Zardinovsky v. Arctic Glacier Income Fund (In re Arctic Glacier Int'l, Inc.), 17-2522

901 F.3d 162

IN RE: ARCTIC GLACIER INTERNATIONAL, INC., et al. Debtors in a Foreign Proceeding

Eldar Brodski Zardinovsky, a/k/a Eldar Brodski, a/k/a Eldar Brodski (Zardinovsky); EB Books, Inc; EB Design, Inc; EB Online, Inc ; EB Imports, Inc ; Lazdar, Inc; Eldar Brodski, Inc; Y Capital Advisors, Inc; Valley West Realty Inc; Ruben Brodski; Ruben Brodski, Inc; Ester Brodski; Yehonathan Brodski, Appellants

v.Arctic Glacier Income Fund ; James E. Clark; Gary A. Filmon; David R. Swaine; Hugh A. Adams

No. 17-2522

United States Court of Appeals, Third Circuit.

Argued March 22, 2018

Filed: August 20, 2018

Amended October 24, 2018

David B. Gordon, Esq. [ARGUED], Mitchell Silberberg & Knupp, 437 Madison Avenue, 25th Floor, New York, NY 10022, Counsel for Appellants

Autumn H. Patterson, Esq., Mark W. Rasmussen, Esq. [ARGUED], David R. Woodcock, Esq., Jones Day, 2727 North Harwood Street, Dallas, TX 75201, Marcos A. Ramos, Esq., Brendan J. Schlauch, Esq., Richards Layton & Finger, 920 North King Street, One Rodney Square, Wilmington, DE 19801, Counsel for Appellees

Before: SMITH, Chief Judge, and HARDIMAN and BIBAS, Circuit Judges

OPINION OF THE COURT

BIBAS, Circuit Judge.

Buying shares in a bankrupt company can be perilous business. Here, shareholders were on notice of Arctic Glacier's bankruptcy proceedings, were represented throughout those proceedings, and voted overwhelmingly to confirm the company's reorganization Plan. So their shares were subject to its benefits (its dividend-distribution scheme) as well as its burdens (its implementation particulars and releases of claims relating to the Plan). When appellants, the Brodskis, bought their shares from those shareholders, they stepped into their shoes. So the Brodskis bought shares subject to the Plan's terms, including the terms that governed post-confirmation acts taken to carry out the Plan.

The Brodskis argue that the Plan's releases of liability do not apply to them because they are not transferees and because due process forbids releasing their claims. But the Plan came along with the shares, and the Brodskis were on notice. So we will hold them, like all buyers, to the terms of their bargain.

I.

On review of this motion to dismiss, we take as true the factual allegations in the complaint: Arctic Glacier Income Fund is a Canadian income trust. It owns a company that manufactures and distributes packaged ice across Canada and the United States. In 2012, after a rough patch, Arctic Glacier filed for bankruptcy under the Companies Creditors' Arrangement Act, Canada's analogue of Chapter 11 of our Bankruptcy Code. Because Arctic Glacier operates in both countries, it filed for and received recognition under Chapter 15. That recognition granted the Canadian reorganization Plan (in Canada, an "arrangement") full effect in the United States. See 11 U.S.C. § 1521(a).

Under the Plan, Arctic Glacier was to sell its assets and distribute the proceeds to a list of creditors, giving lowest priority to shareholders (technically, "unitholders" in the trust). The Plan imposed few limits on the discretion of the Monitor (a Canadian official with some of a trustee’s powers) to sell and distribute assets, and even fewer limits on when or how much the Monitor could distribute to shareholders. But the Plan required that the Monitor give 21 days' notice of any distribution.

The Plan also included broad releases of liability. The releases insulated Arctic Glacier and its officers from any claim "in any way related to, or arising out of or in connection with" the bankruptcy. App. 248 (§ 9.1). The only exceptions were for claims to enforce the Plan, those for gross negligence or willful misconduct, and those whose release was not "permitted by applicable law." Id. ; App. 546.

The Monitor sold Arctic Glacier's assets and repaid the creditors in full. From the remaining funds, the Monitor was set to distribute dividends to the shareholders. On December 11, 2014, Arctic Glacier published legal notices announcing that the shareholders as of December 18 would be "entitled to receive the initial distribution from [Arctic Glacier] pursuant to the Plan." App. 628, 630. Four days later, Arctic Glacier announced the same information in a press release. It also posted that information on the Monitor's website and on Canada's database of corporate disclosures.

None of these notices specified how much Arctic Glacier would distribute or when. And Arctic Glacier did not notify the Financial Industry Regulatory Authority (FINRA) of its planned distribution. (FINRA is a self-regulatory organization charged by the Securities and Exchange Commission with regulating distributions on, and publishing corporate disclosures for, the U.S. Over-the-Counter Market.) Nor did the Plan incorporate, or even refer to, FINRA's rules.

Central to FINRA's rules is its distinction among dates. The "record date" determines who is entitled to receive the dividend from the company. FINRA, Uniform Practice Code § 11120(f) (2010). The issuing company must send the dividend payment to the shareholders of record as of that date. Id. The "ex-date" or "ex-dividend date" is the date on which the right to retain the dividend no longer travels with the share from the seller to the buyer. Id. §§ 11120(d), 11140. The owner of the share immediately before the ex-date is the one "entitled to retain the dividend." Limbaugh v. Merrill Lynch, Pierce, Fenner & Smith, Inc. , 732 F.2d 859, 861 (11th Cir. 1984). If the shareholder sells a share after the record date but before the ex-date, the seller will receive the dividend from the company but must send that amount to the buyer. Id. ; In re Arctic Glacier Int'l, Inc. , 255 F.Supp.3d 534, 542 (D. Del. 2017) (citing Silco, Inc. v. United States , 779 F.2d 282, 284 (5th Cir. 1986) (per curiam) ). Finally, the "payable date" is the date on which the company disburses the dividend. See FINRA, Uniform Practice Code § 11140(b)(2).

Those distinctions matter. FINRA treats dividends worth less than 25% of a share's value differently from those worth more, setting different ex-dates for each. Id. § 11140(b). By contrast, the Plan spoke of a "Unitholder Distribution Record Date" and a "Unitholder Record Date." App. 231 (§ 1.1). It never mentioned an ex-date or a payable date, but instead used "Distribution Date" and "Plan Implementation Date." App. 227, 229, 240 (§§ 1.1, 6.2). And it never distinguished between dividends worth more than 25% of a share's value and those worth less, eliding FINRA's distinction.

The Plan also elided FINRA's distinction between record dates and ex-dates. The Plan provided that "Registered Unitholder[s]" not only receive "transfer[s]," but are also "entitled to the benefits of a distribution." App. 230, 240 (§§ 1.1, 6.2). Those provisions did not use FINRA's distinction between shareholders entitled to receive a dividend and shareholders entitled to retain them. App. 230 (§ 1.1).

Despite Arctic Glacier's announcements about the distribution, its share price held steady until January 22, 2015. Arctic Glacier noticed this stasis and found it puzzling, as its shares no longer traded with the right to the dividend and should have lost value equal to the dividend. But Arctic Glacier did nothing to respond to the stasis or to clarify who would be entitled to the dividend and when.

Between December 16 and January 22, the Brodskis bought more than 12,600,000 Arctic Glacier shares on the Over-the-Counter Market. On January 21, the Monitor announced that the next day it would distribute a dividend of 15.5557 cents per share to shareholders as of December 18. The Monitor never told FINRA that it planned to pay the dividend. So FINRA never specified who would be entitled to the dividend and never circulated information about it.

Because the dividend payment per share was roughly 75% of the share price, the Brodskis argue, FINRA would have set an ex-date of January 23, 2015, the day after the distribution. So under FINRA's rules, the shares that the Brodskis had bought over the previous five weeks would have entitled them to the dividend. But Arctic Glacier did not follow FINRA's rules and did not pay the dividend to the Brodskis. On January 23, Canadian and American regulators froze trading in Arctic Glacier's shares. When they let trading resume, the share price plunged from 21 to 5 cents, reflecting the value of the paid-out dividend.

The Brodskis sued Arctic Glacier and four of its officers, claiming that Arctic Glacier owed them the dividend but never paid them. Count 1 of their complaint asserts that the defendants negligently failed to pay the Brodskis the dividend under the Plan. Count 2 asserts that they negligently, without FINRA's approval, specified that shareholders as of December 18 would be entitled to dividends. Count 3 asserts that the officers breached a fiduciary duty they owed to the Brodskis. Count 4 asserts that Arctic Glacier negligently failed to disclose material information. And Counts 5 and 6 assert that, by not disclosing this information, Arctic Glacier committed securities fraud and common-law fraud.

The Bankruptcy Court dismissed the complaint, holding that both the releases and res judicata barred the suit. The District Court affirmed for the same reasons. We review the Bankruptcy Court's and District Court's legal determinations de novo. In re Makowka , 754 F.3d 143, 147 (3d Cir. 2014).

II.

The Brodskis' claims rest on nonbankruptcy law: The officers allegedly violated their fiduciary duty, Arctic Glacier allegedly deceived the Brodskis, and both the company and its officers were allegedly negligent in setting the ex-date and not paying the Brodskis. But the releases bar all these claims.

A. Confirmed plans are res judicata, and Holywell is not to the contrary.

First, the Brodskis argue that a plan can never insulate a debtor from liability for post-confirmation acts. We reject this argument.

When a bankruptcy court enters a confirmation order, it renders a final judgment. 8 ...