Court Opinion

ID: 2962314
Source: CourtListenerOpinion
Date Created: 2015-09-21 20:56:11.577972+00
Date Added: 2024-06-11T11:42:27.860063
License: Public Domain

USCA1 Opinion

	

                            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                                         -2-
                                         -2-

            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).                                         -3-
                                         -3-

            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                                         -4-
                                         -4-

            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                                         -5-
                                         -5-

                 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                                         -6-
                                         -6-

                      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                                         -7-
                                         -7-

            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).                                         -8-
                                         -8-

                 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                                         -9-
                                         -9-

            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,                                         -10-
                                         -10-

            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.                                         -11-
                                         -11-

            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-
                                         -12-

            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                                         -13-
                                         -13-

            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.                                         -14-
                                         -14-

            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                                         -15-
                                         -15-

            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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                                         -16-