On January 23, 2015, the Eleventh Circuit recognized the res judicata effect of provisions contained in a bankruptcy plan of reorganization that released all claims against a third-party guarantor. In deciding In re FFS Data, Inc., the court examined (i) the plain language of the plan provisions to determine whether a particular claim was included in the stated releases and (ii) whether the requirements for res judicata were met such that the confirmation order should be given preclusive effect.

Background

Iberiabank’s predecessor made a $10.6 million loan (the “Loan”) to Siena Realty Associates, LLC (“Siena”) that was guaranteed by Bradford Geisen and FFS Data, Inc. (“FFS” or “debtor”), among others. Mr. Geisen was the president and 100% shareholder of FFS, and owned a 48% interest in Siena. Prior to FFS’s bankruptcy filings, Siena defaulted on the Loan.

During the course of FFS’s bankruptcy, Iberiabank entered into a forbearance agreement related to the Loan with Siena, Mr. Geisen and the other Loan guarantors. This agreement allowed Siena and the guarantors to sell the real property securing the loan and permitted Iberiabank to proceed with an action against the guarantors for any deficiency. (FFS was not party to the forbearance agreement and ultimately ended up entering into a settlement with Iberiabank that gave Iberiabank an allowed general unsecured claim for $2 million against FFS.)

Two days after the forbearance agreement was entered into, FFS filed an amended plan of reorganization. The plan included general releases of Mr. Geisen in exchange for contributions of $750,000 in cash and a release of claims held by Mr. Geisen’s in excess of $1 million, among other things.

Iberiabank did not attend the confirmation hearing or object to the debtor’s plan. On March 21, 2011, the bankruptcy court entered an order confirming the debtor’s plan.

More than a year later, Iberiabank commenced an action in state court against the Loan guarantors, including Mr. Geisen, to collect on the deficiency claim. Mr. Geisen responded that the debtor’s plan released any claims related to his personal guaranty of the loan. As a result, Iberiabank reopened the bankruptcy case to obtain a determination from the court that the claim was not released. Ruling against Iberiabank, the bankruptcy court held that the claim against Mr. Geisen had in fact been released pursuant to the plan and the district court affirmed the bankruptcy court’s decision.

Plan Interpretation

On appeal to the Eleventh Circuit, the court first noted that the proper interpretation of the releases contained in the plan were, like contract interpretations, subject to the plain meaning contained in the document. The plan release provision provided a “general release” of Mr. Geisen for “all such claims” by “all Persons” based on any events prior to confirmation. Iberiabank attempted to argue that the release was only in connection with Mr. Geisen’s position as an officer and/or director and could therefore not cover a personal guaranty granted by Mr. Geisen. However, the court rejected the argument and decided that reference to “officer and/or director” in the release provisions was merely descriptive, not limiting. According to the Eleventh Circuit, the provisions of the plan were unambiguous and broad enough to provide a general release of all pre-confirmation claims against Mr. Geisen, including a claim based on a personal guaranty.

Res Judicata

Next the court rejected Iberiabank’s request to apply Fifth Circuit precedent that requires releases to be “sufficiently specific” to provide res judicata effect to confirmed plans. The Eleventh Circuit declined to adopt the Fifth Circuit precedent, noting that such precedent was decided prior to the Supreme Court’s decision in Travelers Indemnity Co. v. Bailey, 557 U.S. 137 (2009). The Eleventh Circuit explained that the Supreme Court in Bailey emphasized the “practical necessity” of prohibiting collateral attacks on confirmation orders and held that creditors cannot later raise objections to the terms of plans or confirmation orders if they failed to object to confirmation initially. While the Eleventh Circuit declined to adopt Fifth Circuit precedent, it chose to humor Iberiabank and still evaluated the validity of the release provisions contained in the plan under the Fifth Circuit standard. According to the Eleventh Circuit, the release provisions were “sufficiently specific” and therefore would have res judicata effect under the Fifth Circuit standard as well. Distinguishing Fifth Circuit cases that held the bankruptcy court had not “enumerated or approved” the third-party personal guaranties, the court reiterated that the provision stated that “all holders of Claims agree to a general release of Bradford Geisen” and that, even under Fifth Circuit law, a release of “all claims” need not specifically or separately identify that it is releasing a guaranty. In addition to the language of the releases, the court reasoned that Mr. Geisen’s consideration for the release was an integral part of the plan, and therefore the confirmation order.

Takeaway

When evaluating terms in a plan of reorganization or liquidation, it is important to consider the plain meaning of the terms. And, as many practitioners can attest to, it is vital that third-party releases contained in any plan be closely scrutinized prior to entry of the confirmation order. This recent decision highlights that confirmation orders are likely to be afforded res judicata effect, and, thus, if objections are not lodged prior to entry of the order, the creditors will be bound to the terms of the plan and order.