Contributed by Rich Mullen
Over the last couple of years, slowly but surely, we’ve been Breaking the Code one section at a time. Thanks to our super smart and sophisticated bankruptcy computer, we’ve canvassed the Code and examined numerous sections that might not otherwise see the light of day. It seems that our bankruptcy computer is currently fixated on confirmation because our most recent Breaking the Code entry discussed section 1144 and revocation of a confirmation order, and today’s entry discusses section 1127(b) and postconfirmation plan modifications. Section 1127(b) provides:
The proponent of a plan or the reorganized debtor may modify such plan at any time after confirmation of such plan and before substantial consummation of such plan, but may not modify such plan so that such plan as modified fails to meet the requirements of sections 1122 and 1123 of this title. Such plan as modified under this subsection becomes the plan only if circumstances warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of this title.
So, unless the debtor is an individual, section 1127(b) sets forth certain limitations on postconfirmation plan modifications, and, thus, “reinforces the principle of finality by preserving the rights bought and paid for under the plan.” In re Rickel & Assocs., Inc., 260 B.R. 673, 677 (Bankr. S.D.N.Y. 2001) (collecting cases). This notion is a longstanding one, as section 1127(b) was derived from sections 222 and 229(c) of the old Bankruptcy Act. See Legend Radio Grp., Inc. v. Sutherland, 211 F.3d 1265 (4th Cir. 2000). Indeed, as the Honorable Learned Hand once said:
[T]he court may never under the guise of ‘alteration’ or ‘modification’ substitute an entirely new ‘plan’ in place of the original; although what is a line between a substitute and an ‘alteration’ or a ‘modification’ is necessarily left at large. . . . The question is one of discretion, though of a discretion which should be sparingly exercised, . . . unless the circumstances peremptorily demand it. . . . [I]t is often exceedingly difficult for a bankruptcy court to resist the importunities, usually unopposed, of those who wish to keep the ‘revived debtor’ indefinitely beneath its aegis; and our review of a discretion, which we may think to have been unwisely exercised, is not a very effective remedy. We can do no more than declare, for whatever weight it may have, that we deem the long delay which so often occurs between the order of ‘confirmation’ and the ‘final order’ a major abuse, and that a judge who superintends such a proceeding should feel himself charged with an affirmative duty to insist upon its early conclusion.
Prudence-Bonds Corp. v. City Bank Farmers Trust Co., 186 F.2d 525, 528 (2d Cir.1951).
Taking a step back, what is a “modification” for purposes of section 1127(b)? There is not a tried and true answer for every case. The Bankruptcy Code does not define “modification,” and courts determine what constitutes a “modification” on a case-by-case basis. In re Boylan Int’l, Ltd., 452 B.R. 43, 47 (Bankr. S.D.N.Y. 2011). Plan proponents may, however, have some control over what will constitute a “modification” during the postconfirmation period because some courts will “turn to the [p]lan for guidance” in determining what constitutes a “modification.” In re Johns-Manville Corp., 920 F.2d 121, 128 (2d Cir. 1990).
Section 1127(b) provides that only the plan proponent or the reorganized debtor may propose a postconfirmation plan modification. See 11 U.S.C. § 1127(b); see also In re Sea Island Co., 486 B.R. 559, 570 (S.D. Ga. 2013) (liquidation trustee was not a plan proponent and, thus, section 1127(b) would prohibit him from making a “modification” to the plan); In re Calpine Corp., No. 05-60200 (BRL), 2008 WL 207841, at *6 (Bankr. S.D.N.Y. Jan. 24, 2008) (objecting shareholders were not proponents of confirmed plan and were not authorized under section 1127(b) to modify the confirmed plan); In re Burk Dev. Co., Inc., 205 B.R. 778, 799 (Bankr. M.D. La. 1997) (United States Trustee did not have standing to seek modification of confirmed plan); In re Cinderella Clothing Indus., Inc., 93 B.R. 373, 378 (Bankr. E.D. Pa. 1988) (“Here, the debtor was the plan proponent, and thus creditors are precluded from seeking a plan modification.”); In re Charterhouse, Inc., 84 B.R. 147, 151 (Bankr. D. Minn. 1988) (creditors’ committee did not have standing to modify the plan because it was not a plan proponent). This limitation is even imposed on bankruptcy courts, which “cannot on [their] own modify a confirmed plan.” In re Boylan Int’l, Ltd., 452 B.R. at 48 (citing In re Planet Hollywood Int’l, 274 B.R. 391, 400 (Bankr. D. Del. 2001)); see also Goodman v. Phillip R. Curtis Enters., Inc. (In re Goodman ), 809 F.2d 228 (4th Cir. 1987) (bankruptcy court could not sua sponte modify plan, modification had to be sought by proper party under section 1127(b)).
Section 1127(b) also places a temporal restraint on postconfirmation plan modification, i.e., the modification must take place before the plan is substantially consummated. See Airadigm Communs., Inc. v FCC (In re Airadigm Communs., Inc.), 547 F.3d 763, 769 (7th Cir. 2008) (“a plan cannot be modified for any reason after substantial consummation”); see also In re Best Products Co., Inc., 177 B.R. 791, 802 (S.D.N.Y. 1995) (noting that after a confirmed plan has been substantially consummated, “[t]he court cannot adopt any modification that materially alters the plan and adversely affects a claimant’s treatment”) (citations omitted), aff’d, 68 F.3d 26 (2d Cir. 1995). The Bankruptcy Code defines “substantial consummation” as:
(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.
11 U.S.C. § 1101(2). There is considerable case law discussing substantial consummation, and, generally, the inquiry turns on the specific facts of the case.
The postconfirmation modification must also comply with sections 1122, 1123, and 1125, and, after notice and a hearing, must be confirmed by the court pursuant to section 1129. See In re Downtown Inv. Club III, 89 B.R. 59, 65 (B.A.P. 9th Cir. 1988) (material modification is improper where debtor did not give affected creditor notice and did not comply with sections 1125 and 1129). These limitations on postconfirmation plan modifications essentially seek to preserve certain protections afforded to creditors by the Bankruptcy Code and prevent plan proponents and reorganized debtors from making modifications that could not have been approved in the originally confirmed plan.
Perhaps the most import limitation imposed by section 1127(b) on postconfirmation plan modifications is the open-ended requirement that “circumstances warrant” the modification. Equitable considerations typically guide the court in its determination of whether circumstances warrant approval of a proposed modification, and some courts have concluded that there were unforeseen changed circumstances that prompted the modification. For example, courts have determined that circumstances warranted postconfirmation modification where a debtor farmer could no longer comply with a payment schedule set forth in the plan because the government changed a farm program upon which the debtor relied, In re Olson, 861 F.2d 188 (8th Cir. 1988), the reorganized debtor, due to not fault of its own, suffered a serious loss of revenue that rendered the plan unworkable, In re Gene Dunavant & Son Dairy, 75 B.R. 328 (Bankr. M.D. Tenn. 1987), and there was unforeseen and protracted trial and appellate litigation that prevented the liquidating trustee from prosecuting a malpractice claim that was the debtor’s primary asset, In re Boylan Int’l, Ltd., 452 B.R. 43 (Bankr. S.D.N.Y. 2011). On the other hand, courts have concluded that circumstances did not warrant postconfirmation where there was a general slowdown in the debtor’s industry and a lack of commercial financing that rendered the reorganized debtor unable to make payment to creditors within the required time, In re Dam Road Mini Storage, 156 B.R. 270 (Bankr. S.D. Cal. 1993), and the reorganized debtor, a mining company, faced difficulties in meeting its obligations under the plan due to new mining regulations that were passed several months before confirmation, In re Bullion Hollow Enters. Inc., 185 B.R. 726 (Bankr. W.D. Va. 1995).
Courts have also denied postconfirmation plan modifications where it was determined that the proposed modification was really an attempt to circumvent the confirmed plan. In In re Legend Radio Grp., Inc., 248 B.R. 281 (W.D. Va 1999), the court denied a proposed modification to a confirmed liquidating plan because the proposed modification was actually a new plan (and not merely a modification) that allowed equity holders to retain control of the debtor while infusing new money into the capital structure to pay off old debts. In affirming the district court’s decision, the Fourth Circuit said that the liquidating plan “is a fair and reasonable plan already confirmed, and we feel ‘charged with an affirmative duty to insist upon its early conclusion.’” Legend Radio Grp., Inc., 211 F.3d 1265 (4th Cir. 2000). Similarly, in In re Savannah, Ltd., 162 B.R. 912 (Bankr. S.D. Ga. 1993), the court extended section 1127(b) to a subsequent chapter 11 filing by the reorganized debtor because it concluded that the second chapter 11 was an attempt to modify the confirmed chapter 11 plan, and thus not filed in good faith, and that changed market conditions did not sufficiently meet the “unforeseen changed circumstances” requirement.
The big take away from this segment of Breaking the Code is that postconfirmation plan modification is going to be scrutinized on a case-by-case basis with a fact-specific eye towards equity. Courts will be hesitant to disrupt the finality of confirmation, but will, in appropriate circumstances, allow modification when it is not perceived as a runaround the previously confirmed plan.