

                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 &amp; Howard, Howard J. Berman and Greenberg,                                                                            
Traurig, Hoffman, Lipoff, Rosen &amp; 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.                         

                             -16-                                         -16-
