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.

_____________
Edward

Kaufman,

challenge

an

bankruptcy

Robert

district court.

Richards,

injunctive

court

in

On this appeal, the appellants--

New

order

and

issued

Martin
by

Hampshire, and

Rochman--

the

affirmed

federal
by

the

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

1980s,

Public

New

Hampshire public

Service owned

nuclear

construction in Seabrook, New Hampshire.

utility.

In

power plant

the
under

Due to the Seabrook

project, Public Service experienced severe financial problems

and filed for Chapter 11 bankruptcy on January 28, 1988.
details

of the

bankruptcy proceeding

are recounted

The

in the

opinion

of the bankruptcy court

Service Co., 148 B.R.

___________

in this case,

In re Public
____________

702, 703-09 (Bankr. D.N.H.

1992), and

we confine ourselves to a brief overview.

In

1989,

Public

security holders and

creditors filed

Service,

committee

of

a committee representing its

with

the bankruptcy

plan of reorganization.
with

its

11

that section, the plan

U.S.C.

court a
1125.

equity

unsecured

comprehensive
In

accordance

was accompanied by a disclosure

-2-2-

statement, to be used in soliciting

holders of claims and
described

the plan's acceptance by

interests, see 11 U.S.C.

___

1126, that

the nature and consequences of the plan.

Over the

appellants' objections, the disclosure statement was approved

by

the bankruptcy

1125(b).
confirmed

Public
on

court on

January 3,

Service's

April 20,

1990,

plan

of

after six

1990.

11

U.S.C.

reorganization
days

was

of hearings

largely devoted to the appellants' objections.

11 U.S.C.

1128-29.
The plan was to
contingent

be implemented in two stages,

on approval

step--reorganization

by regulatory
of

Public

each one

agencies.

Service

The first

with

certain

distributions to its owners and creditors--was to take effect

only

if

the

New

approved the plan's

for

See 11
___

was forthcoming,

approval by

Public

Utilities

provisions regarding

Public Service.

approval

586

Hampshire

U.S.C.

a court

Commission

new utility
1129(a)(6).

challenge to

rates
That

the agency

appellants failed, Appeal of Richards, 590 A.2d

___________________

(N.H.), cert. denied, 112

_____________

S. Ct.

225 (1991),

and the

reorganization occurred on May 16, 1991.1

The
with

second stage
subsidiary

of

effected a

merger of

Northeast Utilities,

Public Service
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.

secured, despite an unsuccessful

That approval was also

attempt at intervention

appellants in the FERC proceeding, and the merger

by

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

statement.

After

reorganization

or

January 1991

the

merger,

to revoke

the ground that

representations

in

confirmation
appellants

the
but

filed

the order approving

disclosure
before

motion

1144,

it had been procured by fraud.

which permits

reopening for

in

confirmation on
The request

was dismissed on the ground that it was time barred

U.S.C.

the

fraud

under 11
only if

sought within 180 days of confirmation.

After

the plan

Richards--who is
a letter in March

was confirmed and

largely implemented,

also the attorney for the appellants--wrote

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

violations of federal securities laws, 15 U.S.C.

of

78, and of

-4-4-

common law fraud, based on supposed misrepresentations in the

bankruptcy-court disclosure statement.
Public

Service,

holders, and

committee

in the

from commencing

the injunction.
The

the

threatened

statement,

the

the

action.

any future civil

bankruptcy

confirmation order
The

enjoin the
After

court in November 1992 granted

injunction barred

challenging

security

promptly brought an

Public Serv. Co. v. Richards, 148

_________________
________

appellants

acceptance.

equity

bankruptcy court to

granting interim relief, that

(1992).

of

the State of New Hampshire

adversary proceeding
appellants

its

district court

or

court

B.R. 702
action by
disclosure

the solicitation

affirmed

of

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
Hampshire,

in the

bankruptcy court

Southern

against the State of

District

found Richards

of

New

York.

in contempt but

New
The

imposed no

sanction; the district court for the Southern District of New

York

thereafter dismissed

Richards
court,

the complaint

without prejudice.

has not sought review of the contempt order in this

and

we

are

therefore

concerned

only

with

the

not challenge

the

injunction.
II.

DISCUSSION

-5-5-

On

this

appeal the

authority

of the

attack on

its orders and

appellants

bankruptcy

court to

proceedings.

Loan Co. v. Hunt, 292 U.S. 234 (1934).

________
____

do

enjoin a

collateral

See generally Local

______________ _____
Instead,

they attack

the injunction on
harbor

the merits, arguing that

provision of

principles

forestall

Southern District
bases

the

for the

Bankruptcy Code

the

of

although it also held

nor res judicata

_____________

subsequent fraud

New York.

injunction

neither the safe

These

issued by

action

were the

in

principal

the bankruptcy

that a suit against New

the

court,

Hampshire was

barred by the Eleventh Amendment.

The

Bankruptcy

reorganization
interests, based
court

on a

contains

1125(b), 1126.
determined under
any

may be

after notice,

statement

otherwise

regulation

Code

provides

voted upon by

that

chapter

holders of

claims and

disclosure statement approved

hearing

adequate

The adequacy

and a

by the

determination that

information.

11

11

the

U.S.C.

of the disclosure statement

is

the Bankruptcy Code and "is not governed by

applicable

. . . ."

provision, 11 U.S.C.

nonbankruptcy

11 U.S.C.

1125(d).

law,

or

The safe harbor

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-

rule,

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

forbidden by law."
confirmed after

"in good
11 U.S.C.

the

and

not

by any

1129(a)(3).

the necessary vote, the

revoked only if, within 180

in interest

faith

If a plan

is

confirmation may be

days after confirmation, a party

so requests and the court

thereafter finds that

confirmation order was "procured by fraud."

1144.

means

These provisions are

the framework

11 U.S.C.

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

contingency was pertinent to

treatment

failed.

This

the plan's approval because the

of the Seabrook investment

was in dispute and the

-7-7-

plan

embodied a

negotiated compromise

forestall litigation.
The

disclosure

See 11 U.S.C.
___
statement

on utility

rates to

1129(b)(6).
contained

some

general

statements about the power of a utility commission to

to include in the
an issue
to
in)
in

refuse

utility's rate base imprudent investment--

of central importance in

relation to Seabrook--and

temper any required rate increase (e.g., by using a phase

____
to avoid "rate shock" to customers.
their

complaint

was

that the

Appellants' theory

disclosure

painted

too

pessimistic a picture of the legal rules that would constrain

Public

Service

rate increases

if

the reorganization

rejected and the rate level had to be litigated in court.

were

The

second

statement

prong

concerned

of

the

attack

the merger

of

subsidiary of Northeast Utilities.

offered

ranges

of

projected

preferred stockholders

on

the

Public

disclosure

Service into

The disclosure statement

value

for

of Public Service,

the

common

and

assuming (in

the

alternative) that the second-phase merger were or were not to

be approved.

Not

surprisingly, the "with" merger assumption

generated slightly
without the

higher values.

The appellants

merger Public Service might

say that

have collapsed, the

stockholders would have been far worse off, and therefore the
___
stockholders were not adequately
of financial harm.

warned of a material threat

(The merger, of course, did occur).

-8-8-

Appellants also say that the

the "with"

and

vast benefit that

"without" merger

small differential between

projections concealed

the merger synergies would

the

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.
there was a

threat that Public Service would collapse absent

the merger, and that great

it, appellants
the

To show that

synergies would be achieved

from

point to several statements to this effect by

regulatory

agencies

that

ultimately

considered

the

merger.
Few public utility lawyers would be greatly disturbed by
the

description

of

state

disclosure statement;

agency

although there

disagreement about

nuance, the

respect

far-fetched.

is

very

wrong, let alone

given

is plenty of

As

for

the

in

the

room for

suggestion of fraud

projections, the complaint does not

they were

powers

in this
financial

even begin to show

that

fraudulent; at most,

it asserts

some inconsistency

with later agency appraisals.

Still, we

are

here with

not concerned

a motion

assume arguendo (albeit with a

________
we are

dealing with

to dismiss

and will

good deal of skepticism) that

a serious, although

entirely unproven,

fraud complaint.
If we were
judge

called

faced with
"secret

a case of

fraud,"

-9-9-

what the

appellants

might

bankruptcy
have

an

arguable basis
1125(d)

for their

collateral attack.

could be read very

broadly to make

disappear since that section provides

disclosure

statement

is

"not

applicable nonbankruptcy
doubt that
every

Congress meant in

damage

remedy

deceive everyone,

On

any fraud claim

that the adequacy of a

governed

law."

True, section

by

any

otherwise

the other hand,

all circumstances to

against

a defrauder

who

including the bankruptcy court.

one may
wipe out

managed

to

The very

existence of the safe harbor provision suggests otherwise.

Similarly, the safe harbor provision presents puzzles of
its

own.

On

"solicit[ations]"

its

face,
for

it

immunizes

approval

only

or

good

faith

rejection

and

"participat[ion]" in securities transactions; it says nothing

explicit about false disclosure statements; even if read more
broadly,
faith
to

as is

conduct.

likely

Nor does it say

be determined; the

findings

justified, it

in approving

does not

where and how good faith is

bankruptcy court did

the plan,

protect bad

but (as we

make good faith

explain below)

their significance is itself open to dispute.

In
this

our view--and we have little precedent to guide us--

case can be disposed

of based on

a single, relatively

narrow circumstance:

the attacks now made

statement were in part

itself; and, to

on the disclosure

made in the reorganization proceeding

the extent

that they were

not made

there,

-10-10-

they

could

there.2

It

and

(if

meritorious)

should

is this

circumstance

that led

judge to distinguish the

is

to

say, fraud

of

have

been

made

the bankruptcy

possibility of "secret fraud," that

such a

character

that it

could not

reasonably be uncovered until after the confirmation.

There is no secret fraud here.
utility commission
during
fact

powers not only could

the approval of
challenged

by

have been disputed

the disclosure statement

appellants.

projections, they were open

appellants

The description of state

point to nothing

As

the

financial

to attack at the same

time, and

in the way

for

but was in

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

need for,

or

statements from

benefits

of,

regulators about

the merger

does

not

the

remotely

justify the delay.

The bankruptcy
that the
raise"

judge found, in

appellants "did

raise or

issuing the injunction,

had

the opportunity

to

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

opposing confirmation.3
to undermine

their present

The appellants do

the finding, but

contentions in
not even attempt

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

not such an attack

1125(d)

or section

background of
11,

had approved.

is literally forbidden by
1125(e)

is debatable;

these provisions, and the

we think it evident

Whether or

either section
but against

the

policies of chapter

that allowing such

an attack would

disrupt Congress' detailed scheme

for approval of disclosure

statements

and

and

reorganizations,

would

frustrate

the

proper administration of the Bankruptcy Code.

If

there

statement, the
incentive
proposed
points
process.

are

opponents in

to raise
plan

to the

substantial
the

them while

can still

errors

in

disclosure

reorganization have
the disclosure

every

statement or

be

modified;

the statute

importance of

a single,

definitive approval

E.g., 11 U.S.C.
____

1125-26.

itself

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
1125(d),

of execution of the plan.

(e);

H. Rep.

acting

to

No. 595,

95th

See 11 U.S.C.
___

Cong., 2d

Sess. 236

(1978).
In

protect

its

prior

proceedings,

bankruptcy court acts in an equitable capacity.

that

threaten to

merely

the

undermine

concern

of

willingness of future
in

chapter

11

in

determining

considerations
results

that

and
are

the

not

litigants;

the

individual

proceedings
approval a

depends

much finality

policy

concerns

not

literally

to compromise

on

giving

due measure

how

can

Later suits

judgment are

claimants and creditors

reorganization court's
And

a bankruptcy

the

is

of finality.

due,

equitable

properly

compelled

the

by

justify
statutory

language.
Absent substantial
reason why Congress would

new evidence
___

of fraud, there

have wished, or the

is no

courts should

permit,

participants

reorganization

to

who

actively

relitigate

in

participated
later

in

civil

the

actions

previously raised issues about the adequacy of the disclosure

statement,

or

to

feasibly could

reserve

for

have been made

courts have ample

such
in the

authority to infer

actions

claims

that

reorganization.

The

restrictions necessary

-13-13-

to make Congress' plan work.

F.2d at 584.
narrow

The

and--as

Cf. Yell Forestry Products, 853

___ ______________________

restriction inferred in this case

the

facts

of

this

is both

case illustrate--amply

justified.
Res judicata principles were
____________
by

the

bankruptcy

briefing in this

and

and

of

discussion
extensive

helpful to explain why

pursue this line of reasoning.

as appellees

did in confirming

district courts

court, so it may be

we have chosen not to

quite true,

the subject of

assert, that the

the plan make

It is

bankruptcy court

explicit findings that

the

plan

was proposed, and its acceptance was solicited, in good

faith.
with

See 148 B.R.

___
the good

protection

at 707.

The

faith requirement

for the

private

latter finding dovetails

that triggers

appellees, and

safe harbor

might at

first

glance seem to resolve the case against them.4

But

the res judicata argument

____________

of problems.

Putting

that the good faith

leads into a briar patch

aside the appellants'

doubtful claim

finding in question was not

"necessary"

to the result, the

appellants argue that collateral estoppel

should

because

not

apply

obtaining review of the

mootness

prevented

them

confirmation in this court.

from
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

appellants'

failure to

that

seek

mootness

a stay

while appealing the confirmation.

was caused

of the

by

reorganization

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.
true

If we were dealing

with a

case of secret fraud, the same concealment that was the

gravamen

of

the

collateral

likely

have

constituted a fraud on the reorganization court itself.

This

would not vitiate

within 180

attack

would

the confirmation order,

days, 11 U.S.C.

unless challenged

1144, but it

would raise very

serious concerns

about giving collateral estoppel

effect to

any

good

the

finding

of

fraudulent concealment.
28(5)(c),

70

faith

that

rested

upon

same

See Restatement (Second), Judgments

___

(limitations

on

later

use

of

judgment

procured by fraud).
We are
is

not saying that the

entirely circular;

but

if
__

collateral estoppel defense

appellees

had

fraudulently

concealed critical information from the reorganization court,

it

is not clear that

finding

by the

same

merely pointing to
court

(made

ignorance) would resolve the matter.

we
have

follow to

affirmance--that

in

a prior good faith

the

same

state

of

By contrast, the route

appellants could

and should

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
language of
policies

also does

the safe

harbor

therefore

applies

comparable claims against

officials, even

the

provision but

the literal

on the

broader

of chapter 11 and on considerations of equity.

determination

covered

not depend on

equal

force

to

the State of New Hampshire and its

though the

state itself is

by section 1125(e).

Eleventh Amendment

with

The

We have no occasion to consider

defense

adopted as an alternative

technically not

that the

bankruptcy

court

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.

be unwise for appellants

It would

to take our present decision

as an

invitation

to

invent

reorganization plan
Litigation

is

new

collateral

that purport
device

for

prolonging them to the point

to

skirt the

settling
of abuse.

11.
Affirmed.
________

-16-16-

attacks

on

the

injunction.

disputes,
Cf. Fed. R.
___

not

for

Civ. P.