Restructuring

When it comes to releases, plan proponents generally agree the broader the better.  But when plan proponents include far reaching and all-encompassing language in hopes of securing a release for every possible claim under the sun, they sometimes overlook the very claims for which they may actual want a release.  This was the case in a recent decision, Hernandez v. Larry Miller Roofing, Inc., where the Fifth Circuit Court of Appeals examined the effect of boilerplate chapter 11 plan release language on claims held by a claimholder against an officer of the debtor. 
Background
Prior to the chapter 11 filing, the plaintiff-appellant filed a claim with the U.S. District Court for the Northern District of Texas against his former employers, defendants-appellees Larry Miller Roofing, Inc. (“LMRI”) and Larry Miller, LMRI’s president, individually, alleging violations of the Fair Labor Standards Act, 29 U.S.C. § 207, for failing both to pay overtime wages and to compensate the plaintiff for travel time to job sites.
Approximately a year after the plaintiff filed his claim, LMRI filed for chapter 11 protection, which stayed the FLSA action in the district court.  Plaintiff filed a proof of claim in LMRI’s chapter 11 case for his unpaid wages.  LMRI eventually filed a disclosure statement and chapter 11 plan, which plaintiff voted to accept.  The plan was later confirmed and, in accordance with its terms, plaintiff received thirty percent of his unpaid wages claim in two equal payments.
Included among the provisions of the plan was a release section providing that “once the Plan payments are completed, Claims asserted against [LMRI] shall be deemed paid in full, including the release of rights to enforce or collect such Claims against non-debtor parties.”  The plan also included an injunction preventing holders of claims against LMRI from “commencing or continuing in any manner, any action or other proceeding of any kind with respect to any such Claim against [LMRI], its agents or attorneys, its assets or third parties also liable for the payment of such Claim.”
Following plan confirmation, the district court administratively closed plaintiff’s FLSA case without prejudice.  About four months later, however, plaintiff filed a motion to reopen the FLSA case and the district court lifted the stay as to Miller, individually.  Miller, thereafter, moved for summary judgment arguing that the FLSA claim against him was discharged under LMRI’s chapter 11 plan and that, in the alternative, the claim was barred by the doctrine of res judicata.  The district court granted summary judgment in favor of Miller finding that the plan and plan distributions released Miller and “anyone else” from plaintiff’s FLSA claim.  Applying principles of contract interpretation to determine the meaning of the plan release, the district court concluded that “the language of the Plan to which [plaintiff] agreed clearly releases anyone else from the claims asserted by claimants.”  Plaintiff moved the district court to reconsider under Federal Rule of Civil Procedure 59(e), which was also denied. Plaintiff then appealed to the Fifth Circuit Court of Appeals.
Analysis
The Fifth Circuit reversed and remanded the judgment of the district court.  Basing its decision on a line of Fifth Circuit cases, including Republic Supply Co. v. Shoaf and In re Applewood, which stand for the proposition that a “clear and unambiguous” reorganization plan that “expressly releases” a third party from liability can release claims against non-debtors, the Court of Appeals held that the plain language of the release in LMRI’s plan did not release claims held by the plaintiff against Miller, individually.
Applying the so-called “specificity test” to the language set forth in the plan, the Court of Appeals held that the release language in the plan did not identify Miller by name and, while Miller was an officer of LMRI, “a party’s status as an officer combined with boilerplate release language is not sufficiently specific.”  The Court of Appeals went on to state that “nowhere does the Plan mention anything related to a FLSA claim or employment law violations more generally” and plainly stated that “the language in the Plan is, if anything, generic.”  The Fifth Circuit also noted the provisions of section 542(e) of the Bankruptcy Code, which provides that “discharge of a debt to the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”  Lacking any language relating the FLSA claims, the Court of Appeals held that the Plan was not specific enough to release plaintiff’s FLSA claim against Miller.
Interestingly, although the district court decision did not address Miller’s res judicata argument because it granted summary judgment on the plan release provisions and appellate courts typically do not address issues not first addressed by the lower courts, the Court of Appeals did take up Miller’s res judicata argument as well.  Following the Eleventh Circuit, the Fifth Circuit held that “in cases such as the one before us today, the res judicata inquiry and the interpretation of the reorganization plan are essentially one in the same.”  Accordingly, the Fifth Circuit held that res judicata did not bar plaintiff from proceeding on his FLSA claim against Miller for the same reasons that the plan was not sufficiently specific to discharge Miller’s liability on plaintiff’s FLSA claim.
Conclusion
The specificity test ensures that parties in interest are on notice of potential claims they may be waiving (or deemed to waive) in connection with a chapter 11 plan.  Broader releases may provide greater protection when a party is unaware of any specific claims that may asserted but where a party is cognizant of concrete or definitive claims that may be asserted, the better practice is to identify those claims with specificity in a release to ensure parties are on notice that those claims are to be waived and discharged under a plan.  Keep that in mind in future drafting or plan negotiations because when it comes to chapter 11 plan releases, broader is not necessarily better.
Matthew Goren is an Associate at Weil Gotshal & Manges, LLP in New York.