More than 180 days after confirmation, the court cannot set aside an order of confirmation, even on the most laudable grounds resulting from a debtor’s egregious conduct, for reasons explained by Bankruptcy Judge Erik P. Kimball of Palm Beach, Fla.

The corporate debtor filed a Subchapter V petition, but never once disclosed in any filing that a bank held a claim secured by all of the debtor’s personal property and other collateral.

The debtor filed in chapter 11 because a creditor held a $2.2 million judgment and was pursuing collection aggressively, Judge Kimball said in his March 12 opinion. In the chapter 11 case, the judgment creditor filed a motion to modify the automatic stay.

The lift-stay motion resulted in a settlement giving the judgment creditor an allowed claim of $1.7 million secured by all of the debtor’s property. A few months later, the settlement was engrafted into a chapter 11 plan confirmed by the bankruptcy court.

Less than five months after confirmation, the bank for the first time learned about the chapter 11 case, the settlement and plan confirmation. The bank did not file a motion to set aside confirmation under Section 1144. The section reads, in part, “On request of a party in interest at any time before 180 days after the date of the entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud.”

Instead, the bank took discovery for several months. Long after the 180-day period proscribed in Section 1144, the bank filed a motion under Federal Rule 60(b), made applicable by Bankruptcy Rule 9024, to vacate the confirmation order, vacate the settlement order and prohibit the debtor from using cash collateral. The bank confirmed that it was not seeking relief under Section 1144.

Confirmation Untouchable

Perforce, Judge Kimball denied the motion. He said that “Section 1144 is the sole basis to vacate or revoke an order confirming a chapter 11 plan.” He added, “Rule 60 does not provide an end run around section 1144.”

Were there any doubt, Judge Kimball quoted Bankruptcy Rule 9024, which says, “Rule 60 F. R. Civ. P. applies in cases under the Code except that . . . (3) a complaint to revoke an order confirming a plan may be filed only within the time allowed by § 1144 . . . .”

Judge Kimball declined to follow a bankruptcy court decision from 1988 that evidently set aside confirmation using Rule 60(b). He said that the “decision is an unfortunate example of sympathy for the plight of the parties overshadowing the will of Congress. The goal was admirable but the outcome nonetheless unauthorized.”

The Settlement Untouchable

Contending that the settlement was not subject to Section 1144, the bank wanted Judge Kimball to vacate the settlement with the judgment creditor. Judge Kimball declined, saying that “the settlement is an integral part of the Plan . . . . The Court cannot vacate the order approving the . . .  settlement for the same reasons it cannot vacate the confirmation order.”

Next, the bank wanted the judge to bar the debtor’s use of its cash collateral. Again, the theory didn’t hold water.

On confirmation, estate property revested in the debtor, meaning there was no longer a bankruptcy estate. “Thus,” Judge Kimball said, “there is no cash collateral subject to Section 363.”

The Bank Isn’t Without Relief

Although the bank’s motion failed, Judge Kimball said that his order “is without prejudice to [the bank’s] rights to pursue similar relief in other courts of competent jurisdiction as a result of alleged defaults under [the bank’s] loan documents.” He added that the “complete lack of due process” means that the bank “is not bound by the order” approving the settlement and the plan and the confirmation order.

Judge Kimball said that the bank “retains all of its rights” against the debtor and everyone else, “whether or not such parties participated in these jointly administered cases.” He added, “No order of this Court . . . modified any of [the bank’s] rights in its collateral.”

Judge Kimball said he was “not unsympathetic” to the bank’s desire to resolve the disputes in the bankruptcy court, but “the Court is unable to ignore the limitations imposed by Congress.”