Arctic Glacier International v. , 901 F.3d 162 ( 2018 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 17-2522
_______________
In re: ARCTIC GLACIER INTERNATIONAL, INC., et al.
Debtors in a Foreign Proceeding
ELDAR BRODSKI ZARDINOVSKY, a/k/a Eldar Brodski,
a/k/a Eldar Brodski (Zardinovsky); EB BOOKS, INC;
EB DESIGN, INC; EB ONLINE, INC; EB IMPORTS, INC;
LAZDAR, INC; ELDAR BRODSKI, INC; Y CAPITAL
ADVISORS, INC; VALLEY WEST REALTY INC;
RUBEN BRODSKI; RUBEN BRODSKI, INC;
ESTER BRODSKI; YEHONATHAN BRODSKI,
Appellants
v.
ARCTIC GLACIER INCOME FUND; JAMES E. CLARK;
GARY A. FILMON; DAVID R. SWAINE;
HUGH A. ADAMS
_______________
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 1:16-cv-00617)
District Judge: Honorable Sue L. Robinson
_______________
Argued March 22, 2018
Before: SMITH, Chief Judge, and HARDIMAN and BIBAS,
Circuit Judges
(Filed: August 20, 2018 )
_______________
David B. Gordon, Esq. [ARGUED]
Mitchell Silberberg & Knupp
437 Madison Avenue
25th Floor
New York, NY 10022
Counsel for Appellants
Autumn H. Patterson, Esq.
Mark W. Rasmussen, Esq. [ARGUED]
David R. Woodcock, Esq.
Jones Day
2727 North Harwood Street
Dallas, TX 75201
Marcos A. Ramos, Esq.
Brendan J. Schlauch, Esq.
Richards Layton & Finger
920 North King Street
One Rodney Square
Wilmington, DE 19801
Counsel for Appellees
2
_______________
OPINION OF THE COURT
_______________
BIBAS, Circuit Judge.
Buying shares in a bankrupt company can be perilous busi-
ness. Here, shareholders were on notice of Arctic Glacier’s
bankruptcy proceedings, were represented throughout those
proceedings, and voted overwhelmingly to confirm the com-
pany’s reorganization Plan. So their shares were subject to its
benefits (its dividend-distribution scheme) as well as its bur-
dens (its implementation particulars and releases of claims re-
lating to the Plan). When appellants, the Brodskis, bought their
shares from those shareholders, they stepped into their shoes.
So the Brodskis bought shares subject to the Plan’s terms, in-
cluding the terms that governed post-confirmation acts taken
to carry out the Plan.
The Brodskis argue that the Plan’s releases of liability do
not apply to them because they are not transferees and because
due process forbids releasing their claims. But the Plan came
along with the shares, and the Brodskis were on notice. So we
will hold them, like all buyers, to the terms of their bargain.
I.
On review of this motion to dismiss, we take as true the
factual allegations in the complaint: Arctic Glacier Income
Fund is a Canadian income trust. It owns a company that man-
ufactures and distributes packaged ice across Canada and the
3
United States. In 2012, after a rough patch, Arctic Glacier filed
for bankruptcy under the Companies Creditors’ Arrangement
Act, Canada’s analogue of Chapter 11 of our Bankruptcy Code.
Because Arctic Glacier operates in both countries, it filed for
and received recognition under Chapter 15. That recognition
granted the Canadian reorganization Plan (in Canada, an “ar-
rangement”) full effect in the United States. See 11 U.S.C.
§ 1521(a).
Under the Plan, Arctic Glacier was to sell its assets and dis-
tribute the proceeds to a list of creditors, giving lowest priority
to shareholders (technically, “unitholders” in the trust). The
Plan imposed few limits on the discretion of the Monitor (the
Canadian analogue of a trustee) to sell and distribute assets,
and even fewer limits on when or how much the Monitor could
distribute to shareholders. But the Plan required that the Mon-
itor give 21 days’ notice of any distribution.
The Plan also included broad releases of liability. The re-
leases insulated Arctic Glacier and its officers from any claim
“in any way related to, or arising out of or in connection with”
the bankruptcy. App. 248 (§ 9.1). The only exceptions were for
claims to enforce the Plan, those for gross negligence or willful
misconduct, and those whose release was not “permitted by ap-
plicable law.” Id.; App. 546.
The Monitor sold Arctic Glacier’s assets and repaid the
creditors in full. From the remaining funds, the Monitor was
set to distribute dividends to the shareholders. On December
11, 2014, Arctic Glacier published legal notices announcing
that the shareholders as of December 18 would be “entitled to
receive the initial distribution from [Arctic Glacier] pursuant
4
to the Plan.” App. 628, 630. Four days later, Arctic Glacier an-
nounced the same information in a press release. It also posted
that information on the Monitor’s website and on Canada’s da-
tabase of corporate disclosures.
None of these notices specified how much Arctic Glacier
would distribute or when. And Arctic Glacier did not notify the
Financial Industry Regulatory Authority (FINRA) of its
planned distribution. (FINRA is a self-regulatory organization
charged by the Securities and Exchange Commission with reg-
ulating distributions on, and publishing corporate disclosures
for, the U.S. Over-the-Counter Market.) Nor did the Plan in-
corporate, or even refer to, FINRA’s rules.
Central to FINRA’s rules is its distinction among dates. The
“record date” determines who is entitled to receive the divi-
dend from the company. FINRA, Uniform Practice Code
§ 11120(f) (2010). The issuing company must send the divi-
dend payment to the shareholders of record as of that date. Id.
The “ex-date” or “ex-dividend date” is the date on which the
right to retain the dividend no longer travels with the share
from the seller to the buyer. Id. §§ 11120(d), 11140. The owner
of the share immediately before the ex-date is the one “entitled
to retain the dividend.” Limbaugh v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 732 F.2d 859, 861 (11th Cir. 1984). If
the shareholder sells a share after the record date but before the
ex-date, the seller will receive the dividend from the company
but must send that amount to the buyer. Id.; In re Arctic Glacier
Int’l, Inc., 255 F. Supp. 3d 534, 542 (D. Del. 2017) (citing
Silco, Inc. v. United States, 779 F.2d 282, 284 (5th Cir. 1986)
(per curiam)). Finally, the “payable date” is the date on which
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the company disburses the dividend. See FINRA, Uniform
Practice Code § 11140(b)(2).
Those distinctions matter. FINRA treats dividends worth
less than 25% of a share’s value differently from those worth
more, setting different ex-dates for each. Id. § 11140(b). By
contrast, the Plan spoke of a “Unitholder Distribution Record
Date” and a “Unitholder Record Date.” App. 231 (§ 1.1). It
never mentioned an ex-date or a payable date, but instead used
“Distribution Date” and “Plan Implementation Date.” App.
227, 229, 240 (§§ 1.1, 6.2). And it never distinguished between
dividends worth more than 25% of a share’s value and those
worth less, eliding FINRA’s distinction.
The Plan also elided FINRA’s distinction between record
dates and ex-dates. The Plan provided that “Registered Uni-
tholder[s]” not only receive “transfer[s],” but are also “entitled
to the benefits of a distribution.” App. 230, 240 (§§ 1.1, 6.2).
Those provisions did not use FINRA’s distinction between
shareholders entitled to receive a dividend and shareholders
entitled to retain them. App. 230 (§ 1.1).
Despite Arctic Glacier’s announcements about the distribu-
tion, its share price held steady until January 22, 2015. Arctic
Glacier noticed this stasis and found it puzzling, as its shares
no longer traded with the right to the dividend and should have
lost value equal to the dividend. But Arctic Glacier did nothing
to respond to the stasis or to clarify who would be entitled to
the dividend and when.
Between December 16 and January 22, the Brodskis bought
more than 12,600,000 Arctic Glacier shares on the Over-the-
6
Counter Market. On January 21, the Monitor announced that
the next day it would distribute a dividend of 15.5557 cents per
share to shareholders as of December 18. The Monitor never
told FINRA that it planned to pay the dividend. So FINRA
never specified who would be entitled to the dividend and
never circulated information about it.
Because the dividend payment per share was roughly 75%
of the share price, the Brodskis argue, FINRA would have set
an ex-date of January 23, 2015, the day after the distribution.
So under FINRA’s rules, the shares that the Brodskis had
bought over the previous five weeks would have entitled them
to the dividend. But Arctic Glacier did not follow FINRA’s
rules and did not pay the dividend to the Brodskis. On January
23, Canadian and American regulators froze trading in Arctic
Glacier’s shares. When they let trading resume, the share price
plunged from 21 to 5 cents, reflecting the value of the paid-out
dividend.
The Brodskis sued Arctic Glacier and four of its officers,
claiming that Arctic Glacier owed them the dividend but never
paid them. Count 1 of their complaint asserts that the defend-
ants negligently failed to pay the Brodskis the dividend under
the Plan. Count 2 asserts that they negligently, without
FINRA’s approval, specified that shareholders as of December
18 would be entitled to dividends. Count 3 asserts that the of-
ficers breached a fiduciary duty they owed to the Brodskis.
Count 4 asserts that Arctic Glacier negligently failed to dis-
close material information. And Counts 5 and 6 assert that, by
not disclosing this information, Arctic Glacier committed se-
curities fraud and common-law fraud.
7
The Bankruptcy Court dismissed the complaint, holding
that both the releases and res judicata barred the suit. The Dis-
trict Court affirmed for the same reasons. We review the Bank-
ruptcy Court’s and District Court’s legal determinations de
novo. In re Makowka, 754 F.3d 143, 147 (3d Cir. 2014).
II.
The Brodskis’ claims rest on nonbankruptcy law: The of-
ficers allegedly violated their fiduciary duty, Arctic Glacier al-
legedly deceived the Brodskis, and both the company and its
officers were allegedly negligent in setting the ex-date and not
paying the Brodskis. But the releases bar all these claims.
A. Confirmed plans are res judicata, and Holywell is
not to the contrary.
First, the Brodskis argue that a plan can never insulate a
debtor from liability for post-confirmation acts. We reject this
argument.
When a bankruptcy court enters a confirmation order, it
renders a final judgment. 8 Collier on Bankruptcy ¶ 1141.01[4],
at 1141-11 (Richard Levin & Henry J. Sommer eds., 16th ed.
2017). That judgment, like any other judgment, is res judicata.
Id. It bars all challenges to the plan that could have been raised.
Challengers must instead raise any issues beforehand by ob-
jecting to confirmation. Id. A plan’s preclusive effect is a prin-
ciple that anchors bankruptcy law: “[A] confirmation order is
res judicata as to all issues decided or which could have been
decided at the hearing on confirmation.” Donaldson v. Bern-
stein, 104 F.3d 547, 554 (3d Cir. 1997) (quoting In re Szostek,
886 F.2d 1405, 1408 (3d Cir. 1989)); see also Travelers Indem.
8
Co. v. Bailey, 557 U.S. 137, 152 (2009). Thus, the entire Plan
is res judicata, including its releases.
Seeking to skate around the Plan’s releases, the Brodskis
claim that the Plan cannot bar liability for post-confirmation
acts. They rely on Holywell Corp. v. Smith, quoting a single
sentence from the end of the opinion: “[W]e do not see how [a
confirmed plan] can bind the United States or any other credi-
tor with respect to post[-]confirmation claims.” 503 U.S. 47,
58 (1992). The Brodskis interpret this lone sentence as holding
that bankruptcy plans can never bar liability for any post-con-
firmation acts. (They also treat Holywell and other Chapter 11
doctrines as applicable to this Chapter 15 recognition proceed-
ing. That may well be right, but we need not resolve the issue.
We assume the same without deciding so.)
Holywell laid down no such broad rule. In that case, a Chap-
ter 11 plan set up a trust and appointed a trustee to oversee the
liquidation of the debtors’ property. “The plan said nothing
about whether the trustee had to file income tax returns or pay
any income tax due.” Id. at 51. Yet the trustee claimed that the
United States, a creditor, should have objected to the plan’s
confirmation if it wished to preserve its right to collect taxes
on the income generated by the liquidation. Id. at 58. In reject-
ing that argument, the Supreme Court noted that the tax liabil-
ity arose after confirmation. Id. Unlike the Brodskis here, the
government in Holywell did not directly challenge how the
trustee implemented the plan.
Holywell cannot bear the weight that the Brodskis put on it.
Its facts, its language, and its logic do not apply to post-confir-
mation acts that carry out a bankruptcy plan. By definition, a
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debtor can implement its plan only after the bankruptcy court
confirms it. And a confirmed plan is a binding plan. So the
Brodskis’ overreading of a single sentence in Holywell would
nullify the res judicata effect of confirmed plans and, with it,
much of Chapter 11. We do not read Holywell that broadly. It
casts no doubt on the rule that confirmed plans can bar liability
for post-confirmation acts.
This is not to say that a plan’s preemptive scope can be un-
limited. The Code authorizes preemption of laws related to fi-
nancial condition, but preemption beyond that line is suspect.
See 11 U.S.C. § 1142(a) (providing that plan implementation
preempts “any otherwise applicable nonbankruptcy law, rule,
or regulation relating to financial condition”). Compare In re
Federal-Mogul Global Inc., 684 F.3d 355, 381-82 (3d Cir.
2012) (holding that, under 11 U.S.C. § 1123(a), the preemptive
scope of a plan’s contents can extend beyond financial condi-
tion, but noting that its preemptive “scope is not unbounded”
and warrants scrutiny), with PG&E v. California ex rel. Cal.
Dep’t of Toxic Substances Control, 350 F.3d 932, 937 (9th Cir.
2003) (holding that a plan cannot preempt nonbankruptcy laws
unrelated to financial condition). We need not wade into these
waters, though, because the Brodskis have not preserved any
objection to the scope of the Plan’s preemption.
In sum, a confirmation order is a final judgment that bars
later challenges to the plan. And Holywell does not bar plan
terms authorizing or limiting liability for post-confirmation
acts that implement the plan. So here, the Plan’s terms control.
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B. The Plan did not require paying the Brodskis.
Nothing in the Plan required paying the Brodskis. Instead,
they claim that Arctic Glacier could have harmonized the Plan
with FINRA by following both sets of rules. But the Plan nei-
ther incorporated FINRA’s rules nor contemplated them in its
structure. And its provisions, even when consistent with
FINRA, did not so much as refer to or draw on FINRA’s regu-
latory scheme. So if FINRA’s rules imposed obligations on
Arctic Glacier, those obligations did not arise from the Plan.
And suits to redress FINRA violations must overcome the
Plan’s releases of liability.
C. The releases bar the Brodskis’ claims.
The Plan’s releases were res judicata as to the initial share-
holders. The Plan, including its releases, came along with the
shares that the Brodskis bought from those shareholders. And
the Plan, including its releases, carried the same res judicata
effect. So any nonbankruptcy claims based on the Brodskis’
ownership are subject to the Plan and must overcome its re-
leases. They do not.
The releases waived liability for Arctic Glacier and its of-
ficers. App. 247-48. And they extended to all claims arising out
of the bankruptcy, including distributions under the Plan. Id.
The only exceptions were for suits brought to enforce the Plan,
suits alleging gross negligence or willful misconduct, and suits
whose release would conflict with other “applicable law.” Id.;
App. 546 (¶ 14).
The Brodskis have not asserted gross negligence or willful
misconduct. Nor have they claimed that the releases conflict
11
with otherwise applicable law. In particular, they have never
argued that FINRA’s rules qualify as “applicable law” and so
survive the releases to trump the Plan’s distribution rules. They
did not preserve that argument in the Bankruptcy Court, in the
District Court, or in this Court. So we need not address how
broadly a plan can sweep when it purports to preempt other-
wise applicable laws.
Instead of arguing that the releases do not cover their
claims, the Brodskis attack the releases on two fronts. First, the
Brodskis claim that they are not subject to the releases because
buying shares of stock did not make them transferees. Second,
they claim that the Due Process Clause forbids applying the
releases to them. Neither claim succeeds.
1. Buyers are transferees. To state the first argument is to
refute it. Buying a share of stock is a transfer. The buyer is a
transferee. Transferee, in Black’s Law Dictionary 1727 (10th
ed. 2014) (“One to whom a property interest is conveyed.”).
The share comes with both the Plan’s benefits and its burdens.
So the Brodskis were transferees and took the shares with all
their associated benefits and burdens, including the releases.
As our Court has explained, a claim in bankruptcy may be
transferred. In re KB Toys Inc., 736 F.3d 247, 249 (3d Cir.
2013). When it is, the transferee assumes the same limitations
as the transferor. Id. at 251-52. Otherwise, buyers could revive
disallowed claims, laundering them to receive better treatment
in new hands. Id. at 252. The same holds for shares.
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Nor can the Brodskis claim that they were not represented
and could not have objected to the Plan. The shareholders who
sold to them were represented. And when the Brodskis bought
the shares, they were on notice of the Plan that came with them.
2. Due process does not limit plans’ effects on those who
had notice and representation. For similar reasons, the Brod-
skis’ due-process claim fails. They rely on our decision in
Jones v. Chemetron Corp., 212 F.3d 199 (3d Cir. 2000). But
that case is inapposite.
In Chemetron, one plaintiff was not yet born when Chemet-
ron dumped radioactive rubble. 212 F.3d at 202, 209. That
plaintiff was not represented in the bankruptcy reorganization.
And Chemetron’s bankruptcy plan did not set up a trust to pay
future claims. Id. at 210. So, this Court held, his claim was not
discharged in bankruptcy. Id. Chemetron thus holds that due
process requires giving claimants notice or representation be-
fore discharging their claims in bankruptcy. See also Wright v.
Owens Corning, 679 F.3d 101, 107-09 (3d Cir. 2012); In re
Amatex Corp., 755 F.2d 1034, 1042-43 (3d Cir. 1985).
Chemetron is not a case about buyers and sellers transfer-
ring shares and the plan that travels with them. Nor does
Chemetron extend the Due Process Clause to buyers who had
notice by publication and representation by their sellers but
wish to undo the terms of their bargain. So the Brodskis, like
the sellers from whom they bought, are subject to the releases.
And the Brodskis do not dispute that the language of the re-
leases bars their claims.
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*****
The Brodskis bought shares in a bankrupt company. They
had notice of that bankruptcy and knew how the Plan bore on
their purchase. And they bought from sellers who were repre-
sented in the bankruptcy proceedings. They therefore received
due process and are bound by the Plan, including its releases,
and its res judicata effect. The confirmed Plan properly author-
ized post-confirmation acts to implement its terms and released
liability for those acts. So we will affirm.
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