Under Section 1141(c) of the Bankruptcy Code, property “dealt with” in a confirmed plan is free and clear of the claims and interests of creditors, provided the holder of the claim or interest participated in the bankruptcy case.  But what about assets that are not explicitly specified in a disclosure statement?  United States District Court Judge Cathy Seibel of the Southern District of New York recently affirmed a decision by Bankruptcy Judge Robert D. Drain holding that Section 1141(c) can reach even assets that are not explicitly identified in a disclosure statement in certain circumstances.[1]

Frontier Insurance Company (“FIC”) was a New York insurance carrier and a subsidiary of Frontier Insurance Group, Inc. (“FIGI”).  FIC purchased a parcel of land in 1991 and FIGI purchased two parcels of land adjacent to FIC’s parcel in 1993.  FIC and FIGI shared a building on FIC’s parcel as their headquarters.  In connection with developing those parcels of land, FIC and FIGI entered into an agreement with the local authority, which granted tax relief subject to periodic payments for certain period.  Under the agreement, FIC and FIGI would transfer deeds for those parcels to the authority and would get the deeds back at the end of the period.  The agreement provided that the deeds would be returned to the “Company,” which the agreement defined as FIC.  Yet, both FIC and FIGI regarded this language as an error: they both believed that the deeds for FIGI’s parcels were to be reverted back to FIGI, not FIC. 

In 2001, the New York Supreme Court placed FIC in a temporary rehabilitation proceeding.  In 2003, to sell its properties—including its interest in FIC—to another entity, FIGI filed a Chapter 11 petition.  In its Chapter 11 case, FIGI filed a schedule that listed all of the real properties in which it had any legal, equitable, or future interest.  The schedule—and the amended version of it—referred to the structures that were built on its parcels but did not specify any interest in the land on which the structures were built.  Eventually, a plan of reorganization was confirmed in December 2005 (the “Plan”), and Frontier Insurance Group, LLC (“FIGL”) became the successor to FIGI under the Plan.  FIC did not make any claim upon or assert any interest in FIGI’s parcels during the bankruptcy. 

In 2012, the New York Supreme Court converted FIC’s rehabilitation proceeding to a liquidation proceeding.  Subsequently in 2014, the liquidator of FIC (the “Liquidator”) filed a petition seeking an order declaring FIC the sole beneficial owner of all three parcels.  That petition was eventually transferred to Judge Drain.  Judge Drain held that a creditor with an interest in an asset may lose that interest if, knowing the debtor claims a contrary interest, the creditor nevertheless fails to contest confirmation of a plan. 

The Liquidator appealed and Judge Seibel affirmed.  Even though the Disclosure Statement did not explicitly identify FIGI’s interests in the parcels at issue, the Court concluded that there was at most an ambiguity as to which interests were subject to the Plan:[2] the Plan defined “Assets” broadly as to include “any . . . real property interests” of FIGI, but the Disclosure Statement identified only FIGI’s “significant assets.”  Based on this discrepancy, the Court opined that it was reasonable to conclude that the Plan could cover interests not specified in the Disclosure Statement.[3]  The District Court therefore upheld Judge Drain’s finding that FIGI’s parcels were sufficiently identified during the bankruptcy proceedings: the record included substantial evidence of a mutual understanding between FIC and FIGI that FIGI was the real owner of those parcels. 

[3] Id. at *19.