Ninth Circuit BAP Allows a Complaint to Revoke Discharge After 180 Days

The Ninth Circuit Bankruptcy Appellate Panel was faced with a dilemma on an appeal dealing with the time limit for revoking confirmation of a chapter 11 plan: Do we follow Ninth Circuit precedent, or do we follow a Pennsylvania bankruptcy court decision with similar facts?

Bravely, the BAP distinguished the Ninth Circuit opinion on the facts, followed the Pennsylvania court and allowed a creditor to proceed with a suit to revoke a confirmation order filed more than 180 days after confirmation, but less than 180 days after an order modifying the confirmation order.

The appeal revolved around Section 1144, which permits the court to revoke a confirmation order that “was procured by fraud,” provided that the motion for revocation was made “at any time before 180 days after the date of the entry of the order of confirmation.”

The Facts

The debtor was a real estate developer. Years before bankruptcy, one of his investors obtained a $4 million judgment in state court based on misrepresentations the debtor allegedly had made.

The debtor won confirmation of a chapter 11 plan that gave the investor three options: (1) take $22,000 in full satisfaction of the claim and concede the dischargeability of the debt; (2) take a percentage of the debtor’s earnings until the claim is paid in full; or (3) receive $80,000 in full satisfaction and convey certain property to the debtor. None of the alternatives allowed the investor to pursue nondischargeability.

The investor had initiated an adversary proceeding to challenge the dischargeability of the debt and filed a proof of claim for more than $7 million.

The investor objected to the plan, but the bankruptcy court confirmed the plan nonetheless. The investor did not elect any of the options, so he was given (1) as the default option in the plan. The confirmation order seemed to mean that the investor could not pursue nondischargeability.

The investor immediately filed a motion for reconsideration of the confirmation order. Perhaps recognizing flaws in the plan and the confirmation order, the bankruptcy court granted the motion for reconsideration. The new order specifically allowed the investor to pursue nondischargeability, notwithstanding the confirmation order and the plan.

Significantly, the bankruptcy court conceded that the plan would have been unconfirmable absent the alteration made in the reconsideration order.

The reconsideration order effectively modified the plan and the original confirmation order. Neither the investor nor any other creditor appealed the modified confirmation order.

More than 180 days after confirmation but 179 days after entry of the reconsideration order that effectively modified the plan, the investor filed an adversary proceeding to revoke confirmation under Section 1144. Among other things, the complaint alleged that the debtor had defrauded creditors and failed to disclose assets.

The debtor moved to dismiss the revocation complaint, contending the complaint was out of time because it came more than 180 days after the original confirmation order. The bankruptcy court granted the motion and dismissed the complaint to revoke confirmation, holding that the attempt at revoking confirmation was too late.

In a 22-page opinion July 10, the BAP reversed in an opinion by Bankruptcy Judge Robert J. Faris.

The Dueling Authorities

Third Circuit precedent favored the debtor, while an opinion by former Bankruptcy Judge David A. Scholl favored the investor. See Dale C. Eckert Corp. v. Orange Tree Associates, Ltd. (In re Orange Tree Associates, Ltd.), 961 F.2d 1445 (9th Cir. 1992); and Berg v. TM Carlton House Partners Ltd. (In re TM Carlton House Partners Ltd.), 110 B.R. 185 (Bankr. E.D. Pa. 1990).

Tersely stated, the Third Circuit’s Orange Tree opinion held that a proceeding to revoke discharge was untimely if it came more than 180 days after confirmation but less than 180 days after an order modifying the confirmation order.

A more detailed review of the facts puts Orange Tree in a different light.

Three months after confirmation of the chapter 11 plan, the bankruptcy court in Orange Tree modified the plan by setting a new effective date, explicitly discharging liens, and setting a new bar date for claims. A creditor moved to revoke confirmation within 180 days of the modification order but more than 180 days after the original confirmation order. The Third Circuit held that the attempt at revoking confirmation was too late.

The modifications in Carlton House were more thoroughgoing. As Judge Faris said, they changed the plan in “significant ways” and were not “housekeeping matters” like Orange Tree. The plan modifications approved in Carlton House brought the plan into compliance with the confirmation requirements of Section 1127(b). The bankruptcy court in Carlton House also said that the order confirming the modified plan was the operative confirmation order.

Comparing the cases, Judge Faris said that the “facts of this care are closer to Carlton House [because the reconsideration order in the case on appeal] changed the Plan in significant ways.” The changes, he said, “affected all creditors and were not ‘housekeeping matters’ by any stretch of the imagination.”

Judge Faris explained that the changes wrought by the reconsideration order threatened the debtor with the inability to carry out the plan if he lost the dischargeability litigation. The change in that regard was “of great significance to all concerned,” he said, because creditors would be affected alongside the debtor.

In contrast, Judge Faris said the Ninth Circuit characterized the changes in Orange Tree as “mere clarifications and housekeeping matters.” In the case on appeal, he said that the reconsideration order “did not confirm the same Plan as the [original] Confirmation Order.”

Judge Faris reversed and reinstated the complaint to revoke confirmation.

The opinion by the BAP seems to mean that a material modification of a plan or confirmation order starts the clock running anew under Section 1144, at least when the modification results from a timely filed reconsideration motion.

Observations

In Orange Tree, the Ninth Circuit relied in part on policy, especially the “compelling need for finality” in the confirmation of chapter 11 plans. Orange Tree, 961 F.2d at 1448. The circuit court also observed that the second confirmation order was unrelated to the alleged fraud.

The same could be said for the BAP appeal. The alleged fraud apparently could have been raised under Section 1144 within 180 days of confirmation. Given the investor’s presumed ability to seek revocation within 180 days of the original confirmation order, perhaps an appellate court should give more weight to the expectations of other creditors and their belief that confirmation was unassailable.

Absent a strict 180-day deadline with no exceptions, what is the rule? If there no bright-line rule, will decisions be made on a case-by-case basis? Absent a bright-line rule, how will debtors and creditors know when confirmation is truly final?

What if there is a material modification of a plan or confirmation order two years after confirmation — does the clock on Section 1144 start running again? To restart the clock on revocation, must the motion to modify the plan or confirmation order come not more than 180 days after confirmation? Will the revocation clock restart only if modification of the plan results from a timely filed motion to reconsider confirmation?

If there are exceptions to the 180-day deadline, what is the statutory basis for the exceptions?

Let’s see what happens if the case goes to the Ninth Circuit.