KHI Liquidation Trust v.  Wisenbaker Builder Services, Inc. et al (In Re Kimball Hill, Inc.), AP No. 10-00824  Bankruptcy Court for the Northern District of Illinois (Chicago Division):  On June 3, 2011, Judge Susan Pierson Sonderby rejected the Defendants’ claim that the litigation trust lack standing but dismissed the preference count for failure to state a claim.   To see a copy of Judge Sonderby’s opinion, click here.

The Defendants’ Request to Dismiss Pursuant to Fed. R. Civ. P. 12(b)(1) for the Litigation Trust’s Lack of Standing

The Defendants’ challenge to the litigation trust’s standing was based on Section 1123 of the Bankruptcy Code. Subsection (b)(3)(B) of that section allows a plan to provide for “the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any . . . claim or interest” belonging to the debtor or the estate. The Seventh Circuit Court of Appeals has interpreted that provision as requiring that “the debtor must specifically identify in its reorganization plan the claims it wishes to pursue post confirmation.” P.A. Bergner & Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner & Co.), 140 F.3d 1111, 1117 (7th Cir. 1998).  The Defendants argued that the plan failed to “specifically identify” for post confirmation retention the claims brought against them.  The Court summarized the Defendants’ position as follows:

The Defendants contend that the categorical description of avoidance claims with no reference to the names of the entities against whom the Debtors hold the claims in Article IV(J)(2) of the Plan is not a specific identification and it was therefore ineffective to retain the claims asserted in the Amended Complaint against them.

In addressing the Defendants standing argument, the Court reviewed the various, often conflicting decisions of the bankruptcy and appellate courts in other jurisdictions.  However, the Court ultimately rejected the Defendants’ position that Section 1123(b)(3)(B) requires “specific and unequivocal” language to retain claims belonging to the estate.  The Court concluded that “the Plan’s categorical retention provision”, was “clear in what it reserves” and clarity, rather than breadth, was the determining factor in finding that the Plan had successfully retained the actions against the Defendants.   The Court rested its decision of the Seventh Circuit decisions in Berger and in D & K Properties Crystal Lake v. Mutual Life Ins. Co. of New York, 112 F.3d 257 (7th Cir. 1997):

A careful reading of D & K Properties thus reveals that it is in sync with the Seventh Circuit’s later holding in Bergner that the categorical description in a retention provision is a “specific identification” required by section 1123 (b)(3)(B), and is therefore effectively retained for standing purposes. Nonetheless, many defendants in post confirmation litigation seize on the quote in D & K Properties that “[a] blanket reservation that seeks to reserve all causes of action reserves nothing,” to show that the Seventh Circuit does indeed reject the efficacy of a categorical description in a retention provision. Again, as explained by this court in Kmart, D & K Properties can be harmonized with Bergner:

. . . reading Bergner and D & K Properties together, certain conclusions can be reached with respect to the requisites of a valid retention provision. First, and most obviously, there must be a reservation of something. Plans with no retention provisions at all will not suffice to protect the claim from the binding effect of the plan. See Paramount Plastics, 172 B.R. at 335 (plan at issue contained “no reference to preference actions, either in the description of creditor treatment, the means for implementing the plan, the liquidation analysis, or the retention of jurisdiction”). Attempts to manufacture an 1123(b)(3) reservation by resorting to other plan provisions, such as those relating to reservation of jurisdiction or appointment of estate representative, are vulnerable to failure. See D & K Properties (where debtor unsuccessfully argued that appointment of disbursing agent to assert claims constituted express reservation).

Second, a blanket or general provision, i.e., one that does not clearly evince the debtor’s intent to reserve claims, will not suffice to defeat the preclusive effect of the confirmation order. Bergner stands for the proposition that plan provisions identifying causes of action by type or category are not mere blanket reservations. Therefore, categorical reservation can effectively avoid the res judicata bar. Dispensing with a requirement of cataloging claims by name comports with the Court’s view in Bergner that section 1123(b)(3) does not require “specific and unequivocal” identification.

Kmart, 310 B.R. at 124.

Defendants’ Request to Dismiss the Preference Count Pursuant to Fed. R. Civ. P. 12(b)(6) for Failure to State a Claim Pursuant to Rule 8(a)

Defendants’ also moved to dismiss the preference count of the complaint on the grounds the Liquidation Trust failed to plead sufficient facts to establish a claim under Section 547. Here, the Court agreed with the Defendants, and in providing the grounds for her decision, Judge Sonderby telegraphed that the Plaintiff may have some fundamental problems with its case.

Of particular concern here is the requirement that in order to be avoided, the subject transfer must have been made for or on account of an antecedent debt owed by the debtor before such transfer was made. “An antecedent debt exists when a creditor has a claim against the debtor, even if the claim is unliquidated, unfixed, or contingent.” Warsco v. Preferred Technical Group, 258 F.3d 557, 569 (7th Cir. 2001). The allegations of a preference avoidance complaint therefore must plausibly suggest, among other things, that an antecedent debt was owed by the debtor. The terms “owed by the debtor” were explained by Judge Gonzalez in the Enron case:

Only those transfers on account of an antecedent debt owed by the debtor are subject to avoidance under section 547(b); transfers on account of an antecedent debt owed by a third-party are not. Under this interpretation, the word “owed” is the verb form of the concept “liability for payment” and is coterminous with the noun “debt.” Thus, for example, a payment by the debtor of an affiliated entity’s debt would not be a preference unless the debtor was in some fashion liable for that debt, as would be the case where the debtor guaranteed the affiliate’s debt in case of default. In all other cases, the transfer would not be a preference though, it would likely be a fraudulent conveyance.

The Official Committee of Unsecured Creditors of Enron Corp. v. Whalen (In re Enron Corp.), 357 B.R. 32, 48 (Bankr. S.D.N.Y. 2006) (citations omitted).

The Liquidation Trust alleges in the Amended Complaint that within the 90-day period prior to the Petition Date, KHH Texas made fifty-three payments by cheek totaling 1,665,181. The specific check amounts, numbers, issuance dates, and honor dates are included in a chart at paragraph 8 of the Amended Complaint. The checks were made payable by different business divisions of the Debtors, which seemingly contradicts the allegation that KHH Texas made the payments. In any event, the checks were made payable to either Wisenbaker Builder or Wisenbaker Builders (who, as noted earlier, is not a named defendant) at the same Houston address.

The Liquidation Trust alleges in conclusory fashion at paragraph 25 of the Amended Complaint that the Transfers were made on account of antecedent debts owed by KHH Texas. Detailed factual allegations in the background section of the Amended Complaint appear to contradict that conclusory allegation, however. At paragraphs 11 and 13, the Liquidation Trust alleges that each of the Transfers paid for goods and/or services that the Defendants provided [not to KHH Texas but] to KHH Houston, KHH Dallas, KHH San Antonio, or KHH Austin before the Transfers were made and that the Defendants contracted with and invoiced KHH Houston, KHH Dallas, KHH San Antonio, and KHH Austin. KHH Texas issued “certain” work orders to the Defendants for the goods and/or services that were provided to KHH Houston, KHH Dallas, KHH San Antonio, and KHH Austin.

The Court went on to conclude that an “allegation that ‘certain work orders’ were issued by KHH Texas does not plausibly suggest that KHH Texas incurred liability to either of the Defendants for the work those Defendants performed for KHH Houston, KHH Dallas, KHH San Antonio, and KHH Austin.”

Although the Court granted the Plaintiff leave to amend the complaint, this may be an instance where the motion to dismiss was worth it.  Certainly, the Court is now aware that the Plaintiff is being loose with respect to the identification of which transfers were made by which one of the multiple debtors.