Opinion ID: 671466
Heading Depth: 1
Heading Rank: 1

Heading: Use of Equitable Principles in Reorganization

Text: 25 It is well settled that bankruptcy courts are courts of equity, empowered to invoke equitable principles to achieve fairness and justice in the reorganization process. Section 105(a) of the Code provides that [t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. 26 We have repeatedly emphasized the importance of the bankruptcy court's equitable power. In In re Prudential Lines Inc., 928 F.2d 565 (2d Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 82, 116 L.Ed.2d 55 (1991), we explained that Section 105(a) should be  'construed liberally to enjoin [actions] that might impede the reorganization process.'  4 Id. at 574 (brackets in original; citation omitted). We have also stressed that a bankruptcy court 27 may sift the circumstances surrounding any claim in order to ascertain that injustice or unfairness is not accomplished in the administration of the debtor's estate, and in so doing it may adopt that remedy which it deems most appropriate under the circumstances. 28 In re Stirling Homex Corp., 591 F.2d 148, 155-56 (2d Cir.1978) (quoting 6 Collier, On Bankruptcy p 3.17 (14th ed. 1978)). See also In re Sire Plan, Inc., 100 B.R. 690, 694 (Bankr.S.D.N.Y.1989). 29 Of prime importance in the reorganization process is the principle of disclosure. The Code obliges a Debtor to engage in full and fair disclosure, providing to creditors information of a kind, and in sufficient detail, as far as is reasonably practicable ... that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan.... 11 U.S.C. Sec. 1125(a)(1). This disclosure requirement does not attach only to the preparation of disclosure statements. Full and fair disclosure is required during the entire reorganization process; it begins on day one, with the filing of the Chapter 11 petition. In re V. Savino Oil & Heating Co., 99 B.R. 518, 526 (Bankr.E.D.N.Y.1989). 30 Consistent with these equitable principles, the courts below properly applied the doctrine of equitable estoppel. To prevail on their claim of equitable estoppel, the employees were required to show that when they voted on the Plan, they (1) lacked knowledge of the true facts, (2) reasonably relied on the Debtor's misleading conduct, and (3) suffered prejudice as a result of their reliance. See In re Roundabout Theatre Co., 131 B.R. 14, 17 (S.D.N.Y.1991). We believe the employees met their burden. 31 The Amended Disclosure Statement fairly communicated the Debtor's intention to pay under the Plan approximately $500,000 in severance pay, earned within 90 days of the petition, to a maximum of $2,000 per employee. The Debtor continued to convey this impression through the confirmation hearing. The evidence showed that, notwithstanding such representations, the Debtor had intended to deny such benefits from the inception of the Chapter 11 case. For example, at the hearing on Momentum's motion to amend, Momentum's Vice President for Finance testified that when Momentum filed the original schedule, it had already decided not to provide severance payments. And although Momentum filed the applications at issue here two months after confirmation, its counsel had researched amending the schedules a month before the plan was confirmed. 32 The evidence showed furthermore that the employees relied on Momentum's misleading representations and suffered prejudice as a result: several employees testified that they would not have voted for the Plan had they been aware that the Debtor intended to reject their pension claims. 5 Had the employees rejected the Plan, the Plan would never have been approved. 33 Based on the Debtor's deceptive misrepresentation of its intention to deny severance payments, the district court justifiably found that the employees reasonably believed they would be receiving severance payments under the Plan and that the Debtor's conduct engendered this belief. Moreover, we are satisfied by the court's finding that the employees suffered prejudice as a result of their reliance on the Debtor's conduct. 34 We are convinced that the bankruptcy court's denial of the Debtor's motion to amend its Schedules and to file objections was a valid exercise of its equitable powers, reflecting a well-founded concern that the Debtor had engaged in deception rather than disclosure, 6 and that the employees had suffered prejudice thereby. The Debtor had breached its obligation to engage in full and fair disclosure; the court fashioned an appropriate remedy.