Source: https://law.justia.com/cases/federal/appellate-courts/F3/43/763/553174/
Timestamp: 2020-08-15 10:20:27
Document Index: 522706324

Matched Legal Cases: ['§ 1125', '§ 1126', '§ 1125', '§ 1128', '§ 1129', '§ 1144', '§ 78', '§ 1125', '§ 1125', '§ 1125', '§ 1129', '§ 1144', '§ 1129', '§ 1125', '§ 1144', '§ 1125', '§ 1144', '§ 101']

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, 43 F.3d 763 (1st Cir. 1995) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › First Circuit › 1995 › In Re Public Service Company of New Hampshire, Debtor.edward Kaufman, et al., Defendants, Appellants...
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, 43 F.3d 763 (1st Cir. 1995)
US Court of Appeals for the First Circuit - 43 F.3d 763 (1st Cir. 1995) Heard Sept. 7, 1994. Decided Jan. 6, 1995
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, 848 F. Supp. 318. 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.
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 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, 134 N.H. 148, 590 A.2d 586, cert. denied, --- U.S. ----, 112 S. Ct. 275, 116 L. Ed. 2d 227 (1991), and the reorganization occurred on May 16, 1991.1
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. § 78a, and of common law fraud, based on supposed misrepresentations in the bankruptcy-court disclosure statement.
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, 54 S. Ct. 695, 78 L. Ed. 1230 (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:
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 plan embodied a negotiated compromise on utility rates to forestall litigation. See 11 U.S.C. § 1129(a) (6).
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 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).
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 Secs. 28(5) (c), 70 (limitations on later use of judgment procured by fraud).
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.
Appellants 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, --- U.S. ----, 113 S. Ct. 304, 121 L. Ed. 2d 226 (1992)
Yell 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
The 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