Even if the distributions made to creditors after confirmation were de minimis, and even if all creditor classes have not even begun to receive distributions, a plan under Subchapter V of chapter 11 has been substantially consummated, and the debtor may not amend the plan, according to Bankruptcy Judge David C. Cleary of Chicago.
The corporate debtor filed a petition under Subchapter V of chapter 11 in November 2020 and confirmed a plan in December 2021. The plan had six classes of creditors and equity holders. All voting classes accepted the plan.
The plan put the claim of the Small Business Administration in the class for general unsecured creditors.
After confirmation, the debtor learned that it would be eligible for a new SBA loan if it were to pay the “old” loan in full. So, the debtor proposed an amended plan that would put the SBA in a new class by itself and pay the SBA’s “old” claim in full. The amendment would be conditioned on the SBA’s agreement to grant the new, favorable loan.
No creditors objected to confirmation of the amended plan, but Judge Cleary refused to approve the amendment in his June 6 opinion.
The case turned on the question of whether the plan had been substantially consummated under Sections 1193(b) and 1101(2). Here was the status in terms of consummation:
Two creditor classes had received no payments at all. The debtor had paid about $850 to one class and $585 to another. The debtor had not made a $50,000 payment to a different class.
If other conditions are met, Section 1193(b) provides that a debtor “may modify the plan at any time after confirmation of the plan and before substantial consummation of the plan.”
In turn, “substantial consummation” is defined in Section 1101(2) to mean:
(A) transfer of all or substantially all of the property proposed by the plan to be transferred;
(B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and
(C) commencement of distribution under the plan.
The debtor conceded that it had assumed management of the business. Perhaps fatally, the debtor also admitted that substantially all of the property had been transferred. The debtor argued that distributions had not commenced, because the payments so far were de minimis.
The debtor relied on a North Carolina case that had defined “commencement of distribution” as the beginning of distributions to all or substantially all creditors. In re Dean Hardwoods, Inc., 431 B.R. 387, 392 (Bankr. E.D.N.C. 2010).
Having “no binding authority” from the Seventh Circuit, Judge Cleary said that the “plain language of this Code section does not require commencement of distribution to every creditor, or every class, or even substantially all creditors or classes. It means, simply, that the process contemplated in the confirmed plan is underway. See In re MF Global Holdings Ltd., No. 13 CIV. 3532(AT), 2014 WL 231130, at *3 (S.D.N.Y. Jan. 22, 2014).”
[Note: MF Global was a decision defining the requisites for invoking substantial consummation as an element required to dismiss an appeal as equitably moot.)
Judge Cleary went on to say that Congress said “all or substantially all” in other sections of the Bankruptcy Code, but not in Section 1101(2).
Judge Cleary declined to follow Dean Hardwoods, saying that its “analysis violates the plain meaning canon; it reads into § 1101(2)(C) a condition that does not exist.” He said that the “Dean Hardwoods decision is in the minority.”
Judge Cleary denied the motion to modify, saying that “Dean Hardwoods is not binding on this court and its reasoning cannot be reconciled with the plain and unambiguous language of section 1101(2) of the Bankruptcy Code.”
Observations
Distributions under confirmed plans often continue for years. If “substantial consummation” meant the completion of all or substantially all distributions, then substantial consummation often would not occur until years after confirmation in many chapter 11 cases.
For substantial consummation to occur closer to confirmation, perhaps “commencement of distribution” should mean the commencement of distributions to all or most classes, but not distributions to just a handful of the creditor body.
Even if the distributions made to creditors after confirmation were de minimis, and even if all creditor classes have not even begun to receive distributions, a plan under Subchapter V of chapter 11 has been substantially consummated, and the debtor may not amend the plan, according to Bankruptcy Judge David C. Cleary of Chicago.