Kaufman v. PSC NH ( 1994 )

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 94-1489
IN RE PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
Debtor.
EDWARD KAUFMAN, ET AL.,
Defendants, Appellants,
v.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, ET AL.,
Plaintiffs, Appellees.
ERRATA SHEET
The opinion of this Court, issued on January 6, 1995, is
amended as follows:
In case title on cover sheet, replace "Plaintiffs,
Appellants," with "Defendants, Appellants," and "Defendants
Appellees," with "Plaintiffs, Appellees,".
January 9, 1995 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 94-1489
IN RE PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE
Debtor.
EDWARD KAUFMAN, ET AL.,
Defendants, Appellants,
v.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, ET AL.,
Plaintiffs, Appellees.
ERRATA SHEET
The opinion of this Court, issued on January 6, 1995, is
amended as follows:
On cover sheet, replace [Hon. Ronald R. Lagueux,* U.S.
District Judge]" with "[Hon. Ernest C. Torres,* U.S. District
Judge]". Footnote should remain the same.
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 94-1489
IN RE PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE,
Debtor.
EDWARD KAUFMAN, ET AL.,
Defendants, Appellants,
v.
PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE, ET AL.,
Plaintiffs, Appellees.
,
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Ernest C. Torres,* U.S. District Judge]
Before
Selya, Circuit Judge,
Aldrich, Senior Circuit Judge,
and Boudin, Circuit Judge.
Robert C. Richards for appellants.
Wynn E. Arnold, Assistant Attorney General, Civil Bureau, with
whom Jeffrey R. Howard, Attorney General, was on brief for appellee
State of New Hampshire.
John B. Nolan with whom Steven M. Greenspan, Lorenzo Mendizabal,
Gary M. Becker, Day, Berry & Howard, Howard J. Berman and Greenberg,
Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. were on brief for
appellees Public Service Company of New Hampshire and The Official
Committee of Equity Security Holders.
January 6, 1995
*Of the District of Rhode Island, sitting by designation.
BOUDIN, Circuit Judge. On this appeal, the appellants--
Edward Kaufman, Robert Richards, and Martin Rochman--
challenge an injunctive order issued by the federal
bankruptcy court in New Hampshire, and affirmed by the
district court. That order enjoined appellants from bringing
a securities fraud suit against the Public Service Company of
New Hampshire ("Public Service"), its committee of equity
security holders, the State of New Hampshire, and others. We
affirm.
I. BACKGROUND
The appellants in this case were common stockholders of
Public Service, a New Hampshire public utility. In the
1980s, Public Service owned a nuclear power plant under
construction in Seabrook, New Hampshire. Due to the Seabrook
project, Public Service experienced severe financial problems
and filed for Chapter 11 bankruptcy on January 28, 1988. The
details of the bankruptcy proceeding are recounted in the
opinion of the bankruptcy court in this case, In re Public
Service Co., 148 B.R. 702, 703-09 (Bankr. D.N.H. 1992), and
we confine ourselves to a brief overview.
In 1989, Public Service, its committee of equity
security holders and a committee representing its unsecured
creditors filed with the bankruptcy court a comprehensive
plan of reorganization. 11 U.S.C. 1125. In accordance
with that section, the plan was accompanied by a disclosure
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statement, to be used in soliciting the plan's acceptance by
holders of claims and interests, see 11 U.S.C. 1126, that
described the nature and consequences of the plan. Over the
appellants' objections, the disclosure statement was approved
by the bankruptcy court on January 3, 1990. 11 U.S.C.
1125(b). Public Service's plan of reorganization was
confirmed on April 20, 1990, after six days of hearings
largely devoted to the appellants' objections. 11 U.S.C.
1128-29.
The plan was to be implemented in two stages, each one
contingent on approval by regulatory agencies. The first
step--reorganization of Public Service with certain
distributions to its owners and creditors--was to take effect
only if the New Hampshire Public Utilities Commission
approved the plan's provisions regarding new utility rates
for Public Service. See 11 U.S.C. 1129(a)(6). That
approval was forthcoming, a court challenge to the agency
approval by appellants failed, Appeal of Richards, 590 A.2d
586 (N.H.), cert. denied, 112 S. Ct. 225 (1991), and the
reorganization occurred on May 16, 1991.1
The second stage effected a merger of Public Service
with a subsidiary of Northeast Utilities, a Connecticut
1Appellants also sought unsuccessfully to challenge the
confirmation itself in the district court, in this court and
in the Supreme Court. See In re Public Service Company of
New Hampshire, 963 F.2d 469 (1st Cir. 1992), cert. denied,
113 S. Ct. 304 (1992).
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utility company selected as the winning bidder for Public
Service through a competitive bidding process provided for in
the plan. The merger was conditioned on the approval of the
Federal Energy Regulatory Commission. That approval was also
secured, despite an unsuccessful attempt at intervention by
appellants in the FERC proceeding, and the merger took place
on June 5, 1992.
At various stages in the bankruptcy proceeding,
appellants contended that the proponents of the plan had made
false and misleading representations in the disclosure
statement. After the confirmation but before the
reorganization or merger, appellants filed a motion in
January 1991 to revoke the order approving confirmation on
the ground that it had been procured by fraud. The request
was dismissed on the ground that it was time barred under 11
U.S.C. 1144, which permits reopening for fraud only if
sought within 180 days of confirmation.
After the plan was confirmed and largely implemented,
Richards--who is also the attorney for the appellants--wrote
a letter in March 1992 to counsel for various proponents of
the plan, revealing that he intended shortly to begin a class
action in the district court for the Southern District of New
York. Pertinently, the enclosed draft complaint accused
private plan proponents and the State of New Hampshire of
violations of federal securities laws, 15 U.S.C. 78, and of
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common law fraud, based on supposed misrepresentations in the
bankruptcy-court disclosure statement.
Public Service, its committee of equity security
holders, and the State of New Hampshire promptly brought an
adversary proceeding in the bankruptcy court to enjoin the
appellants from commencing the threatened action. After
granting interim relief, that court in November 1992 granted
the injunction. Public Serv. Co. v. Richards, 148 B.R. 702(1992). The injunction barred any future civil action by
appellants challenging the bankruptcy court disclosure
statement, the confirmation order or the solicitation of
acceptance. The district court affirmed the injunction.
Kaufman, Richards and Rochman appeal.
Despite the injunction, in late November 1992 Richards,
acting as the attorney for yet another Public Service
stockholder, did commence the threatened fraud action against
several private appellees, but not against the State of New
Hampshire, in the Southern District of New York. The
bankruptcy court found Richards in contempt but imposed no
sanction; the district court for the Southern District of New
York thereafter dismissed the complaint without prejudice.
Richards has not sought review of the contempt order in this
court, and we are therefore concerned only with the
injunction.
II. DISCUSSION
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On this appeal the appellants do not challenge the
authority of the bankruptcy court to enjoin a collateral
attack on its orders and proceedings. See generally Local
Loan Co. v. Hunt, 292 U.S. 234 (1934). Instead, they attack
the injunction on the merits, arguing that neither the safe
harbor provision of the Bankruptcy Code nor res judicata
principles forestall the subsequent fraud action in the
Southern District of New York. These were the principal
bases for the injunction issued by the bankruptcy court,
although it also held that a suit against New Hampshire was
barred by the Eleventh Amendment.
The Bankruptcy Code provides that a chapter 11
reorganization may be voted upon by holders of claims and
interests, based on a disclosure statement approved by the
court after notice, hearing and a determination that the
statement contains adequate information. 11 U.S.C.
1125(b), 1126. The adequacy of the disclosure statement is
determined under the Bankruptcy Code and "is not governed by
any otherwise applicable nonbankruptcy law, rule, or
regulation . . . ." 11 U.S.C. 1125(d). The safe harbor
provision, 11 U.S.C. 1125(e), then states:
A person that solicits acceptance or
rejection of a plan, in good faith and in
compliance with the applicable provisions
of this title, or that participates, in
good faith and in compliance with the
applicable provisions of this title, in
the offer, issuance, sale, or purchase of
a security, offered or sold under the
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plan, of the debtor, of an affiliate
participating in a joint plan with the
debtor, or of a newly organized successor
to the debtor under the plan, is not
liable, on account of such solicitation
or participation, for violation of any
applicable law, rule, or regulation
governing solicitation of acceptance or
rejection of a plan or the offer,
issuance, sale, or purchase of
securities.
The Bankruptcy Code provides further that the plan
cannot be confirmed by the court unless, inter alia, the plan
has been proposed "in good faith and not by any means
forbidden by law." 11 U.S.C. 1129(a)(3). If a plan is
confirmed after the necessary vote, the confirmation may be
revoked only if, within 180 days after confirmation, a party
in interest so requests and the court thereafter finds that
the confirmation order was "procured by fraud." 11 U.S.C.
1144. These provisions are the framework for the present
dispute.
The heart of the appellants' fraud complaint filed in
the Southern District of New York was a two-pronged attack on
the disclosure statement used in the reorganization of Public
Service. The first prong challenged the disclosure
statement's description of the authority of the New Hampshire
Public Service Commission to impose unfavorable rates on
Public Service if the reorganization failed. This
contingency was pertinent to the plan's approval because the
treatment of the Seabrook investment was in dispute and the
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plan embodied a negotiated compromise on utility rates to
forestall litigation. See 11 U.S.C. 1129(b)(6).
The disclosure statement contained some general
statements about the power of a utility commission to refuse
to include in the utility's rate base imprudent investment--
an issue of central importance in relation to Seabrook--and
to temper any required rate increase (e.g., by using a phase
in) to avoid "rate shock" to customers. Appellants' theory
in their complaint was that the disclosure painted too
pessimistic a picture of the legal rules that would constrain
Public Service rate increases if the reorganization were
rejected and the rate level had to be litigated in court.
The second prong of the attack on the disclosure
statement concerned the merger of Public Service into a
subsidiary of Northeast Utilities. The disclosure statement
offered ranges of projected value for the common and
preferred stockholders of Public Service, assuming (in the
alternative) that the second-phase merger were or were not to
be approved. Not surprisingly, the "with" merger assumption
generated slightly higher values. The appellants say that
without the merger Public Service might have collapsed, the
stockholders would have been far worse off, and therefore the
stockholders were not adequately warned of a material threat
of financial harm. (The merger, of course, did occur).
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Appellants also say that the small differential between
the "with" and "without" merger projections concealed the
vast benefit that the merger synergies would provide to the
new owner. If the Public Service stockholders had known of
these benefits, say appellants, they might well have demanded
a greater share and rejected the proposed plan. To show that
there was a threat that Public Service would collapse absent
the merger, and that great synergies would be achieved from
it, appellants point to several statements to this effect by
the regulatory agencies that ultimately considered the
merger.
Few public utility lawyers would be greatly disturbed by
the description of state agency powers given in the
disclosure statement; although there is plenty of room for
disagreement about nuance, the suggestion of fraud in this
respect is very far-fetched. As for the financial
projections, the complaint does not even begin to show that
they were wrong, let alone fraudulent; at most, it asserts
some inconsistency with later agency appraisals. Still, we
are not concerned here with a motion to dismiss and will
assume arguendo (albeit with a good deal of skepticism) that
we are dealing with a serious, although entirely unproven,
fraud complaint.
If we were faced with a case of what the bankruptcy
judge called "secret fraud," appellants might have an
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arguable basis for their collateral attack. True, section
1125(d) could be read very broadly to make any fraud claim
disappear since that section provides that the adequacy of a
disclosure statement is "not governed by any otherwise
applicable nonbankruptcy law." On the other hand, one may
doubt that Congress meant in all circumstances to wipe out
every damage remedy against a defrauder who managed to
deceive everyone, including the bankruptcy court. The very
existence of the safe harbor provision suggests otherwise.
Similarly, the safe harbor provision presents puzzles of
its own. On its face, it immunizes only good faith
"solicit[ations]" for approval or rejection and
"participat[ion]" in securities transactions; it says nothing
explicit about false disclosure statements; even if read more
broadly, as is likely justified, it does not protect bad
faith conduct. Nor does it say where and how good faith is
to be determined; the bankruptcy court did make good faith
findings in approving the plan, but (as we explain below)
their significance is itself open to dispute.
In our view--and we have little precedent to guide us--
this case can be disposed of based on a single, relatively
narrow circumstance: the attacks now made on the disclosure
statement were in part made in the reorganization proceeding
itself; and, to the extent that they were not made there,
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they could and (if meritorious) should have been made
there.2 It is this circumstance that led the bankruptcy
judge to distinguish the possibility of "secret fraud," that
is to say, fraud of such a character that it could not
reasonably be uncovered until after the confirmation.
There is no secret fraud here. The description of state
utility commission powers not only could have been disputed
during the approval of the disclosure statement but was in
fact challenged by appellants. As for the financial
projections, they were open to attack at the same time, and
appellants point to nothing in the way of newly discovered
evidence that could explain why the criticisms now made could
not have been litigated at the time. To refer summarily to a
couple of conclusory statements from regulators about the
need for, or benefits of, the merger does not remotely
justify the delay.
The bankruptcy judge found, in issuing the injunction,
that the appellants "did raise or had the opportunity to
raise" in the reorganization all of the issues that they now
seek to litigate. 148 B.R. at 718. It is implicit in this
finding that the appellants by exercising due diligence could
2Yell Forestry Products, Inc. v. First State Bank, 853
F.2d 582 (8th Cir. 1988) may represent the closest authority
in point. We agree with appellants that it is
distinguishable on its facts but believe that it comports
with our own view that the courts have authority to fashion
appropriate limitations on collateral attacks while reserving
the possibility that in some cases they may be justified.
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have learned enough to raise their present contentions in
opposing confirmation.3 The appellants do not even attempt
to undermine the finding, but blandly assert that they had
"no obligation" to discover that they had been "lied to." In
this context appellants are mistaken.
Because the alleged inaccuracies could have been, and in
part were, litigated in the bankruptcy court, we think that
court was entitled to prohibit a new (albeit indirect) attack
upon the disclosure statement it had approved. Whether or
not such an attack is literally forbidden by either section
1125(d) or section 1125(e) is debatable; but against the
background of these provisions, and the policies of chapter
11, we think it evident that allowing such an attack would
disrupt Congress' detailed scheme for approval of disclosure
statements and reorganizations, and would frustrate the
proper administration of the Bankruptcy Code.
If there are substantial errors in a disclosure
statement, the opponents in the reorganization have every
incentive to raise them while the disclosure statement or
proposed plan can still be modified; the statute itself
points to the importance of a single, definitive approval
process. E.g., 11 U.S.C. 1125-26. Conversely, putting to
3The bankruptcy court made this clear by reserving the
possibility of a post-reorganization fraud suit based on
"secret fraud," 148 B.R. at 720, which we take to mean fraud
that a plan opponent could not reasonably have discovered at
the time of the reorganization. Id.-12-
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one side the possibility of secret fraud, the Bankruptcy Code
looks not only toward repose for a confirmed plan, 11 U.S.C.
1144, but toward protecting those who have participated in
the development of execution of the plan. See 11 U.S.C.
1125(d), (e); H. Rep. No. 595, 95th Cong., 2d Sess. 236
(1978).
In acting to protect its prior proceedings, the
bankruptcy court acts in an equitable capacity. Later suits
that threaten to undermine a bankruptcy judgment are not
merely the concern of the individual litigants; the
willingness of future claimants and creditors to compromise
in chapter 11 proceedings depends on giving the
reorganization court's approval a due measure of finality.
And in determining how much finality is due, equitable
considerations and policy concerns can properly justify
results that are not literally compelled by statutory
language.
Absent substantial new evidence of fraud, there is no
reason why Congress would have wished, or the courts should
permit, participants who actively participated in the
reorganization to relitigate in later civil actions
previously raised issues about the adequacy of the disclosure
statement, or to reserve for such actions claims that
feasibly could have been made in the reorganization. The
courts have ample authority to infer restrictions necessary
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to make Congress' plan work. Cf. Yell Forestry Products, 853
F.2d at 584. The restriction inferred in this case is both
narrow and--as the facts of this case illustrate--amply
justified.
Res judicata principles were the subject of discussion
by the bankruptcy and district courts and of extensive
briefing in this court, so it may be helpful to explain why
we have chosen not to pursue this line of reasoning. It is
quite true, as appellees assert, that the bankruptcy court
did in confirming the plan make explicit findings that the
plan was proposed, and its acceptance was solicited, in good
faith. See 148 B.R. at 707. The latter finding dovetails
with the good faith requirement that triggers safe harbor
protection for the private appellees, and might at first
glance seem to resolve the case against them.4
But the res judicata argument leads into a briar patch
of problems. Putting aside the appellants' doubtful claim
that the good faith finding in question was not "necessary"
to the result, the appellants argue that collateral estoppel
should not apply because mootness prevented them from
obtaining review of the confirmation in this court. See In
re Public Service Company of New Hampshire, 963 F.2d at 471-
4The State of New Hampshire is not covered by the safe
harbor provision--not being a "person" under chapter 11, 11
U.S.C. 101(41)--although appellants have never explained
why they think that the state is responsible for any mistakes
in the disclosure statement.
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75. The appellees respond that mootness was caused by
appellants' failure to seek a stay of the reorganization
while appealing the confirmation. Appellants say they could
not afford the bond.
Even if we resolved these issues in favor of appellees,
which we might well do, there is a further more basic problem
in invoking collateral estoppel. If we were dealing with a
true case of secret fraud, the same concealment that was the
gravamen of the collateral attack would likely have
constituted a fraud on the reorganization court itself. This
would not vitiate the confirmation order, unless challenged
within 180 days, 11 U.S.C. 1144, but it would raise very
serious concerns about giving collateral estoppel effect to
any finding of good faith that rested upon the same
fraudulent concealment. See Restatement (Second), Judgments
28(5)(c), 70 (limitations on later use of judgment
procured by fraud).
We are not saying that the collateral estoppel defense
is entirely circular; but if appellees had fraudulently
concealed critical information from the reorganization court,
it is not clear that merely pointing to a prior good faith
finding by the same court (made in the same state of
ignorance) would resolve the matter. By contrast, the route
we follow to affirmance--that appellants could and should
have litigated their inaccuracy claims in the reorganization
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forum--does not depend on any prior good faith findings by
the reorganization court but on what we see before us today.
Our determination also does not depend on the literal
language of the safe harbor provision but on the broader
policies of chapter 11 and on considerations of equity. The
determination therefore applies with equal force to
comparable claims against the State of New Hampshire and its
officials, even though the state itself is technically not
covered by section 1125(e). We have no occasion to consider
the Eleventh Amendment defense that the bankruptcy court
adopted as an alternative ground for precluding suit against
the state.
III. CONCLUSION
The bankruptcy court was forebearing in its decision not
to punish the apparent contempt of its injunction. It would
be unwise for appellants to take our present decision as an
invitation to invent new collateral attacks on the
reorganization plan that purport to skirt the injunction.
Litigation is a device for settling disputes, not for
prolonging them to the point of abuse. Cf. Fed. R. Civ. P.
11.
Affirmed.
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