An unresolved objection to the dischargeability of a large debt will neither render an individual’s chapter 11 plan infeasible nor prevent the bankruptcy court from confirming the plan.
Even if the debt is eventually declared nondischargeable, the creditor cannot glom the debtor’s future income during the life of the plan, assuming it was properly drafted, the Sixth Circuit Bankruptcy Appellate Panel ruled in an opinion on April 16.
The debtor was a professional hockey player who ran up more than $20 million in debt betting on his future income. In chapter 11, he proposed a plan devoting a chunk of his future income to payments under the plan. Creditors with about half of the debt approved the plan, but creditors with the other half opposed the plan, contending it was not feasible under Section 1129(a)(11) because the court had not resolved their dischargeability complaint.
In substance, the objecting creditors argued that they could seize the debtor’s future income despite confirmation of the plan if the debt was later declared nondischargeable.
The bankruptcy court overruled the objection to confirmation and confirmed the plan, which was then consummated. In an opinion written by Bankruptcy Judge Marian F. Harrison of Nashville, Tenn., the BAP upheld the confirmation order and also ruled that the appeal was equitably moot.
The objecting creditors contended that they would not be bound by the plan if their dischargeability complaint was upheld.
Judge Harrison disagreed on several grounds. She cited the Eighth Circuit and the First Circuit Bankruptcy Appellate Panel for holding that a declaration of nondischargeability only permits the creditor to collect pro rata payments during the life of the plan, although the creditor would retain the right to collect the debt in full after the plan is completed. The First Circuit BAP, she said, even precluded a debtor from paying a larger percentage to the holder of nondischargeable student loans.
The structure of the plan was crucial. It provided that all of the debtor’s future income would remain estate property, even amounts earmarked for the debtor’s living expenses. By continuing to protect estate property, the automatic stay would bar the creditors from attaching future income until the case was dismissed or converted, or a discharge was issued, Judge Harrison said.
Consequently, the plan was feasible because, as Judge Harrison said, “the automatic stay prevents [the objecting creditors] from any attempt to undermine the confirmed plan by collecting from property of the estate.”
Judge Harrison reached the merits of the appeal after having first ruled that the appeal was equitably moot because the creditors had not sought a stay pending appeal, the plan had been consummated, “reliance interests” were created, and a reversal would entail a wholesale rewriting of the plan.