Working Group Proposal #8: Postconfirmation Plan Modification
Section 1127(b) provides that a plan proponent or reorganized debtor can seek modification
confirmed plan prior to substantial consummation of the plan, subject to numerous restrictions.
[ FN: " The proponent of a plan or the reorganized
may modify such plan at any time after confirmation of such plan and before substantial
of such plan, but may not modify such plan so that such plan as modified fails to meet the
of sections 1122 and 1123 of this title. Such plan as modified under this subsection becomes the
only if circumstances warrant such modification and the court, after notice and a hearing, confirms
plan as modified, under section 1129 of this title. " 11 U.S.C. §
Courts have utilized somewhat disparate interpretations of the concept "substantial
consummation," but under most readings, substantial consummation usually occurs quickly
confirmation, leaving only a narrow window of opportunity for a debtor to make necessary plan
modifications. The ability to modify the plan can help avert a conversion to chapter 7 or a refiling
chapter 11 and may be beneficial to all parties, but one might not be able to determine by the time
substantial consummation whether the debtor will need to negotiate for plan modifications with its
creditors. The numerous and adequate substantive and procedural protections for creditors and
holders in chapter 11 remain intact during the modification process, which permits lengthening the
modification period without repercussion.
11 U.S.C. § 1127(b) should be amended to permit modification
confirmation of such plan until the later of 1) substantial
consummation or 2) two years after the date on which the order of confirmation is
All other restrictions on postconfirmation plan modification in section 1127(b) should
Reasons for the Change
Even the most carefully crafted plans are subject to unforseen circumstances that
adjustment. Modifications may prevent plan failure, which will threaten the continuation of the
enterprise, reduce productivity, put the employees jobs at risk, and deprive creditors of
anticipated distributions. A modification may avert a conversion to chapter 7 or vitiate the need
second chapter 11 filing.
At the Working Group session in February, the discussion participants unanimously agreed
is unduly restrictive to preclude plan modifications after substantial consummationof the plan,
often arises almost immediately after confirmation. [
FN: According to the Code, substantial consummation has occurred upon the transfer of
substantially all of the property to be transferred, the assumption by the debtor/successor of the
business or the management of substantially all property dealt with by the plan, and the
of distributions under the plan. 11 U.S.C. § 1101(2).] If other
procedural requirements for modification prevent improvident and unfair plan modifications and
the interests of creditors and equity holders, it is not necessary to maintain such stringent time
on modification. Consistent with this notion, this proposed amendment would enlarge the window
opportunity to modify, but would not otherwise liberalize the strict rules that define the
permissible modifications. Thus, the fact that modification would be available for a slightly longer
period does not mean that it would be an accessible option in all cases. Any modification would
to meet court approval, satisfy the requirements of sections 1122 and 1123 and be subject to the
confirmation requirements of section 1129. Because class voting governs the modification
majority of each class of creditors - -and not just the debtor or plan proponent -- still would
whether a modification is prudent. If the majority of creditors have lost confidence in the ability of
business debtor to reorganize, a modification will not be possible notwithstanding the fact that the
modification was not time-barred. Falling within the statute of limitations is necessary, but
sufficient, in demonstrating that the relief requested should be granted.
This amendment also would address several corollary issues. First, the proposal would
litigation by limiting the need for the "substantial consummation" inquiry to a mere
cases. Although the term has caused a fair amount of confusion, [ FN: See Benjamin Weintraub & Michael J.
Crames, " Defining Consummation, Effective Date of Plan of Reorganization and Retention of
Postconfirmation Jurisdiction: Suggested Amendments to Bankruptcy Code and Bankruptcy
64 Am. Bankr. L. J. 245, 247 (1990).] under any analysis it will have
well before the two-year anniversary of plan confirmation in the vast majority of cases. [ FN: See, e.g. ,In re Bullion Hollow
, 185 B.R. 726, 728 (W.D. Va. 1995), citing In re Hayball Trucking, Inc. , 67 B.R. 681
(Bankr. E.D. Mich.1986);In re Earley , 74 B.R. 560 (Bankr. C.D. Ill.1987);In re
Bedford Springs Hotel , 99 B.R. 302 (Bankr. W.D. Pa.1989); In re Burlingame , 123
409 (Bankr. N.D. Okla.1991);In re Burnsbrooke Apts. of Athens, Ltd. , 151 B.R. 455
(Bankr. S.D. Ohio 1992); In re Dam Road Mini Storage , 156 B.R. 270 (Bankr. S.D.
Cal.1993). But see In re Heatron , 34 B.R. 526 (Bankr. W.D. Mo. 1983) (consummation
not occurred because distribution to creditors were little more than halfway completed);
& Jorgenson v. Federal Land Bank , 66 B.R. 104 (Bankr. 9th Cir. 1986) (adopting Heatron
standard that distributions " must be more than halfway " completed); accord In re Hotel
Assocs. of Tuscon , 165 B.R. 470 (Bankr. 9th Cir. 1994) (same). These cases prompted the
Bankruptcy Conference to propose that section 1101(2) clarify that the " transfer of property "
excludes creditor distributions, which are covered by section 1101(2)(C). National Bankruptcy
Conference, " Reforming the Bankruptcy Code, " at 301 (1994). Consistent with this position,
cases, including those cited at the beginning of this footnote, have rejected the Heatron
approach.] The proposal would streamline the analysis without disrupting
body of case law that has developed on this issue. Second, this amendment would assure that
are not deprived of their rights to negotiate meaningful postconfirmation plan changes. In the
authorityto permit modifications after substantial consummation, [ FN: See , e.g. ,In re Best Products
177 B.R. 791, 802 (S.D.N.Y. 1995) ( " relief requested by the RTC would, if granted, be
to confirmation of a plan that is different than the one that was proposed by the Debtors and
by 97% of the creditors. The court cannot adopt any modification that materially alters the plan
adversely affects a claimant's treatment " ).] some courts have permitted
"clarifications" or "variations" on extant plans [ FN: See , e.g. , Internal Revenue Service v.
Indus. Inc. , 128 B.R. 145 (W.D.N.C. 1991) (postconsummation order directing IRS in
trust fund taxes was plan clarification, since plan had not specified application). See also State
t Creditors Comm. for Property & Damage Claims v. McKay (In re
Johns-Manville Corp.) , 920 F.2d 121, 128 (2d Cir. 1990) (upholding suspension of operations of
claims resolution facility as " variation with respect to timing and claims processing "
).] This proposal would ensure that this shortcut would not be viable for
fide modifications. The proposal would eliminate cases that would permit parties to circumvent
protections of section 1127(b) and the plan negotiation process. [ FN: See Findley v. Blinken (In re Joint E. & S.
Dist. Asbestos Litigation) , 982 F.2d 721 (2d Cir. 1992), modified on reh g , 993 F.2d 7
Cir. 1993) (restructuring of trust pursuant to settlement of mandatory non-opt-out class action
impermissible modification of chapter 11 plan);In re Stevenson , 148 B.R. 596 (D. Idaho
1992) (proposed modification improperly would create new plan with respect to bank s
allowed secured claim);In re U.S. Repeating Arms Co. , 98 B.R. 138 (Bankr. D. Conn.
1989) (adding particular product liability action to unsecured class amounted to modification
section 1127(b));In re Charterhouse Inc. , 84 B.R. 147 (Bankr. D. Miss. 1988) (section
105(a) cannot be used to implement postconsummation modification).]
An expanded time frame also may avert the request for a successive filing. In their empirical
of forty-three publicly-held businesses in chapter 11 in the 1980s, Professors LoPucki and
found that a significant number of companies emerged from chapter 11 overleveraged as
industry standards, and a fair percentage of those companies refiled for bankruptcy. [ FN: Lynn M. LoPucki & William C. Whitford, "
Patterns in the Bankruptcy Reorganization of Large, Publicly Held Companies, " 78 Cornell L.
597, 606 (1993). Of the thirty-eight companies in which an entity survived confirmation, twelve
subsequent bankruptcy petition. Not all of the refilings necessarily were attributable to an
debt. Id. , at 606, fn 44.] To the extent that such repeat trips into
bankruptcy are prompted by the need to deal with debt involved in the first filing, a more realistic
modification period might provide more cost-efficient resolution while being equally protective of
creditors rights. Statements of experienced practitioners and judges indicate that the
cases that result in failure or attempts at successive chapter 11 filings might be reduced by
the time limit for plan modification. [ FN: See ,
e.g. , Memorandum of March 21, 1997 from Leon S. Forman Re: " chapter 11 Working
Group of National Bankruptcy Review Commission on Post-Confirmation Modification, " at 2;
Robert D. Martin, Hon. Robert E. Ginsberg, Ellen M. Triebold & Derrick A. Dyer, " Plan
Default and Post Confirmation Issues, " at 16 (1995) (citing the inability to modify after
consummation as a cause of chapter 11 serial filings). The expansion of the time limits on
also would speak to one of the arguments sometimes used to disallow a subsequent filing. Some
have developed the conception that a business may not file a subsequent chapter 11 petition that
amount to a de facto modification that was otherwise time-barred under section 1127. See In
re Elmwood Dev. Co. , 964 F.2d 508, 511 (5th Cir. 1992) (second chapter 11 petition not
invalid, but cannot be used to avoid conditions of first plan); accord In re Sportpages
101 B.R. 528, 529 (N.D.Ill. 1989);In re Roxy Real Estate Co. , 170 B.R. 571 (Bankr.
Pa. 1993);In re AT of Maine Inc. , 56 B.R. 55 (Bankr. D. Me. 1985);In re
Northampton Corp. , 39 B.R. 955 (Bankr. E.D. Pa.), aff d , 59 B.R. 963 (E.D. Pa.
See 11 U.S.C. § 1112(b) (delineating causes for court to convert or dismiss chapter 11
case).] Of course, if postconfirmation debt was the root of the
debtors problems,modification would not be the solution, for the debtor could not sweep
postconfirmation debt into the newly modified plan. [
FN: See , e.g. ,In re Continental Airlines Inc. , 1990 WL 309439 (Bankr.
A longer modification period might lessen the perceived finality of the confirmation process,
potentially discouraging some parties that currently work hard to determine the right answers
Conversely, some have advocated that consensual modifications be available for more than
years. For example, suggestions for three years and six years have been put forth.
Still others might argue that this proposal is not sufficiently far-reaching because it retains
"substantial consummation" as one of its triggers. As stated previously, however, in
majority of cases, substantial consummation will be of greatly minimized importance for