05/10/2011 – Motion to Dismiss filed in the Lyondell Chemical Company Adversary Proceedings by Thermon Heat Tracing Services Inc. before Judge Gerber in the Southern District of New York (Manhattan). Fed. R. Civ. P. 12(b)(1) challenge to the standing of the Trustee of the LB Litigation Trust to pursue the preference claim. Estoppel, res judicata and due process challenges also are significant. A tour de force, must read with significance for most pending and “in the pipeline” preference claims. Registered Users, click this link to see the filing.*

The movant summarizes its arguments as follows:

[P]ursuant to FED. R. CIV. P. 12(b)(1), Thermon Heat Tracing Services Inc. (“Thermon”) has moved this Court to dismiss this adversary proceeding. Plaintiff lacks standing, and thus this Court lacks subject matter jurisdiction because Lyondell’s Third Amended and Restated Joint Chapter 11 Plan (the “Plan”) (Doc. No. 4418 Ex. A) together with the Disclosure Statement (Doc. No. 3988) (the “Disclosure Statement”) and other plan documents, upon which Plaintiff relies to enforce its claims, did not “specifically and unequivocally” retain the Debtors’ preference claims against Thermon. Pursuit of preference claims is a discretionary call by a trustee, but it is guided by a statutory fiduciary duty to unsecured creditors. This decision must be made timely, and it must be specifically and unequivocally disclosed to the targeted trade creditor in the Plan so the trade creditor may make a fully informed judgment about the Plan. Blanket statements with muddled language, references to undisclosed lists of “potential targets”, and misleading statements pervade the Lyondell Plan. Such statements are not sufficient to retain and enforce post-confirmation claims such as the one asserted in this action. Because the Plan failed to provide, inter alia, adequate information that Thermon would be sued, Plaintiff lost standing. To hold otherwise, violates Thermon’s due process right to fair notice.

This summary is supported by citations of authority in numerous jurisdictions.  Most notable is a quotation of  Judge Bohm, in the United States Bankruptcy Court of the Southern District of Texas – Houston Division, in In re MPF Holdings U.S. LLC, 443 B.R. 736 (Bankr. S.D.Tex. 2011):

The Fifth Circuit’s insistence on ‘specific and unequivocal’ preservation of claims may well arise from the culture of craw-fishing that has evolved in recent years in the bankruptcy practice. The Fifth Circuit could well be telegraphing to the bankruptcy bar that the ‘now you see it, now you don’t’ provisions in plans is no longer acceptable: either the plan sets forth absolutely who will be sued and on what basis – or no suit will be allowed. This conclusions dovetails with the Eighth Circuit’s very apt and telling observation in Harstadt, which this Memorandum Opinion has already referenced once before:

We agree with the Bank that, if the Hartsads wished to retain the power to enforce this claim pursuant to § 1123(b)(3), it would have been a simple matter to do so with straightforward language (although not so easy to do so without alerting their creditors and the Bankruptcy Court to the possibility of viable preference claims).”

The Eighth Circuit, like the Fifth Circuit, is informing the bar that ambiguous reservation provisions will no longer suffice. Either be straightforward in the proposed plan, or be straightjacketed after confirmation of the plan.

The brief also cites Bankruptcy Judge Michael Romero of Colorado in his decision in Connolly v. The City of Houston (In re Western Integrated Networks, LLC), 322 B.R. 156 (Bankr. D. Colo. 2005):

There is a growing trend away from the ‘blanket reservation of rights’ employed in those cases quoted in Mako. The cases exploring this new trend suggest the failure of a plan to identify defendant and claim-specific actions which could be brought post-confirmation by the reorganized debtor or its successor-in-interest prohibits any attempt to assert post-confirmation claims.

The significance of the Defendant’s arguments, if accepted by Judge Gerber in Lyondell, can not be exaggerated.   The Disclosure Statement  in Lyondell contains no less disclosure than many of the disclosure statements approved over the past 2 years in the Southern District of New York, Manhattan Division.   A finding that the Lyondell disclosure statement is inadequate to preserve the standing of the litigation trust to pursue preference claims, likely would mean that standing has not been adequately preserved in many of the current and “in the pipeline” mass bankruptcy preference actions.