate is limited to that which has been retained in the plan.” Id. (quoting Paramount Plastics v. Polymerland (In re Paramount Plastics, Inc.), 172 B.R. 331, 333 (Bankr.W.D.Wash.1994)).

The Fifth Circuit has held that for a debtor to preserve a claim, the plan must expressly retain the right to pursue that action, and such reservation must be “specific and unequivocal.” Id. (internal citations omitted). If the plan does not make an effective reservation of the claim, “the debtor has no standing to pursue such a claim that the estate owned before it was dissolved.” Id.

In short, United Operating holds that in order for a debtor to have standing to bring an action post-confirmation, the plan of reorganization must contain “specific and unequivocal” language retaining that cause of action. The question now for this Court to decide is whether Crescent's Plan of Reorganization specifically and unequivocally retained the causes of action alleged in the Complaint.

1. The Relevant Plan Language

The most specific retention language is found in the Plan of Reorganization at section 8.5, describing the Litigation Trust Assets to be transferred to the Litigation Trust. The sentence in full states:

The Litigation Trust Assets shall include, but are not limited to, those Causes of Action arising under Chapter 5 of the Bankruptcy Code including those actions which could be brought by the Debtors under §§ 544, 547, 548, 549, 550, and 551 against any Person or Entity other than the Litigation Trust Excluded Parties.

“Litigation Trust Assets” is defined in the Plan to mean “the Litigation Trust Claims, the Litigation Trust Funds, and any other assets acquired by the Litigation Trust after the Effective Date or pursuant to the Plan” (docket no. 880, Section 1.78). “Causes of Action” is defined in the Plan to mean “any and all Claims, Avoidance Actions, and rights of the Debtors, including claims of a Debtor against another Debtor or other affiliate” ( Id., Section 1.21). As will be discussed later, there is no mention of “Section 542” or “turnover” in the Plan of Reorganization, the Disclosure Statement, or the Litigation Trust Agreement (the “Plan Documents”).

The other Plan language cited by the Trust which the Court finds relevant is Section 1.7(d) of the Litigation Trust Agreement:

The Litigation Trustee shall have, retain, reserve, and be entitled to assert all such Claims, Causes of Action, rights of setoff and other legal or equitable defenses which the Debtors had immediately prior to the Commencement Date fully as if the Chapter 11 Cases had not been commenced or the Litigation Trust Claims had not been transferred to the Litigation Trust in accordance with the Plan and this Litigation Trust Agreement ...

Additionally, the Trust cites to portions of the Disclosure Statement for the proposition that the language advised the Debtors' creditors that the Litigation Trust would be prosecuting avoidance actions such as that asserted against Burr:

The liquidation of the Litigation Trust Assets may be accomplished either through the prosecution, compromise and settlement, abandonment, or dismissal of any or all claims, rights, or causes of action, or otherwise ... [T]he Debtors anticipate the Litigation Trustee will investigate and pursue any such Avoidance Actions ... Any and all proceeds generated from the Litigation Trust Assets will be the property of the Litigation Trust.

(Case No. 09–11507, docket no. 879, p. 81.)

2. Parties' Contentions

Burr cites to United Operating for the proposition that the Plan must expressly retain the right to pursue a cause of action and that reservation must be “specific and unequivocal.” 540 F.3d at 355 (citations omitted). Burr then makes the distinction between two approaches within the Fifth Circuit for how to interpret “specific and unequivocal”; the “Categorical Approach” and the “Specific Approach.” Burr argues for the “Specific Approach,” citing to In re MPF Holding U.S. LLC for the proposition that a Chapter 11 plan must set forth “absolutely who will be sued and on what basis—or no suit will be allowed.” 443 B.R. 736, 756 (Bankr.S.D.Tex.2011). Burr additionally cites to TXCO Resources Inc. v. Peregrine Petroleum, LLC (In re TXCO Resources...