On February 16, 2012, J.H. Cohn, LLP, as Unsecured Creditor Agent in the Orleans Homebuilders, Inc. Bankruptcy, commenced mass Chapter 5 preferential transfer recovery litigation in the District of Delaware.   The proceedings add insult to injury.  Each defendant now knows that the Debtors chose not to invoke the reorganization plan’s “Litigation Protocol” to stop the the avoidance action against it.

The Unsecured Creditor Agent was granted the right to bring avoidance claims, “subject to” the Debtors’ right to “purchase” and thereby stop certain of such claims.  The process depended upon three lists, all described in the disclosure schedule. The fist list was prepared by the Creditors Committee and consisted of a preference analysis of potential avoidance actions.  The  second and third lists were both prepared by the Debtors and consisted of the names of vendors that the Debtors  considered to be “Critical Vendors” or whom the Debtors wished to classify as “Additional Vendors”.   All three lists were kept confidential.   The reasons for the confidentiality of the lists was summarized in the Disclosure Statement as follows:

 The schedule of Critical Vendors contains a list of approximately 52 parties and the schedule of Additional Vendors contains a list of approximately 76 parties. The Debtors, the Reorganized Debtors, the Sponsors, the Creditors Committee, and the Unsecured Creditor Agent will keep the respective schedules of the Additional Vendors and the Critical Vendors confidential (although the Debtors will provide copies of these schedules to the Bankruptcy Court and to the United States Trustee for their review) because they have determined that a failure to do so may prejudice the Debtors and/or the Unsecured Creditor Agent (as applicable) in a variety of ways. Initially, the schedules contain the Creditors Committee’s analysis of the potential preference exposure of each of the various Critical Vendors or Additional Vendors, information that should not become public because it would reveal to potential defendants how the Creditors Committee has valued the applicable Avoidance Claim and/or the merits of any defenses thereto. Also, if a vendor were to discover that it has been deemed a Critical Vendor or an Additional Vendor, this could adversely impact the Debtors’ or the Unsecured Creditor Agent’s (as applicable) ability to successfully negotiate a settlement of the applicable Avoidance Claim because it might signal that the plaintiff would be willing to settle such claim at only 40% or 60% (as applicable). Finally, the Debtors are concerned that any vendor that discovers the Debtors did not seek to have it deemed a Critical Vendor or Additional Vendor would consider this as a sign that the Debtors do not sufficiently value their business relationship with the applicable vendor, which could impair the Debtors’ or the Reorganized Debtors’ future activities with such vendor.

The Bankruptcy Code, in 11 U.S.C. § 1123(b)(3)(B), allows a chapter 11 confirmation plan to provide for “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.”  In some jurisdictions, this provision is interpreted require that the language retaining claims be “specific and unequivocal”.   Unfortunately, Delaware is not among these jurisdictions.

The Delaware bankruptcy courts have held that a general reservation indicating the type of claims to be preserved provides creditors with any required notice under 11 U.S.C. § 1123(b)(3)(B).  However, the type of “conditional reservation” scheme described in the Orleans Homebuilders plan tests the boundaries of even the most  liberal interpretations of the requirement of notice of “retention and enforcement” of claims.

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Related Materials:

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• Registered users can click here to see the full APScans Report for Orleans Homebuilders, Inc. Bankruptcy preferential transfer recovery adversary proceedings.