National Benevolent Ass'n of the Christian Church (Disciples of Christ) v. Weil, Gotshal & Manges, LLP

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
June 11, 2009
No. 08-50677
Charles R. Fulbruge III
Clerk
In The Matter Of: THE NATIONAL BENEVOLENT ASSOCIATION OF THE
CHRISTIAN CHURCH (DISCIPLES OF CHRIST), ET AL, Reorganized Debtors
Debtor
-------------------------
THE NATIONAL BENEVOLENT ASSOCIATION OF THE CHRISTIAN
CHURCH (DISCIPLES OF CHRIST), ET AL, Reorganized Debtors
Appellant
v.
WEIL, GOTSHAL & MANGES, LLP
Appellee
Appeal from the United States District Court
for the Western District of Texas
USDC No: 5:07-CV-379
Before WIENER, DENNIS, and CLEMENT, Circuit Judges.
PER CURIAM:*
The district court dismissed the debtor-appellant National Benevolent
Association of the Christian Church (Disciples of Christ) (“NBA”)’s malpractice
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .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.
claims against appellee law firm of Weil, Gotshal & Manges, LLP (“Weil
Gotshal”) on res judicata and estoppel grounds. NBA appealed from that
dismissal. Weil Gotshal then filed in this court a motion to dismiss for lack of
subject-matter jurisdiction. We now vacate the district court’s dismissal of NBA’s
claims but grant Weil Gotshal’s motion to dismiss this case for a lack of subject-
matter jurisdiction. Accordingly, we dismiss NBA’s claims without prejudice.
BACKGROUND
Prior to filing for bankruptcy, appellant NBA owned and operated eleven
senior-care facilities, three special-care facilities for individuals who are
developmentally disabled, and four children’s-care facilities. NBA also managed
more than seventy adult low-income residential housing projects under a
contract with the Department of Housing and Urban Development (“HUD”).
NBA financed its facilities with bond debt. In 2003, it had outstanding
variable-rate bond debt of approximately $63 million and fixed rate bonds of
approximately $150 million. For each variable-rate bond issue, KBC Bank of
New York (“KBC”) issued a letter of credit to guarantee the payment of principal
and interest on those bonds. UMB Bank (“UMB”) served as the master trustee
for NBA’s bond and bank debt. Further, NBA maintained a revolving line of
credit with the First Bank of St. Louis (“First Bank”) (collectively “the Banks”).
Between 1999 and 2003, NBA’s annual revenues ranged from $123 million
to $145 million but between 2000 and 2003, NBA suffered significant losses.
Consequently, in 2003 NBA anticipated a review of its letters of credit by KBC;
the letters were due for renewal on September 1, 2003. If NBA could not renew
its letters of credit, the variable-rate bonds would be subject to a mandatory
purchase funded with draws on the letters of credit. In short, NBA would be
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obligated to repay KBC the entire amount on the letters of credit (approximately
$63 million) over a period of eight quarters.
In spring of 2003, NBA hired Cain Brothers, a New York investment
advisor, and defendant law firm of Weil Gotshal to advise on the upcoming
review. Deryck Palmer was the partner-in-charge at Weil Gotshal, and he
allegedly took charge of negotiations with the Banks and instructed NBA to
cease all direct communications with the bankers. NBA also hired Huron
Consulting Group (“Huron”) to perform accounting and financial analysis.
In July 2003, KBC requested a written request for renewal, updated
financials, and a proposed business plan from NBA. At about that time, Huron
completed its initial evaluation of NBA’s financial condition and submitted a
proposed business plan to Weil Gotshal. Palmer allegedly nonetheless refused
to give the Huron report to KBC unless KBC signed a confidentiality agreement.
Initially, KBC was willing to sign a confidentiality agreement but did not
want to sign a provision that required KBC to use the information only to
consider the restructure proposals. Nevertheless, KBC eventually signed the
agreement on August 18, 2003. Palmer, however, allegedly refused to provide the
Huron materials and, as a result, NBA missed the renewal deadline.
Immediately after the passing of the deadline, Palmer relented and
provided KBC with the Huron report. However, NBA was already bound by the
mandatory purchase provision. An effort to revoke the mandatory purchase was
too late, and the first payment became due on December 1, 2003. Because of the
mandatory purchase, donations to NBA slowed, its bond ratings were
downgraded, and potential purchasers at its senior living centers demanded
refunds of their deposits. Sales halted for several months.
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By late September, Weil Gotshal, along with the other consultants,
presented to the Banks the first and only restructure proposal for NBA, which
proposed a 40% debt reduction. The Banks disagreed with the first proposal and
imposed a condition on NBA before conducting further negotiations. The Banks
required NBA to agree to hire third-party professional management to operate
their senior living centers. The NBA Board discussed the proposal, but Palmer
allegedly advised the Board that it could not legally delegate the operation to
third-party professionals. On November 12, Palmer told one of the Banks’
lawyers that NBA would not make the December 1st bond payment, the first
payment pursuant to the mandatory purchase. On November 20, Palmer
participated in a telephone conference among the various NBA officers and
several consultants. Palmer, along with Tom Barry from Cain Brothers, advised
the NBA Board not to make the December 1st payment. The Board followed
Palmer’s advice, and NBA did not make the first payment.
Despite NBA’s refusal to make the payment, the Banks were still willing
to renegotiate a debt restructure if NBA agreed to professional management in
some capacity. However, Palmer allegedly represented to the Board and the
Texas and Missouri Attorney Generals that the Banks were unwilling to permit
debt restructuring and had “forced” NBA into Chapter 11 bankruptcy
proceedings.
At a NBA Board meeting on January 4, 2004, Palmer allegedly predicted
that, after filing for bankruptcy, adverse summary judgments would soon occur
and put the Banks in a position to forcibly sell NBA’s assets. Palmer predicted
that NBA may face the appointment of a receiver. On January 9-10, 2004, Weil
Gotshal made a PowerPoint presentation to the NBA board entitled “Chapter 11
Update and Strategies.” The presentation offered a positive view of bankruptcy
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and touted Cain Brothers, Weil Gotshal, and Huron’s value to NBA. Weil
Gotshal, however, allegedly never presented possible risks to bankruptcy, such
as the loss of NBA’s senior care centers.
NBA filed its bankruptcy petition on February 16, 2004. On June 1, 2004,
Weil Gotshal made another proposal to the Banks offering a 20% debt reduction.
The Banks rejected the proposal and informed NBA that the “starting point” for
negotiations was the sale of the senior care living centers. An agreement was
reached regarding the marketing and sale of the centers. The centers were
eventually sold to Fortress Investments for $210 million.
On March 2, 2005, NBA’s bankruptcy plan was confirmed. Creditors were
paid from the sale of NBA’s real estate, including all eleven senior living centers
and its St. Louis headquarters, along with NBA’s cash-on-hand and securities.
HUD terminated its management arrangement with NBA in its seventy-plus
residential housing projects, and the Attorney Generals of Texas and Missouri
demanded the ouster of the President and the Board. Nevertheless, NBA exited
the bankruptcy with significant assets, including $23.4 million in cash and
marketable securities and five child-and special-care centers.
Professional fees from Weil Gotshal amounted to $34 million in a little
over one year. The bankruptcy court scheduled a post-confirmation hearing in
respect to Weil Gotshal’s application for a professional fee award. Before the
hearing but after the plan’s confirmation, NBA filed an adversary action in the
bankruptcy court against Weil Gotshal alleging legal malpractice for both pre-
and post-petition conduct. By its own motion, NBA consolidated the adversary
action with proceedings in respect to Weil Gotshal’s final fee application. The
bankruptcy court dismissed both pre-petition and post-petition malpractice
claims on res judicata grounds and then granted Weil Gotshal’s fee request after
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a hearing. The district court affirmed the dismissal of both pre-petition and post-
petition malpractice claims and affirmed the fee award. NBA now appeals only
the dismissal of its pre-petition malpractice claims. NBA did not appeal the fee
award or the dismissal of its post-petition malpractice claims.
NBA alleges that Palmer was negligent in respect to the confidentiality
negotiations and in permitting NBA to miss the renewal deadline. NBA further
asserts that Palmer failed to adequately inform NBA of the consequences of
defaulting on the December 1st payment. NBA also alleges that Palmer should
have known that filing for bankruptcy would likely result in a liquidation of
NBA’s assets to effect full payment to its creditors. Finally, NBA alleges that
Palmer had advised the NBA board on these decisions and that the NBA board
always followed his advice. NBA contends that Palmer’s negligence created
unnecessary professional fees and prevented NBA from reaching a more
favorable out-of-court resolution and thereby avoiding bankruptcy. In its
appellate briefs, NBA clearly states that its malpractice claims are based solely
on Weil Gotshal’s pre-petition conduct. NBA does not claim that Weil Gotshal
was negligent in handling the bankruptcy. Thus, the malpractice claim does not
challenge the law firm’s conduct underlying Weil Gotshal’s bankruptcy fee
application.
While this case was pending on appeal, Weil Gotshal filed a motion to
dismiss for lack of subject-matter jurisdiction based on an intervening Fifth
Circuit case, In re United Operating, LLC, 540 F.3d 351 (5th Cir. 2008). We
review de novo a question of subject-matter jurisdiction, and objections to the
exertion of subject-matter jurisdiction can be raised at any time during the
proceedings. Sealed Appellant v. Sealed Appellee, 130 F.3d 695, 697 (5th Cir.
6
1997). For the reasons below, we vacate the district court’s judgment but grant
Weil Gotshal’s motion to dismiss for lack of subject-matter jurisdiction.
DISCUSSION
In In re United Operating, we considered the question: what happens to
a debtor and its claims upon entering and concluding reorganization under
Chapter 11. We concluded that a debtor’s claim can survive the reorganization
as the reorganized debtor’s claim “only if the plan of reorganization expressly
provides for the claim’s ‘retention and enforcement by the debtor.’” 540 F.3d at
355 (quoting 11 U.S.C. § 1123(b)(3)(B)). Otherwise, the reorganized debtor has
no standing to pursue the debtor’s claims in federal court and the federal court
would be deprived of subject-matter jurisdiction over those claims. Id. at 354-55
& n.1. “‘After confirmation of a plan, the ability of the [debtor] to enforce a claim
once held by the estate is limited to that which has been retained in the plan.’”
Id. at 355 (alteration in original) (quoting In re Paramount Plastics, Inc., 172
B.R. 331, 333 (Bankr. W.D. Wash. 1994)). “For a debtor to preserve a claim, the
plan must expressly retain the right to pursue such actions. The reservation
must be specific and unequivocal.” Id. at 355 (internal citations and quotation
marks omitted) (emphasis added). NBA contends that United Operating’s
interpretation and application of §1123(b)(3)(B) does not bar its claims for two
reasons: (1) In re Intelogic Trace, Inc., 200 F.3d 382, 386 (5th Cir. 2000),
authorizes its claims; and (2) reservations in the confirmation plan
unequivocally and specifically reserve its pre-petition attorney malpractice claim
against Weil Gotshal. We conclude that NBA's arguments are without merit.
In Intelogic Trace, we did not squarely address our subject-matter
jurisdiction over the reorganized debtor’s professional negligence claims against
its bankruptcy accountants for post-petition, pre-confirmation conduct that were
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filed after the plan’s confirmation. 200 F.3d at 385-386. Nevertheless, we
implicitly exerted subject-matter jurisdiction over the claims because we held
that the claims were barred by res judicata. See id.; Republic Supply Co. v.
Shoaf, 815 F.2d 1046, 1052 (5th Cir. 1987) (“[A] court by necessity has the
authority to determine its own jurisdiction over the parties and subject-matter,
and does so either tacitly or expressly, by rendering a judgment.”). In Intelogic
Trace, the parties’ dispute arose over a reorganized debtor’s failure to pay its
accountant’s court-ordered fee award for its work on the confirmed Chapter 11
plan. 200 F.3d at 385. The accountant filed a claim for the unpaid award with
the bankruptcy court, but the reorganized debtor responded with allegations of
bankruptcy-related malpractice and filed a suit for malpractice in Texas state
court. Id. In short, the accountant sought to enforce the bankruptcy court’s fee
award but the reorganized debtor filed a bankruptcy-related malpractice claim
to collaterally attack the order.
“A final decree closing the case after the estate is fully administered does
not deprive the court of jurisdiction to enforce or interpret its own orders.” In re
350 Encinitas Invs., LLC, No. 07-56623, 2009 WL 382428, at *1 (9th Cir. Feb. 17,
2009) (unpublished) (quoting Bankruptcy Rule 3022 advisory committee’s note
(1991)); see also In re Millenium Seacarriers, Inc., 419 F.3d 83, 97 (2d Cir. 2005)
(“Bankruptcy courts retain jurisdiction to enforce and interpret their own
orders.”). In Intelogic Trace, the reorganized debtor’s state court suit that
collaterally attacked the fee award was subject to the bankruptcy court’s
jurisdiction because “[f]ederal jurisdiction is proper where a claim brought in
state court seeks to attack or undermine an order of a federal district court.”
Baccus v. Parrish, 45 F.3d 958, 960 (5th Cir. 1995). Accordingly, we had subject-
8
matter jurisdiction in Intelogic Trace because our decision merely protected a
federal court’s previous fee award against a collateral attack.
Consistent with our exertion of subject-matter jurisdiction in Intelogic
Trace, we barred the state legal malpractice claims under the doctrine of res
judicata. 200 F.3d at 391. We concluded that the malpractice claims were barred
under res judicata because the bankruptcy court, in determining that fees should
be awarded to the accountants for their services in the Chapter 11 proceedings,
necessarily determined that the accountant’s work was reasonable and not
negligent. Id. at 386-91. “By granting [the professional’s] fee application, the
bankruptcy court implied a finding of quality and value in [the professional’s]
services.” Id. at 387.
For our subject-matter jurisdiction analysis in this case, Intelogic Trace
supports the proposition that a federal court can hear state court malpractice
claims if they relate to, and thereby collaterally attack, a bankruptcy court’s fee
award; but Intelogic Trace does not provide a general legal basis to exert subject-
matter jurisdiction over a reorganized debtor’s malpractice claims in respect to
a professional’s pre-confirmation conduct that is not reserved in the confirmation
plan and also unrelated to a bankruptcy ruling. Cf. In re Smyth, 273 F.3d 393
(5th Cir. Aug. 7, 2001) (unpublished) (applying Intelogic Trace to bar malpractice
claims against a bankruptcy accountant for conduct during bankruptcy
proceedings because of a previous fee award decision); In re Iannochino, 242 F.3d
36 (1st Cir. 2001) (finding debtor’s claims of malpractice during bankruptcy
barred by res judicata after the court’s implicit finding of quality in the fee
award); Grausz v. Englander, 321 F.3d 467, 471 (4th Cir. 2003) (exerting subject-
matter jurisdiction over malpractice claims filed in state court that challenge the
fee award for legal services during bankruptcy proceedings). Intelogic Trace,
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which applies to collateral attacks against previous bankruptcy fee awards, is
entirely consistent with United Operating, which applies to any of the debtor’s
pre-confirmation claims unrelated to the bankruptcy court’s own orders.
Unlike the malpractice claim in Intelogic Trace, NBA’s malpractice claim
here is based on Weil Gotshal’s alleged pre-petition malpractice that was
unrelated to its legal services during the bankruptcy and the bankruptcy court’s
fee award. Consequently, 11 U.S.C. § 1123(b) as interpreted by United
Operating compels the dismissal of NBA’s claims for lack of subject-matter
jurisdiction unless the confirmed plan specifically and unequivocally reserved
these claims. See United Operating, 540 F.3d at 355. Therefore, the dispositive
question is whether the plan specifically and unequivocally reserved the pre-
petition malpractice claims. Id. NBA contends the plan reserves these claims in
Sections 9.2 and 9.3. We conclude that the plan does not specifically and
unambiguously reserve the claims.
Section 1.2.89 of the plan’s “Definitions” section defines the capitalized
term “Professional.” 1 This definition is important for reading Sections 9.2 and
9.3. Section 1.2.89 states:
Professional means a professional employed in the Bankruptcy
Cases under 11 U.S.C. §§ 327 and 1103.2
Section 9.2 describes the general release of claims against professionals thus:
1
The plan, in section 1.1, recognizes the difference between capitalized terms and non-
capitalized terms. Section 1.1 notes that all capitalized terms are defined in the “Definitions”
section or by the Bankruptcy Code and Rules.
2
The pertinent statutory provision for hiring debtor’s attorneys is 11 U.S.C. § 327.
Under 11 U.S.C. § 327, the bankruptcy court must approve of the employment of professionals
and determine that the professionals do “not represent or hold any interest adverse to the
debtor or to the estate with respect to the matter on which such attorney is to be employed.”
11 U.S.C. § 327(e); see also id. § 327(a).
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The Debtors . . . shall release, and be permanently enjoined from
any prosecution or attempted prosecution of, . . . their . . . advisors,
professionals, except that any Professional required to seek and
obtain approval for payment of a Professional Fee claim is excluded
. . . [and] not released. . . . Notwithstanding any provisions in the .
. . Plan to the contrary, NOTHING in the Plan or Confirmation
Order shall be deemed to release or indemnify any current or former
. . . Professional or firm for which the Debtors filed an application to
employ as a Professional from any liability for any claims or causes
of action which may be asserted by any of the Attorney Generals of
any state or by the Reorganized Debtors.
Section 9.3 reads:
[T]he following claims shall be expressly reserved and not released: . . . (d)
objections to professional compensation applications as well as any other
claims, if any, by Debtors against their professionals . . . (g) claims, if any,
regarding any Professional or relating to or arising from any Professional
Fee Claim.
NBA’s argument is premised on the contention that the terms
“Professional” and “professional” in the plan should be read interchangeably and
generically to include any attorney or law firm rendering services to the debtor
regardless of whether the services were rendered during the bankruptcy
proceedings or before.
Assuming arguendo that NBA’s interpretation is reasonable and
acceptable, it is not the only plausible or reasonable reading of the plan
provisions. We “interpret the Plan[ ] using traditional tools of contractual
interpretations.” In re Advisory Comm. of Major Funding Corp., 109 F.3d 219,
222 (5th Cir. 1997). The plan provisions may also be construed to reserve
malpractice and other claims only in respect to a professional’s employment in
the bankruptcy case and its fee application. The reservations generally refer to
the Professionals’ actions during bankruptcy and/or in relation to a Professional’s
11
fee application. See, e.g., Copelin v. Spirco, Inc., 182 F.3d 174, 183 (3d Cir. 1999)
(reading language in the bankruptcy plan in the context of other provisions so
as to determine the scope of a discharge provision). The plan defines
“Professionals” as “a professional employed in the Bankruptcy Cases under 11
U.S.C. §§ 327 and 1103.” It is reasonable to read the provisions as reserving only
claims against Weil Gotshal in respect to post-petition conduct because Weil
Gotshal only became a professional employed in the Bankruptcy Case under 11
U.S.C. §§ 327 and 1103 after the petition for bankruptcy was filed and after the
bankruptcy court had approved of its employment as a professional in the
bankruptcy case. See 11 U.S.C. § 327. This reading also accords with the first
part of Section 9.2, which specifically states that: “The Debtors . . . shall release,
and be permanently enjoined from any prosecution or attempted prosecution of,
. . . their . . . advisors, professionals, except that any Professional required to
seek and obtain approval for payment of a Professional Fee claim is excluded .
. . [and] not released.” (emphasis added). This statement appears to indicate an
intent to reserve claims against “Professionals” in respect to their conduct
related to the bankruptcy proceedings and not claims against “professionals”
generally. See, e.g., Brown v. Fin. Serv. Corp., Int’l, 489 F.2d 144, 151 (5th Cir.
1974) (describing the general rule of contractual interpretation that “conflicting
provisions should be reconciled in order to give meaning to all parts of the
contract.”).
We need not decide which is the true or preferred interpretation of the
plan’s provisions in order to decide the present case. We merely conclude that
the plan’s provisions do not specifically and unequivocally reserve to NBA the
right to prosecute its claim against Weil Gotshal arising out of the alleged
attorney malpractice conduct that occurred prior to the NBA bankruptcy petition
12
filing and proceedings. See United Operating, 540 F.3d at 355. Accordingly, NBA,
as the reorganized debtor, has no standing to pursue these claims in federal
court. For these reasons we vacate the district court’s judgment but grant Weil
Gotshal’s motion to dismiss this case for lack of subject-matter jurisdiction
without prejudice.
VACATED AND DISMISSED FOR LACK OF SUBJECT-MATTER
JURISDICTION.
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