On two important questions, the Third Circuit handed down a decision on modification of chapter 13 plans that should apply equally to modified chapter 11 plans:

1.     When the debtor moves to modify a confirmed plan, issues that were or could have been litigated in confirmation of prior versions of the plan may not be raised in objection to confirmation of an amended plan; and

2.     Joining the majority of circuits on an issue where the circuits are split, the Third Circuit held that the feasibility of a plan is reviewed for clear error.                     

The chapter 13 debtor owned two parcels of commercial real property where the mortgage lender had an absolute assignment of rents. The bankruptcy court confirmed a plan with three provisions to which the lender did not object:

a.     Based on a valuation of the commercial property, the plan bifurcated the lender’s claim into a secured claim of $95,000 and an unsecured claim of $150,000. The lender did not object on confirmation of the original plan.

b.     Rental income from the commercial property was about $1,500 a month. The previously confirmed plan provided that the $1,500 would be applied to secured debt as bifurcated. The lender did not object on confirmation of the original plan.

c.     After several months, the debtor’s payments to the chapter 13 trustee were to increase. The lender did not object on confirmation of the original plan by contending that the payments should have been uniform throughout the term of the plan.

When the pandemic interrupted cash flow from the commercial property, the debtor moved to modify the confirmed plan. The amendment only changed the amounts of the payments to the trustee, which, again, were to increase after the first several months.

The lender objected to confirmation of the amended plan and challenged the three provisions to which it had previously consented. In addition, the lender contended that the amended plan was not feasible.

Bankruptcy Judge John K. Sherwood of Newark, N.J., found the amended plan to be feasible and decided that the lender was barred from objecting to the three provisions that had been confirmed in prior versions of the plan. The district court affirmed.

In an opinion on May 22, Third Circuit Judge Kent A. Jordan affirmed, dismissing the lender’s argument that “all of the components of the plan are open to challenge” when “a plan is modified.”

Saving feasibility for later, Judge Jordan first dealt with the question of “whether res judicata applies to a confirmed plan when the debtor properly seeks to modify plan terms under § 1329.”

Quoting the Supreme Court, Judge Jordan said that “res judicata ‘preclude[s] parties from contesting matters that they have had a full and fair opportunity to litigate[.]’ Montana v. United States, 440 U.S. 147, 153 (1979).” Section 1327(a), he said, “effectively codifies the res judicata doctrine as it relates to confirmed bankruptcy plans.” He also quoted the Collier treatise for saying that Section 1327(a) serves the same purpose as res judicata.

Next, Judge Jordan quoted the Supreme Court for saying that “‘[c]onfirmation has preclusive effect, foreclosing relitigation of “any issue actually litigated by the parties and any issue necessarily determined by the confirmation order.’” Bullard v. Blue Hills Bank, 575 U.S. 496, 502 (2015) (quoting 8 Collier on Bankruptcy ¶ 1327.02[1][c]).”

Although plan confirmation kicks in res judicata when an amendment is proposed, Judge Jordan cited Section 1329(a) for allowing a debtor to amend a confirmed plan in four respects, including the debtor’s right to raise or lower payments. Synthesizing the law, Judge Jordan said that res judicata bars objections to issues that are unrelated to proposed amendments, which in this case only altered plan payments.

Addressing what is or is not res judicata, Judge Jordan held “that res judicata prevents creditors from challenging the terms of a previously confirmed bankruptcy plan, except for those terms that the debtor seeks to modify under § 1329 of the Bankruptcy Code.” Consequently, he ruled that the lender was “barred from raising any challenges to” the amended plan “that could have been raised when the Bankruptcy Court confirmed” the debtor’s prior plan.

Applying the law to the facts, Judge Jordan ruled that the lender could not object to the $95,000 valuation of the collateral to which the lender had consented in a prior iteration of the plan. Likewise, the lender could not contest having the $1,500 in monthly rental income applied to the secured claim, because the lender had consented in a prior version. Even though the lender might have had a point in objecting to monthly payments that were not uniform throughout the duration of the plan, the lender’s previous consent obviated an objection to the amended plan with the same provision.

In short, res judicata precluded the lender from objecting to the plan other than the amended plan’s feasibility.

Turning to feasibility of the final amended plan, Judge Jordan asked whether review is for abuse of discretion or clear error. Noting a split of circuits, he cited three circuits for holding that review is for clear error, while one circuit looks for abuse of discretion.

Judge Jordan came down on the side of review for clear error, because “feasibility determination is a prototypical example of a forward-looking factual finding.” He upheld the bankruptcy court’s finding of feasibility, since the findings of fact had a rational relationship to the evidence and were not completely devoid of a credible evidentiary basis.

Judge Jordan affirmed the district court’s affirmance of the bankruptcy court’s confirmation of the amended plan.