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[W] Prostok v. Browning

March 28, 2003

JEFF P. PROSTOK, ET AL., APPELLANTS
v.
PETER C. BROWNING, ET AL., APPELLEES



On Appeal from the 160th Judicial District Court, Dallas County, Texas Trial Court Cause No. 95-10670-H

The opinion of the court was delivered by: Justice Moseley

OPINION WITHDRAWN and new opinion filed August 11, 2003.

JEFF P. PROSTOK, ET AL., APPELLANTS
v.
PETER C. BROWNING, ET AL., APPELLEES

On Appeal from the 160th Judicial District Court, Dallas County, Texas Trial Court Cause No. 95-10670-H

The opinion of the court was delivered by: Justice Moseley

OPINION

Before Justices Moseley, and O'Neill*fn1

This case stems from the bankruptcy proceedings of National Gypsum Company ("National Gypsum") and its parent company, Aancor Holdings, Inc. ("Aancor"). Appellants asserted various state law claims based on actions allegedly taken by appellees in connection with National Gypsum's valuation during the course of the bankruptcy proceedings. Pursuant to Tex. R. Civ. P. 166a(c), the trial court granted summary judgment against appellants on all their claims, which they challenge on appeal. In a cross-point, appellees contend the trial court erred in failing to grant summary judgment on the grounds of limitations, and in granting summary judgment for appellants on an attorneys' fee shifting provision of the bankruptcy plan. For the reasons set forth below, we reverse the trial court's judgment, render judgment in part, and remand this cause for further proceedings.

I. Standard of Review

The standards for reviewing a summary judgment granted pursuant to rule 166a(c) are well established. The party moving for summary judgment has the burden of showing no genuine issue of material fact exists and that it is entitled to judgment as a matter of law. See Tex. R. Civ. P. 166a(c); Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d 546, 548 (Tex. 1985); Swilley v. Hughes, 488 S.W.2d 64, 67 (Tex. 1972). A defendant moving for summary judgment must either (1) conclusively disprove at least one element of the plaintiff's theory of recovery, or (2) plead and conclusively establish each essential element of an affirmative defense. See City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678-79 (Tex. 1979); Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 657 (Tex. App.BDallas 1992, no writ).

As discussed in more detail below, the various appellees advanced several grounds in support of numerous motions for summary judgment against appellants. The trial court specifically rejected the motions based on the statute of limitations, but granted the motions for summary judgment in all other respects. However, the trial court's order does not specify which of the remaining grounds asserted in appellees' motions formed the basis, or bases, of its summary judgment. Thus, we affirm the summary judgment if any of the theories advanced, and not specifically rejected by the trial court, are meritorious. See Dow Chem. Co. v. Francis, 46 S.W.3d 237, 242 (Tex. 2001) (per curiam); Carr v. Brasher, 776 S.W.2d 567, 569 (Tex. 1989). Accordingly, appellants must show that none of appellees's remaining grounds were a proper basis for summary judgment. See Holloway v. Starnes, 840 S.W.2d 14, 18 (Tex. App.BDallas 1992, writ denied).

Additionally, we consider all summary judgment grounds on which the trial court actually ruled, whether granted or denied, that are preserved for appeal and are dispositive of the appeal. See Baker Hughes, Inc. v. Keco R. & D., Inc., 12 S.W.3d 1, 5 (Tex. 1999); Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625-26 (Tex. 1996). Further, we may also consider summary judgment grounds expressly presented to but not ruled on by the trial court, if the summary judgment movant presents the alternative grounds on appeal. Baker Hughes, Inc., 12 S.W.3d at 5. Lastly, if an appellant does not properly challenge each independent ground for summary judgment asserted against a claim, we affirm the summary judgment as to that claim. Smith v. Tilton, 3 S.W.3d 77, 83 (Tex. App.BDallas 1999, no pet.).

In deciding whether a disputed issue of material fact exists, that would preclude summary judgment, evidence favorable to the non-movant will be taken as true. Nixon, 690 S.W.2d at 548-49. Further, every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in its favor. Id. It is from this perspective that we review the summary judgment record.

II. Background and Procedural History

A.

Introduction

This is a complex case, involving issues of state and federal law litigated in a variety of courts over several years. The record is over 31,700 pages in length. The parties' briefs before this court refer to approximately 450 cases and other authorities. The appellants in this case include a group of junior bondholders of the old National Gypsum Company, represented by Prostok, Field and Earnest,*fn2 and several groups that had asserted asbestos related claims against the old National Gypsum Company. The appellees include some of the former officers and directors of National Gypsum and its parent company ("Officers and Directors"); their financial advisor, Donaldson, Lufkin & Jenrette Securities Corp. ("DLJ"); some of National Gypsum's senior bondholders; and the senior bondholders' financial advisor, Houlihan Lokey Howard & Zukin Capital ("Houlihan Lokey"). The new National Gypsum Company ("New NGC"), formed pursuant to a plan of reorganization approved by a federal bankruptcy court, intervened in the district court and brings a separate cross-appeal.*fn3

The parties are described in more detail in the following sections. However, the essence of the case is a dispute between the junior bondholders and asbestos claimants on the one side (as appellants herein), and the senior bondholders, management of National Gypsum, and their respective financial advisors on the other (as appellees herein), with cross-appellant New NGC generally siding with the latter group regarding the merits of that dispute.

During this appeal some of the parties have settled some or all of the claims asserted by and/or against them. Those claims and parties will be identified herein as well. However, the issues before this court are framed in part by the nature of the litigation below and before other courts, and by the various parties' participation in portions of that litigation. Thus, for purposes of clarity we describe the entirety of the disputes between the parties.

B. National Gypsum Bankruptcy

In 1986, National Gypsum, a manufacturer of building materials, was the subject of a leveraged buyout, becoming a wholly owned subsidiary of Aancor. To finance this buyout, National Gypsum and Aancor issued approximately $1 billion in bonds.

On October 28, 1990, faced with mounting debt and a multitude of asbestos lawsuits, National Gypsum and Aancor each filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code. The cases were consolidated and jointly administered in the United States Bankruptcy Court for the Northern District of Texas in Dallas; for convenience the two proceedings are referred to herein as one proceeding - the National Gypsum bankruptcy. At the time, the National Gypsum bankruptcy was one of the largest bankruptcy cases in American history. The bankruptcy case was highly contentious; National Gypsum's valuation was hotly contested by the various interested parties, and the parties advocated multiple competing plans of reorganization.

National Gypsum had three classes of publicly traded debt: (1) senior notes worth about $295 million; (2) senior debentures worth about $188 million; and (3) junior bonds worth about $537 million.*fn4 The senior notes and debentures were held by several entities referred to as the Senior Bondholders, who are some of the appellees in this case.*fn5

The junior bonds were held by persons and entities referred to as the Junior Bondholders, including appellant Prostok and the class members he represents. Others interested in the National Gypsum bankruptcy included parties holding actual or potential claims against National Gypsum arising from the manufacture, distribution, or use of asbestos products; these parties are generally referred to herein as the Asbestos Claimants.*fn6

1. Allegations of Undervaluation

The Junior Bondholders' interests were represented in the bankruptcy by the official committee of bond and trade unsecured creditors ("BT Committee"). In January 1992, the BT Committee attempted to replace National Gypsum's management, which was acting as a debtor-in-possession under the Bankruptcy Code, with a bankruptcy trustee. Among other allegations, the BT Committee claimed National Gypsum's management and its financial advisor, DLJ, were manipulating the economic projections of the company in order to diminish its value. However in March 1992, after a two-day evidentiary hearing, the bankruptcy court rejected the BT Committee's motion, stating that insufficient evidence was presented to justify removing National Gypsum as debtor-in-possession and replacing it with a trustee.

2. Reorganization Plans

National Gypsum submitted a reorganization plan to the bankruptcy court based on a valuation of its business of between $300 and $375 million. The plan proposed to divide National Gypsum's assets between two entities. National Gypsum would change its name and keep certain insurance policies and the Austin Company, a National Gypsum subsidiary. The plan further created and funded the NGC Asbestos Disease and Property Damage Trust,*fn7 which would own the stock of old National Gypsum and use its funds to settle asbestos claims against National Gypsum.*fn8

The second entity receiving National Gypsum's assets under its proposed plan was a new National Gypsum Company ("New NGC"), a separate corporate entity to be organized under Delaware law. New NGC would own National Gypsum's operating assets and ongoing business. The management team of National Gypsum would remain as the management team of New NGC. New NGC would largely be owned by the senior noteholders and bondholders of National Gypsum, with the junior bondholders receiving warrants to acquire an additional 10% of the shares in the new company. The senior noteholders would receive new senior notes and approximately 67% of the common stock in New NGC. The holders of senior debentures would receive 20% of the common stock of New NGC. The value of the warrants received by the junior bondholders was considered Aspeculative in nature." The Senior Bondholders and the committee of asbestos claimants supported National Gypsum's reorganization plan, and did not propose a plan of their own.

Unhappy with management's valuation of National Gypsum and their resulting prospective share of New NGC, the BT Committee proposed a competing plan of reorganization based on a valuation of National Gypsum's business of $630 million (in contrast to the $300 to $375 million valuation asserted by National Gypsum). Regarding selling, general and administrative expenses, the BT Committee plan further opined that a "cost conscious management would succeed in identifying cost reductions and efficiencies so as to effect an annualized savings per year of $5.0 million." The BT Committee plan used additional debt to increase the recoveries of creditors and allegedly avoid the danger of undervaluation in the National Gypsum plan. Under the BT Committee plan, the senior noteholders would have received two new classes of corporate notes rather than stock in the new company. The holders of senior debentures would have received 100% of the common stock of New NGC. The junior bondholders under this plan would have received warrants, as under the National Gypsum plan, but the warrants would have entitled them to purchase up to 45% of the new company at a lower exercise price.*fn9

During the hearings on the confirmation of a reorganization plan, the BT Committee and other interested parties contested National Gypsum's valuation. The BT Committee alleged that management and its advisors had intentionally manipulated the financial data and operating projections, resulting in a lower valuation for the business. The bankruptcy court conducted a five-day evidentiary hearing on the issue. Afterwards, the bankruptcy court rejected the BT Committee's proposed plan and its $630 million valuation of National Gypsum, citing problems with the valuation method and certain creditors' lack of acceptance of the proposed plan. The bankruptcy court informed the parties that it gave greater weight to National Gypsum's valuation and would approve its plan. Thereafter, the court entered an order (the "confirmation order") confirming the reorganization plan proposed by National Gypsum based on a value of $350 million on the effective date. Although the bankruptcy court's confirmation order was entered on March 9, 1993, the bankruptcy proceedings did not end until July 9, 1993, at which time the bankruptcy court declared that the reorganization plan had an effective date of July 1, 1993.

One provision of the plan and confirmation order at issue in this case is referred to as "the fee-shifting provision." It provides that, in any lawsuit challenging the good faith of certain parties, including New NGC, the Officers and Directors of National Gypsum*fn10 and their financial advisors, for certain actions taken during the bankruptcy, the losing party will be liable for the winning party's reasonable attorneys' fees and costs. As a condition to continuing such litigation, the fee-shifting provision also requires all parties to provide adequate assurance that they will be able to pay those fees if they do not prevail in the litigation.

Pursuant to the confirmed reorganization plan, the Senior Bondholders received approximately 85% of the stock in New NGC in exchange for their National Gypsum indebtedness. Thus, the Senior Bondholders stood to receive a windfall if the value of New NGC was substantially higher than claimed in the National Gypsum plan. The Junior Bondholders' debt was exchanged for approximately two million warrants for New NGC stock, about 10% of the company, exercisable at $14.50 per share. Thus, according to the Junior Bondholders, the $537 million debt owed to them was to be wiped out for less than $30 million.

A party may appeal from an order confirming a reorganization plan within ten days of its entry. See Fed. R. Bankr. P. 8002(a). Either no party appealed the confirmation order, or any such appeal was subsequently dismissed. Additionally, an interested party may contest a bankruptcy confirmation order on the basis that it was procured by fraud within 180 days after its entry. See 11 U.S.C. ' 1144 (1993). However, no interested party requested the bankruptcy court to set aside the confirmation order based on fraud. The 180-day period under section 1144 expired on September 9, 1993. Approximately one month later, on October 5, 1993, New NGC announced a new cost-savings plan for the business that allegedly resulted in an annual reduction of $30 to $40 million in selling, general, and administrative expenses.

C. Appellants' Claims

Briefly stated, appellants allege that during the course of the bankruptcy proceeding, the Senior Bondholders, the Officers and Directors of National Gypsum (who became the officers and directors of New NGC),and their respective financial advisors,*fn11 intentionally undervalued National Gypsum by concealing a plan to dramatically reduce the company's operating expenses - a plan allegedly devised in secret by National Gypsum's consultant while National Gypsum was acting as debtor-in-possession in the bankruptcy. Appellants allege that the Officers and Directors received secret, lucrative compensation packages for going along with the strategy to conceal the cost-savings plan.*fn12 Then, after the company emerged from bankruptcy as New NGC (and after the 180 day deadline for setting aside a confirmation order for fraud had passed), the plan to reduce the operating expenses was publicly announced and implemented.

More specifically, appellants allege appellees represented to the bankruptcy court and to them that the reorganized National Gypsum, with expenses "cut to the bone," was worth only between $300 and $375 million. Appellants assert, however, that during this same time period appellees were fully aware of a cost-savings plan authored by Harry Leonhardt, a consultant hired by National Gypsum, which would involve a small investment in computerization and result in a drastic reduction in workforce. When implemented, this plan resulted in annual expense savings of $30 to $40 million, five to eight times the expense savings estimated in the BT Committee proposed plan. Appellants claim appellees concealed not only the cost-savings plan, but the fact that National Gypsum had hired consultants to come up with the plan, until the bankruptcy was final and the confirmation order could not be revoked.

Appellants contend that after the cost-savings plan was announced and implemented, New NGC's stock price rose from about $12.50 per share to $45 per share, and ultimately reached $54 per share before New NGC was taken private in April 1995. Appellants allege that the announcement and execution of the previously undisclosed cost-savings plan resulted in an increase in the market value of New NGC's outstanding stock from $350 million to almost $1 billion.

Because the Senior Bondholders' debt against National Gypsum had been exchanged for New NGC stock pursuant to the reorganization plan, the increased valuation of New NGC resulting from the cost-savings plan increased the values of their investments by substantial amounts, far in excess of their original debt. For example, it is alleged that on an investment of approximately $40 million, the TCW creditors made a gross return of $140.9 million, and on an investment of approximately $38.1 million, Water Street made a gross return of $101 million. In contrast, the Junior Bondholders' debt securities had been exchanged for a limited number of warrants in the new company.*fn13 Thus, the Junior Bondholders allege they were unable to (and, were specifically and deliberately excluded from being able to) proportionally benefit from the increased value of New NGC's stock resulting from management's implementation of the cost-savings plan. Likewise, the Asbestos Claimants allege the intentional undervaluation of National Gypsum resulted in the Trust being funded with substantially less money than it otherwise would have, to the detriment of those having asbestos-related claims against National Gypsum.

According to appellants, the purpose of appellees' activities was to keep the stated valuation of National Gypsum as low as possible until after the company emerged from bankruptcy, allowing the Senior Bondholders to avoid sharing with competing creditors (such as the Junior Bondholders and the Asbestos Claimants) as much of the National Gypsum Apie" as they would have otherwise.*fn14 By cooperating in the plan, the Officers and Directors allegedly benefitted by maintaining their positions in New NGC and by receiving the lucrative incentive deals.

D. Litigation History

The parties have litigated disputes relating to the National Gypsum bankruptcy in a number of different proceedings, some of which took place simultaneously. We summarize the significant litigation as follows.

1. Current Case

The current case was filed in state court on October 5, 1995, by appellant Prostok*fn15 on behalf of himself and all others similarly situated (i.e. the Junior Bondholders), against the Officers and Directors, DLJ, and later the TCW Parties,*fn16 based upon their alleged actions in intentionally concealing the cost-savings plan and leading the bankruptcy court to undervalue National Gypsum. The defendants removed the case to federal district court on November 15, 1995. The federal district court referred the case to the bankruptcy court, where it was assigned Adversary No. 395-3612 in the National Gypsum bankruptcy case. On March 26, 1996, the bankruptcy court remanded the case to state court for lack of federal jurisdiction. This remand order was affirmed by the federal district court on February 21, 1997.

Following the remand to state court, on June 10, 1998, Prostok filed his Third Amended Original Petition, adding the TCW Parties as defendants. Prostok did not (and does not) allege any claims against the other Senior Bondholders or their financial advisor, Houlihan Lokey. Prostok alleged claims for:

(1) breach of fiduciary duty against the Officers and Directors, DLJ, and the TCW Parties;

(2) participating, aiding, assisting, and/or inducing breach of fiduciary duties against DLJ and the TCW Parties;

(3) fraud and constructive fraud against the Officers and Directors, DLJ, and the TCW Parties;

(4) gross negligence against the Officers and Directors and DLJ; and

(5) civil conspiracy against the Officers and Directors, DLJ, and the TCW Parties.

On March 30, 1998, New NGC intervened in this action. On July 24, 1998, New NGC joined the trustees of the Trust as "involuntary plaintiffs." New NGC alleged that under the terms of the confirmed reorganization plan, the claims asserted by Prostok in this case (and similar claims the Asbestos Claimants had asserted in other courts)*fn17 were in fact owned by New NGC. Thus, New NGC alleged appellants lacked standing to bring those claims, and sought a declaratory judgment to that effect. New NGC also alleged the provisions of the reorganization plan precluded appellants' claims. In a later pleading, New NGC alternatively asserted that the plan's fee-shifting provision required appellants, as a condition to continuing the suit, to prove their ability to pay the reasonable attorneys' fees and costs of New NGC, the Officers and Directors, and DLJ in successfully defending the suit. The Officers and Directors and DLJ also filed counterclaims against appellants under the fee-shifting provision.

On August 28, 1998, the Trust filed its claims in this action*fn18 against the Officers and Directors, DLJ, and the TCW Parties. The Trust also joined as additional defendants the other Senior Bondholders (Water Street and Fidelity Management) and Houlihan Lokey, none of which had been parties to Prostok's suit.

The Trust asserted claims of fraud, breach of fiduciary duties, misrepresentation, gross negligence, civil conspiracy, and aiding and abetting the breach of fiduciary duties by others (i.e. the Officers and Directors) during and after the bankruptcy proceedings. Initially, the Trust alleged both a direct fiduciary duty with the Officers and Directors, DLJ, and the Senior Bondholders and Houlihan Lokey, and a conspiracy between these defendants to aid and encourage the fraud and breach of fiduciary duty by the Officers and Directors. In a later supplemental pleading, the Trust added an allegation of aiding and abetting a breach of fiduciary duty against the Senior Bondholders and Houlihan Lokey. On December 2, 1998, the Legal Representative and the School District parties intervened and adopted the Trust's pleadings.

Appellees filed a series of motions for summary judgment. The Officers and Directors, DLJ, and New NGC filed a motion for summary judgment asserting the Asbestos Claimants lacked standing to bring the claims asserted in this action.*fn19 All appellees then joined in a motion for summary judgment asserting that appellants' respective claims against them did not exist under Texas law. (This was the only motion for summary judgment asserted by the Officers and Directors against Prostok.) Specifically, this motion argued that: Texas law does not recognize claims for perjury or spoliation; plaintiffs' claims were barred by Bankruptcy Code section 1144; plaintiffs' claims failed because they relied on an inapplicable fraud on the market theory; the bankruptcy court judgment could not be attacked in state court; and that plaintiffs' conspiracy claims failed because there was no underlying tort.

The TCW Parties (except for TCW Group, Inc.)*fn20 also filed a separate supplemental motion for summary judgment against Prostok. (The TCW Parties were the only Senior Bondholders sued by Prostok.) This motion sought summary judgment on the grounds of limitations, res judicata and collateral estoppel, and the absence of a fiduciary duty.

The Senior Bondholders and Houlihan Lokey also filed a supplemental motion for summary judgment against the Asbestos Claimants. This motion asserted that: the Asbestos Claimants' claims were barred by the applicable statute of limitations, res judicata, and collateral estoppel; they owed no fiduciary duty to the Asbestos Claimants; and that the Asbestos Claimants lacked standing to assert their claims.

On March 1, 1999, the trial court denied the motions for summary judgment based on no-evidence and statute of limitations grounds. However, it granted summary judgment against Prostok's and the Asbestos Claimants' claims in all other respects, without stating the specific grounds.*fn21

Prostok and the Asbestos Claimants then moved for summary judgment on New NGC's cross-claim and the counterclaims of the Officers and Directors and DLJ.*fn22 (These claims sought to enforce the fee-shifting provision of the bankruptcy plan.)*fn23

On April 21, 1999, the trial court signed a final judgment addressing all remaining claims in the suit. The judgment granted appellants' motions for summary judgment on the claims based on the fee-shifting provision and, on the court's own motion, dismissed as moot New NGC's intervention asserting its ownership of the claims. The judgment addressed all remaining claims, denied all other relief, and stated it was a final judgment. Thus, the March 1, 1999, interlocutory order on the appellees' motions for summary judgment merged into this final judgment,*fn24 which is the judgment on appeal before us.

2. Federal Declaratory Judgment Actions

On October 17, 1995, Prostok filed a declaratory judgment action in the bankruptcy court against the Officers & Directors and DLJ, seeking a determination that the fee-shifting provision in National Gypsum's plan of reorganization did not apply to Prostok's state court class action. This matter was docketed within the bankruptcy proceeding as Adversary No. 395-3477. New NGC intervened in the adversary proceeding as an additional defendant and moved to dismiss the complaint. The defendant/intervenors also asserted counterclaims seeking a declaratory judgment that Prostok's state court lawsuit was barred because of various preclusion defenses.

The fee-shifting provision was part of a paragraph in the reorganization plan providing that if certain parties, including the officers, directors, and financial advisors of New NGC, National Gypsum, and other entities, acted in good faith during the bankruptcy proceedings, they would not be liable for any actions or inactions in connection with operating the debtor, implementing the transactions contemplated by the plan, or administering the plan, except for willful misconduct or gross negligence. The fee-shifting provision states in relevant part,

In any action, suit or proceeding by any Claimant, Interestholder or other party in interest contesting any action by, or non-action of, Debtors, Reorganized NGC, New NGC, . . . or their respective . . . officers, directors, . . . [and] financial advisors, . . . as not being in good faith, the reasonable attorneys' fees and costs of the prevailing party shall be paid by the losing party and as a condition to going forward with such action, suit, or proceeding at the outset thereof, all parties thereto shall be required to provide appropriate proof and assurances of their capacity to make such payments of reasonable attorneys' fees and costs in the event they fail to prevail.

On cross-motions for summary judgment, the bankruptcy court held the fee-shifting and other provisions of the reorganization plan were final orders not subject to modification, but declined to exercise its discretion to decide the declaratory judgment questions, deferring instead to the state court. On appeal, the federal district court affirmed the finality of the fee-shifting and other provisions of the plan, but reversed the bankruptcy court's decision to not rule on the declaratory judgment action and counterclaims, and remanded the case to the bankruptcy court for further consideration.

After the remand, the Asbestos Claimants (which were not parties to Adversary No. 395-3477) filed a motion in the main National Gypsum bankruptcy case challenging whether the fee-shifting provision applied to a similar lawsuit that they were contemplating.*fn25 Thereafter, the bankruptcy court disposed of both Prostok's declaratory judgment action (Adversary No. 395-3477) and the Asbestos Claimants' motion in the main bankruptcy case in an order entitled "Memorandum Opinion and Orders," dated January 21, 1998 and filed January 26, 1998 (the "January 21, 1998 Order").

In general, the bankruptcy court held the fee-shifting provision was final and binding on Prostok and the Asbestos Claimants, but that it may have been entered in error and therefore should be strictly construed. The bankruptcy court concluded that the release provision in the first part of the paragraph was a limitation on the scope of the fee-shifting provision at the end of the paragraph. The bankruptcy court also concluded that the fee-shifting provision may violate public policy. Thus, the court held that the fee-shifting provision, although final, did not apply to "claims based on gross negligence or willful misconduct relating to the confirmation process," such as those brought by Prostok (in the state court lawsuit) or by the Asbestos Claimants (in Adversary No. 397-3454).

The bankruptcy court also considered the declaratory judgment counterclaims and denied the defendants' motions for summary judgment seeking to bar Prostok's claims on the grounds of res judicata and collateral estoppel. On May 8, 1998, the bankruptcy court entered a final judgment in the Prostok declaratory judgment adversary proceeding (Adversary No. 395-3477). It held, based on the January 21, 1998 Order, that the fee-shifting provision did not apply to Prostok's state court suit and granted him relief from any bankruptcy injunctions against suit. The court abstained from further consideration of the counterclaims raising res judicata and collateral estoppel defenses and administratively closed the case. Thus, the January 21, 1998 Order was subsumed into and confirmed by the May 8, 1998 final judgment.

The Officers and Directors, DLJ, and New NGC appealed the May 8, 1998 judgment's and the January 21, 1998 Order's determination the fee-shifting provision did not apply to Prostok and the Asbestos Claimants to the district court.*fn26 The federal district court reversed in part the bankruptcy court's May 8, 1998 judgment and January 21, 1998 Order. See Nat'l Gypsum Co. v. Prostok, No. 3:98CV0869P, 2000 WL 1499345 (N.D. Tex. Oct. 5, 2000), aff'd, __ F.3d __, No. 00-11097, 2002 WL 1397140 (5th Cir. June 14, 2002) (unpublished table decision). The district court held that the bankruptcy court construed the fee-shifting provision too narrowly, and reversed the January 21, 1998 Order to the extent it held that Prostok and the Asbestos Claimants did not have to comply with the fee-shifting provision. Id. at *22-*23. The district court found the fee-shifting provision was distinct from the release provision. If a claim was not released because it involved "willful misconduct, gross negligence or other bad faith actions (i.e. actions challenging good faith), then the challenging party must post a bond and be subject to fee shifting to pursue that claim." Id. at *20. In response to arguments by DLJ that express findings of good faith in the confirmation order precluded the type of bad faith claims raised by appellants, the district court concluded the fee-shifting provision allowed lawsuits challenging the good faith of the protected parties and thus consitituted an exception to the good faith findings in the other provisions of the confirmation order. Id. at *24.

Prostok and the Asbestos Claimants then appealed the district court's decision to the Fifth Circuit. The Fifth Circuit held that the fee-shifting provision was basically a contract, that it did not violate public policy, and that the bankruptcy court erred in construing the provision too narrowly. Nat'l Gypsum Co. v. Prostok (In re Nat'l Gypsum Co.), __ F.3d __, No. 00-11097, 2002 WL 1397140, slip op. at 13-14 (5th Cir. June 14, 2002) (unpublished table decision). The Fifth Circuit found that the fee-shifting provision applied to any suit by a claimant contesting any action or inaction by the protected parties as not being in good faith. Id. at 14-15. The court then concluded that Prostok's and the Asbestos Claimants' suits fell within the scope of the fee-shifting provision and affirmed the decision of the district court. Id. at 20.*fn27

3. The Trust Litigation

On October 6, 1997, in Adversary No. 397-3454 (described earlier), the Trust first brought its claims against the Officers and Directors, DLJ, the Senior Bondholders, and Houlihan Lokey. The Trust's complaint was almost identical to Prostok's petition in state court and alleged the Trust suffered damages as a result of the intentional undervaluation of National Gypsum. On motion of the Officers and Directors, the bankruptcy court abstained from considering the claims and administratively closed the adversary proceeding without making any determinations on its merits. The Trust later filed a similar suit against the same parties in the 128th District Court of Orange County, Texas. That suit was removed to federal court in the Eastern District of Texas and docketed as Civil Action No. 1:98CV1671 . That suit was dismissed after the Trust had asserted its claims in the suit now pending before us.

E. Partial Settlements

After the final judgment entered in this case was appealed, several of the parties settled their claims against each other. DLJ and a number of the Officers and Directors settled their disputes with appellants; accordingly, all claims asserted against and by DLJ and by and against the settling Officers and Directors*fn28 have been severed*fn29 from this appeal and remanded to the trial court to permit it to effectuate their respective settlements. Thus, we do not discuss those claims further. (For clarity, ...


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