National Gypsum Co v. Prostok

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 00-11097
IN THE MATTER OF: NATIONAL GYPSUM CO,
Debtor,
NATIONAL GYPSUM CO,
Appellee,
versus
JEFF P. PROSTOK; NGC ASBESTOS DISEASE
AND PROPERTY DAMAGE SETTLEMENT TRUST,
Appellants,
PETER C. BROWNING; EDWARD A. PORTER;
ALLAN v. CECIL; ROBERT M. PROKAY;
AUTINO O. MARAIA; GERALD P. CARROLL;
KENNETH L. BLOCK; CHARLES J. CELLA;
JOHN P. HAYES; JAMES B. HENDERSON;
BERNARD L. KASRIEL; LINDA MCFADIN SPAKE,
in her capacity as Co-Executrix of the
estate of Robert L. McFadin; BARBARA
MCFADIN BISHOP, in her capacity as
Co-Executrix of the Estate of Robert L.
McFadin; THE NORTHERN TRUST BANK OF TEXAS,
in its capacity as Co-Executrix of the
Estate of Reece A. Overcash; CYNTHNIA A.
HARTLEY,
Appellees.
In the Matter of: NATIONAL GYPSUM CO.,
Debtor,
PETER C. BROWNING; ALLAN V. CECIL;
EDWARD A. PORTER; ESTATE OF ROBERT
M. PROKAY; AUTINO O. MARAIA; GERALD
P. CARROLL; KENNETH L. BLOCK; CHARLES
J. CELLA; JOHN P. HAYES; JAMES B.
HENDERSON; BERNARD L. KASRIEL; BARBARA
MCFADIN BISHOP; LINDSEY MCFADIN SPAKE;
CHRISTA OVERCASH; NORTHERN BANK OF
TEXAS, NA; CYNTHIA A. HARTLEY,
Appellees,
versus
JEFF P. PROSTOK; NGC ASBESTOS DISEASE
AND PROPERTY DAMAGE SETTLEMENT TRUST,
Appellants.
In the Matter of: NATIONAL GYPSUM CO,
Debtor,
NATIONAL GYPSUM CO,
Appellee,
versus
JEFF P. PROSTOK; NGC ASBESTOS DISEASE
AND PROPERTY DAMAGE SETTLEMENT TRUST,
Appellants.
Appeals from the United States District Court
for the Northern District of Texas
(3:98-CV-1355)
June 14, 2002
2
Before GARWOOD, WIENER, and CLEMENT,1 Circuit Judges.
GARWOOD, Circuit Judge:2
Appellants Jeff P. Prostok (“Prostok”) and the NGC Asbestos
Disease and Property Damage Settlement Trust (“the Trust”) filed
adversary actions in the bankruptcy court seeking a declaratory
judgment that the fee-shifting provision in National Gypsum
Company's Chapter 11 reorganization plan would not apply to their
pending suits against the officers and directors of National Gypsum
Company (NGC) and their financial advisor. The bankruptcy court
granted declaratory judgment in favor of the plaintiffs, but on
appeal the district court reversed. Prostok and the Trust now
appeal to this court. We affirm the district court.
Background
NGC manufactures and supplies products and services to the
building and construction markets. Faced with liability from
asbestos lawsuits and debt from a mid-80s leveraged buyout, NGC and
its parent company Aancor Holdings, Inc. voluntarily filed for
Chapter 11 bankruptcy in 1990. The bankruptcy court approved the
debtor's proposed reorganization plan in 1993. This plan (and the
confirmation order) contained language that released the officers
1
Judge Edith Brown Clement participated by designation in the oral argument of this case as
a United States District Judge for the Eastern District of Louisiana. Since that time she has been
appointed as a Fifth Circuit Judge.
2
Pursuant to 5TH CIR. R.47.5 t he Court has determined that this opinion should not be
published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
3
and directors of NGC and their agents and financial advisors from
liability for certain good faith actions taken during the
reorganization. The reorganization plan also required that in any
lawsuit challenging the good faith of those released, the parties
would have to provide adequate assurance that the losing party
would be able to pay the winner's attorney's fees. The bondholders
did not appeal the confirmation order, even though the plan had
been strenuously opposed by the committee representing the bond and
trade creditors.
We have twice before considered the NGC reorganization. See
In re National Gypsum Co., 118 F.3d 1056 (5th Cir. 1997); In re
National Gypsum Co., 219 F.3d 478 (5th Cir. 2000). This appeal
does not concern those cases, but instead has its origin in a
subsequent lawsuit. In 1995, Prostok filed a class action lawsuit
in Texas state court representing the class of junior bondholders
against the officers and directors of NGC and their financial
advisor during the reorganization, Donaldson, Lufkin & Jenrette
(“DLJ”). Prostok contended the defendants breached their fiduciary
duty and committed fraud because they concealed and failed to
disclose a planned reduction in workforce during the
reorganization; this reduction, Prostok alleged, would have
provided more return to the junior bondholders by causing the
company to be valued more highly. The defendants asserted that the
fee-shifting provision of the reorganization plan applied to the
4
lawsuit and thus Prostok should be required to post bond to
guarantee that he would be able to pay their attorneys' fees if he
lost.
In response, Prostok filed an adversary action in the
bankruptcy court seeking a declaratory judgment that the fee-
shifting provision of the plan did not apply to his lawsuit. The
state court defendants counterclaimed for declaratory judgment,
generally alleging that Prostok's claim was precluded by res
judicata and collateral estoppel. In 1996, the bankruptcy court
affirmed the finality of the reorganization plan but declined to
consider any of the declaratory judgment actions. On appeal in
1997, the district court likewise affirmed the finality of the Plan
but remanded to the bankruptcy court for further consideration of
the declaratory judgments. The Trust, which liquidates and
resolves asbestos claims against NGC, then asked for expedited
consideration of the Prostok declaratory judgment because it was
contemplating an action similar to Prostok's. The bankruptcy
court declined to expedite the decision, and the Trust filed its
complaint as an adversary action in the bankruptcy court in 1997.
On remand in 1998, the bankruptcy court addressed both Prostok
and the Trust's motions. The court declared that the fee-shifting
language did not apply to their suits. After some consideration,
the bankruptcy court subsequently chose to abstain from the
5
defendants’ counterclaims in favor the ongoing state court
proceeding. Thus, in May 1998 the bankruptcy court reiterated the
declaratory judgment in favor of the plaintiffs that the fee-
shifting provision did not apply to their suits, awarded final
judgment to that effect, and administratively closed the case.
In April 1999, the state court granted the defendants' motion
for summary judgment against Prostok. In October 2000, the United
States District Court for the Northern District of Texas reversed
the bankruptcy court's decision and held that the suits by Prostok
and the Trust were subject to the fee-shifting language. Prostok
and the Trust now appeal that decision to this Court. Since that
appeal, both the Trust and Prostok have settled with DLJ and this
court has dismissed DLJ from this appeal.
Discussion
I. This Court Has Jurisdiction
We requested the parties to provide further briefing as to
whether the bankruptcy court's order was final for purposes of
appeal under 28 U.S.C. § 158(d), citing the concerns raised in In
re Aegis Specialty Marketing Inc. of Ala., 68 F.3d 919 (5th Cir.
1995). We are persuaded that we have jurisdiction. The district
court remanded to the bankruptcy court, which then disposed of the
defendants’ counterclaims by abstaining in respect to them in favor
of the ongoing state court proceedings. We are persuaded that the
bankruptcy court’s orders in connection with the abstention had the
6
effect of investing its judgment concerning the fee-shifting
provision with the requisite section 158(d) finality. See Munich
American Reinsurance Co. v. Crawford, 141 F.3d 585, 589 (5th Cir.
1998). Because this situation does not present the finality
concerns at issue in Aegis, we agree with the district court that
the bankruptcy court's decision was final and thus appealable under
28 U.S.C. § 158(d).
II. The Fee-Shifting Language Applies to the Appellants' Suits
The parties call upon us to decide the meaning of paragraph
fifty of the bankruptcy reorganization order. This passage reads
as follows:
Exoneration and Reliance. Pursuant to Section 5.22 of the
Plan and provided that the respective affiliates, officers,
directors, shareholders, members, representatives (including
the Legal Representative), attorneys, financial advisors, and
agents of the Debtors, Reorganized NGC, New NGC, the Legal
Representative, and the Official Committees act in good faith,
they shall not be liable to any Claimant or other party with
respect to any action, forbearance from action, decision, or
exercise of discretion taken during the period from the
Petition Date to the Effective Date in connection with: (a)
the operation of the Debtors, the Debtors’ Subsidiaries, New
NGC, or Reorganized NGC; (b) the implementation of any of the
transactions provided for, or contemplated in, the Plan or the
Plan Documents, including the Assets Sale pursuant to the
Assets Purchase Agreement, the NGC Asbestos Settlement Fund
pursuant to the NGC Asbestos Settlement Fund Documents; or (c)
the administration of the Plan or the assets and property
(including any Cash distributed to the Claimants holding
Claims which are classified in NGC Class 3) to be distributed
pursuant to the Plan and the Plan Documents other than for
willful misconduct or gross negligence. The Debtors,
Reorganized NGC, New NGC, the Official Committees, the Legal
Representative, and their respective affiliates, officers,
directors, shareholders, members, representatives, attorneys,
financial advisors, and agents may rely upon the opinions of
counsel, certified public accountants, and other experts or
7
professionals employed by the Debtors, Reorganized NGC, New
NGC, the Official Committees, and the Legal Representative,
respectively, and such reliance shall presumptively establish
good faith. In any action, suit or proceeding by any
Claimant, Interestholder or other party in interest contesting
any action by, or non-action of, Debtors, Reorganized NGC, New
NGC, the Official Committees, the Legal Representative, or
their respective affiliates, officers, directors,
shareholders, members, representatives, attorneys, financial
advisors, and agents as not being in good faith, the
reasonable attorneys' fees and costs of the prevailing party
shall be paid by the losing party and as a condition of going
forward with such action, suit, or proceeding at the outset
thereof, all parties thereto shall be required to provide
appropriate proof and assurances of their capacity to make
such payments of reasonable attorneys’ fees and costs in the
event they fail to prevail.
The first sentence of this passage (the “release provision”)
releases the debtor parties3 from liability for certain actions
taken in good faith during the period between the petition for
bankruptcy and the effective date of the proposed plan, with the
caveat that willful misconduct and gross negligence are never
released. The third sentence (the “fee-shifting provision”)
applies to any lawsuit by an interestholder4 asserting a lack of
good faith in any action by the debtor parties, and requires the
losing party to pay the winner's attorneys' fees. Under this
provision, all parties must provide assurance they will be able to
3
We will use the title “debtor parties” to refer to the group
described in the order as “the respective affiliates, officers,
directors, shareholders, members, representatives (including the
Legal Representative), attorneys, financial advisors, and agents of
the Debtors, Reorganized NGC, New NGC, the Legal Representative,
and the Official Committees.”
4
We will use the title “interestholder” to refer to the group
described in the Plan and order as “Claimant, Interestholder or
other party in interest.”
8
pay those fees in the event their suit fails.
The bankruptcy and district courts disagreed on the proper
interpretation of these two sentences. The bankruptcy court began
its opinion by recognizing that the fee-shifting provision was
final and binding on the parties, but opined that it “may have
entered the order adopting the fee-shifting provision in error”,
citing Ashland Chemical, Inc. v. Barco, Inc., 123 F.3d 261 (5th
Cir. 1997), noted that “Congress has not expressly authorized the
fee-shifting provision” and concluded that therefore “the court
must construe and apply it narrowly.” The court also stated in
this respect “considering that this fee-shifting provision violates
public policy, the court holds that it does not apply to claims
based on gross negligence or willful misconduct relating to the
confirmation process.” Having thus restricted its view, the
bankruptcy court held that the fee-shifting provision only applied
to suits challenging those actions within the limited scope of the
earlier release provision. Under this interpretation, therefore,
a litigant triggers the fee-shifting provision only if he asserts
bad faith in the operation, implementation or administration of
NGC, yet at the same time avoids any allegation of willful
misconduct or gross negligence. The bankruptcy court then found
that the plaintiffs' suits would not come within the fee-shifting
provision for two reasons: the suits involved allegations of gross
negligence and the suits concerned actions relating to the
9
confirmation process and not the three categories of actions listed
in the release provision.
On appeal, the district court reversed. The district court
began by finding that there was no reason to narrowly construe the
fee-shifting provision because Ashland Chemical did not apply and
there was no public policy against fee-shifting provisions in
specific case orders. Moreover, the district court held that
Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987)
required it to enforce the reorganization plan even if the plan's
provisions exceed the powers set forth in the Bankruptcy Code. The
district court held that the fee-shifting provision was not
coterminous with the release provision. Under this reading, the
fee-shifting provision applies to any lawsuit by an interestholder
that can be characterized as a challenge to the good faith of the
debtor parties' actions in relation to the bankruptcy. The
district court then found that the plaintiffs' suits could be
characterized as such, adding in the alternative that the suits
challenged the “operation” of NGC and thus should come within even
the bankruptcy court's reading of the fee-shifting language.
Prostok and the Trust appeal from the decision of the district
court, arguing that the bankruptcy court made the correct
interpretation of the language at issue. NGC and the Officers and
Directors urge us to affirm. For the reasons explained below, we
agree with the district court.
10
A. The Standard of Review
We first turn to the proper standard of review to be applied
in this case. The legal principles at work were set forth in an
earlier National Gypsum decision:
[W]e should review de novo the purely legal issues--e.g., the
effect of the documents on New-NGC's liability for Unknown
Claims--but should defer to the bankruptcy court's reasonable
resolution of any ambiguities in those documents. Because
New-NGC is correct that the bankruptcy court's ultimate
determination of the meaning of the Plan and Confirmation
Order is a legal one, however, the documents must truly be
ambiguous, even in light of other documents in the record,
before we will defer. In re National Gypsum Co., 219 F.3d
478, 484 (5th Cir. 2000).
Stated another way, we review the plan de novo for “true”
ambiguity, and if we find the language “truly . . . ambiguous” we
then normally defer to the bankruptcy court's interpretation of
that language.
B. There Is No Reason To Construe The Plan Narrowly
The bankruptcy court did not determine that the fee-shifting
provision was ambiguous. Nor did it expressly or inferentially
rely to any extent on its own intention or understanding respecting
that provision when it approved the Plan or on its understanding of
the then intentions of any of the parties in that regard or on its
general familiarity with the NGC bankruptcy. Rather, the
bankruptcy court determined, in 1998, that the 1993 fee-shifting
provision “violates public policy” and that the court had likely
committed legal error in adopting it in 1993, and that therefore
the provision “must” be construed and applied “narrowly”. These
11
legal conclusions were based on this Court’s 1997 decision Ashland
Chemical. We hold, however, that the bankruptcy court erred in
those legal conclusions.5
Ashland Chemical should be distinguished, however. That case
concerned a local rule contained in the Eastern District of Texas's
Civil Justice Expense and Delay Reduction Plan that altered the
traditional “American Rule” for all future civil cases in the
district by shifting the responsibility for fees onto the losing
party in certain circumstances depending on the outcome of the
case. See id. at 262. We began by examining Aleyska Pipeline
Service Co. v. Wilderness Society, 95 S. Ct. 1612 (1975) and its
progeny and noted that “these cases stand for the proposition that
substantive departures from the American rule and its traditional
exceptions must be authorized by Congress.” Id. at 264. We found
that because the fee-shifting rule was based on the outcome of the
case and was imposed generally on all future cases, it was indeed
a substantive departure that required Congressional authorization.
Id. at 265.
We do not reach the same conclusion here, however. The
narrow scope of the fee-shifting provision is not the sort of
broad, generally applicable, “substantive departure” at issue in
5
Cf. In Re Mercer, 246 F.3d 391, 402 (5th Cir. 2001) (“the clear error standard does not
apply to findings of fact resulting from application of an incorrect legal standard”); Merritt-Campbell
Inc. v. RxP Production Inc., 164 F.3d 957, 961 (5th Cir. 1999) (trial court’s finding accepted “unless
clearly erroneous or influenced by an incorrect view of the law”).
12
Ashland Chemical, but is instead imposed by a specific order in one
pending case on a specific group of parties to that case in one
narrow circumstance. Furthermore, a fee-shifting provision in a
reorganization plan resembles the traditional exceptions to the
“American Rule” far more than the substantive provisions criticized
in Ashland Chemical. Parties may circumvent the “American Rule” by
contracting otherwise. See, e.g., Bank One, Texas, N.A. v. Taylor,
970 F.2d 16, 35 (5th Cir. 1992). We recognize that a
reorganization plan lacks some of the characteristics of the
classic contract, but we also note that such plans “should be
construed basically as a contract.” In re Stratford of Texas,
Inc., 635 F.2d 365 (5th Cir. 1981). Accordingly we find the fee-
shifting language does not violate the restrictions set forth in
Ashland Chemical.
Indeed, we believe that this circuit's case law compels us to
enforce the order as written. In Shoaf, we held that a
reorganization plan no longer subject to challenge by appeal should
be enforced as written even though it arguably violated a general
provision of the Bankruptcy Code that discharge of a debtor does
not affect the liability of others for the debtor’s debts. Id. 815
F.2d at 1050. The bondholders of National Gypsum did not appeal
the bankruptcy plan, and the Plan doesn't violate the statutory
terms of the Bankruptcy Code. We must therefore enforce the terms
of the plan against them. The Trust contends that the district
13
court's reading of the plan was unpredictable whereas Shoaf dealt
with a predictable challenge that could have been easily asserted
on appeal. We disagree; the possibility that the fee-shifting
language would be applied to “any [suit] by any [Claimant]
contesting any action by, or non-action of, [the debtor parties] as
not being in good faith” was apparent on the face of the document
and well within the power of the bondholders to challenge on
appeal.
C. There Is No Ambiguity In The Plan
We find no ambiguity in the statement “[i]n any [suit] by any
[Claimant] contesting any action by, or non-action of, [the debtor
parties] as not being in good faith.” By its plain terms, the fee-
shifting provision unambiguously applies to any and all suits in
which an interestholder alleges a lack of good faith by the debtor
parties in relation to the bankruptcy. The fee-shifting language
simply does not restrict the types of activities to which it
applies, even though the repetition of terminology throughout the
paragraph strongly suggests that the drafters would have reiterated
any applicable restrictions. Instead, the plan states that fee-
shifting will be imposed on any suit by an interestholder
contesting any action by the debtor parties as lacking good faith.
We also note that the bankruptcy court reasoned that its
interpretation came from reading paragraph 50 “as a whole,” but in
our view that only highlights the contrasts between the two
14
sentences. The broad scope of the words “any suit” by “any
Claimant” challenging “any action” lie in stark contrast to the
limitations set forth in the release language.
The appellants advance various arguments why the scope of the
fee-shifting provision should be narrowed to match the release
provision, but we are not persuaded. The appellants first argue
that the use of the phrase “good faith” in both provisions requires
them to be read identically, but we reject their fallacious
reasoning. The release provision does not purport to define “good
faith,” but rather incorporates that concept as one boundary of the
release afforded the debtor parties. That is, the release language
only purports to release the debtor parties from liability when
they (1) act in good faith, (2) act with regard to the three stated
categories, and (3) act without willful misconduct or gross
negligence. Items (2) and (3) do not narrow the concept of “good
faith,” they narrow the scope of the release. In contrast, the
fee-shifting language encompasses all cases alleging a lack of
“good faith” without being further narrowed by items (2) and (3)
above. The concept of “good faith” remains constant in both
provisions. We thus find no reason to read the limitations of one
sentence into the other merely because they use the same,
independently stated concept.
The appellants also claim that absurd results arise from the
district court's clear reading of the Plan language. These
15
allegations arise from strained readings of the text, however,
because the fee-shifting language is limited in ways the appellants
do not admit. First, fee-shifting only applies to suits that
allege a lack of good faith, which Black's defines inter alia as
“honesty in belief or purpose,” “faithfulness to one's duty or
obligation,” and “absence of intent to defraud or to seek
unconscionable advantage.” BLACK'S LAW DICTIONARY (7th ed. 1999). The
fee-shifting provision thus applies only to cases alleging such
things as dishonesty, fraud, breach of fiduciary duty and deceit.
This limitation negates Prostok's attempt to argue that automobile
accidents would fall within the scope of the fee-shifting
provision. Second, the fee-shifting provision only applies to
those parties to the NGC bankruptcy who are carefully enumerated in
the Plan. The provision's scope therefore cannot go beyond the
scope of the bankruptcy and reorganization. Prostok argues
hypothetically that the appellee's reading of this provision would
require him to post bond before suing NGC's general counsel for an
instance of slander unrelated to NGC business, but this is again a
strained interpretation. The Plan limits the possible plaintiffs
and defendants to the parties enmeshed in the National Gypsum
reorganization, thereby demonstrating that the only reasonable
interpretation of the fee-shifting provision is that it only
applies to lawsuits against the officers and advisors in their
capacities as such in relation to the NGC bankruptcy. Prostok's
16
hypothetical fails to take this limitation into account, and we
conclude that applying the Plan language as written does not give
rise to absurd results.
We can find no ambiguity in the fee-shifting provision, and
thus we will enforce it as written with no deference to the
bankruptcy court's interpretation.
III. The Fee-Shifting Provision Applies to The Appellants' Suits
Having determined that the fee-shifting provision
unambiguously applies to any suit by an interestholder asserting
that any action by any of the debtor parties (in their capacities
as such and in relation to the NGC bankruptcy) lacked good faith,
we turn to the question of whether the suits by Prostok and the
Trust come within the scope of that provision. We conclude that
they do.
The district court stated that the allegations of gross
negligence and intentional misdeeds “necessarily translate into
lack of good faith.” Appellants argue that this statement renders
the final condition of the release provision redundant. The
release provision only protects actions taken in good faith. Yet,
the release provision then goes on to make clear that actions that
are “willful misconduct or gross negligence” will not be protected.
Appellants argue that unless the drafters of the reorganization
plan (and, by extension, the bankruptcy court in drafting the
order) intended this later limitation to be a needless redundancy,
17
they must have contemplated that some actions taken in good faith
might also be characterized as “willful misconduct or gross
negligence.”6 Thus, it is claimed that the Plan distinguishes
these concepts from good faith, and thus an allegation of willful
misconduct or gross negligence cannot always automatically trigger
the fee-shifting provision. However, a more reasonable reading of
the release provision in this respect is that its “willful
misconduct or gross negligence” language is not any sort of a
negative definition of “in good faith”, but is rather merely
intended to foreclose possible argument that a given action, though
properly found to constitute willful misconduct or gross
negligence, was nevertheless released because it was taken “in good
faith.”
Appellants also claim that the fee-shifting provision cannot
apply to willful misconduct or gross negligence because those items
were not specifically listed. We disagree; the fee-shifting
provision applies to all cases alleging a lack of good faith
regardless of what other labels might also be applied. A
comparison is helpful in making this distinction. The release
provision begins with the scope of “good faith” and then is
narrowed through successive limitations like the exclusion of
“willful misconduct” and “gross negligence.” In contrast, the fee-
6
This possibility, while slender, is not unprecedented.
National Gypsum correctly points out that TEX. CIV. PRAC. & REM. CODE
§ 74.001(a) protects actions taken in good faith that are not
“wilfully or wantonly negligent.”
18
shifting provision begins with the scope of “lack of good faith”
and then is not further narrowed. This indicates that the only
relevant question is whether the suits can be characterized as
alleging a “lack of good faith;” while “willful misconduct and
gross negligence” may overlap with (or remain independent of) “good
faith,” those concepts are simply irrelevant.
Regardless of whether the allegations in the Prostok and Trust
suits might also be characterized as “willful misconduct or gross
negligence,” we find that the suits are replete with accusations
that the defendants acted in bad faith. The petitions contain
allegations of misrepresentation including an assertion that the
defendants made these representations “in bad faith with no intent
to act in accordance with the representations.” (emphasis added).
Both plaintiffs also alleged fraud and breach of fiduciary duty
arising out of “providing false, misleading or incomplete
information.” The Trust also alleges the defendants committed
“actual . . . fraud” by intentional “misrepresentations” and by
failing to “disclose” the possible cost savings –- assertions
encompassing the dishonesty antithetical to good faith. These
assertions of actual fraud, deceit, falsehood and betrayal of
fiduciary trust necessarily challenge the good faith of the
defendants. Indeed, the very foundation of the appellants'
lawsuits is a fundamental lack of good faith by the defendants,
both in their particular allegations of conduct and in their
19
theories of legal liability. We therefore have no trouble holding
that these lawsuits “contest[] any action by, or non-action of,
[the debtor parties] as not being in good faith”, and we affirm the
district court.
IV. The Lawsuits Challenge Bad Faith in the Operation of the
Debtors
We need not rely solely on our own interpretation of the Plan
language. We also conclude that the appellants' lawsuits allege
that the defendants lacked good faith in the operation of the
debtor companies. This places the appellants within the bankruptcy
court's restricted interpretation of the fee-shifting provision,
and provides a separate ground for affirming the district court's
opinion.
The first of the three protected categories in the release
provision reads as follows:
...they shall not be liable to any Claimant or other party
with respect to any action, forbearance from action, decision,
or exercise of discretion taken during the period from the
Petition Date to the Effective Date in connection with: (a)
the operation of the Debtors, the Debtors’ Subsidiaries, New
NGC, or Reorganized NGC . . . .
Appellants characterize the “operation” of National Gypsum as
the manufacture and sale of gypsum wallboard, exclusive of actions
relating to the reorganization and bankruptcy. The bankruptcy
court similarly distinguished between the reorganization and the
day-to-day business of the company. This interpretation cannot
stand once the details of this provision are carefully examined,
20
however. The clause applies to both the debtors and “Reorganized
NGC.” The clause is limited, though, to the time frame stretching
from the filing of the bankruptcy petition to the adoption of the
reorganization plan. Because the reorganized NGC does not exist
until the reorganization plan is adopted, the only way the
defendants could “operate” the reorganized NGC would be through the
bankruptcy and reorganization process. Any other reading would
render the addition of “Reorganized NGC” mere surplusage. We
therefore reject the appellants' claims that the concept of
“operation” cannot include actions related to the bankruptcy and
reorganization process. The allegations of fraud,
misrepresentation and breach of fiduciary duty contained in their
lawsuits fall within the scope of the release provision, and thus
the fee-shifting provision (even as interpreted by the bankruptcy
court) would apply to the appellants.
Moreover, both appellants have challenged actions that are
squarely within even their own understanding of the concept of
“operation.” They argue that the defendants did a poor job of
running National Gypsum because they failed to “ascertain” a
possible $30 million cost savings from a reduction in force. The
Trust went so far as to call this failure “gross negligence.” This
allegation clearly encompasses the day-to-day operations that the
appellants claim is the proper scope of the release provision.
This second-guessing of NGC management's business judgment
21
necessarily implicates the release provision's protections for
“operation.” We therefore find that even under the bankruptcy
court’s erroneously restrictive reading of the reorganization plan,
in which the fee-shifting provision is limited to non-bankruptcy
activity described in the release provision, the appellants are
still bound by the fee-shifting provision.
Conclusion
We hold that the Prostok and Trust lawsuits fall within the
fee-shifting provision. The decision of the district court is
therefore
AFFIRMED.
22