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News Room

Chapter 11
Working Group Proposal #8: Postconfirmation Plan Modification

Section 1127(b) provides that a plan proponent or reorganized debtor can seek modification of a confirmed plan prior to substantial consummation of the plan, subject to numerous restrictions. [ FN: " 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. " 11 U.S.C. § 1127(b).] Courts have utilized somewhat disparate interpretations of the concept "substantial consummation," but under most readings, substantial consummation usually occurs quickly after 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 in chapter 11 and may be beneficial to all parties, but one might not be able to determine by the time of 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 equity holders in chapter 11 remain intact during the modification process, which permits lengthening the modification period without repercussion.

The Recommendation

11 U.S.C. § 1127(b) should be amended to permit modification after 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 entered.

All other restrictions on postconfirmation plan modification in section 1127(b) should remain unaltered.

Reasons for the Change

Even the most carefully crafted plans are subject to unforseen circumstances that necessitate 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 their anticipated distributions. A modification may avert a conversion to chapter 7 or vitiate the need for a second chapter 11 filing.

At the Working Group session in February, the discussion participants unanimously agreed that it is unduly restrictive to preclude plan modifications after substantial consummationof the plan, which 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 commencement of distributions under the plan. 11 U.S.C. § 1101(2).] If other substantive and procedural requirements for modification prevent improvident and unfair plan modifications and protect the interests of creditors and equity holders, it is not necessary to maintain such stringent time limitations on modification. Consistent with this notion, this proposed amendment would enlarge the window of opportunity to modify, but would not otherwise liberalize the strict rules that define the parameters of permissible modifications. Thus, the fact that modification would be available for a slightly longer time period does not mean that it would be an accessible option in all cases. Any modification would have 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 process, the majority of each class of creditors - -and not just the debtor or plan proponent -- still would decide whether a modification is prudent. If the majority of creditors have lost confidence in the ability of a 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 certainly not sufficient, in demonstrating that the relief requested should be granted.

This amendment also would address several corollary issues. First, the proposal would reduce litigation by limiting the need for the "substantial consummation" inquiry to a mere handful of 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 Rules, " 64 Am. Bankr. L. J. 245, 247 (1990).] under any analysis it will have occurred well before the two-year anniversary of plan confirmation in the vast majority of cases. [ FN: See, e.g. ,In re Bullion Hollow Inc. , 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 B.R. 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 had not occurred because distribution to creditors were little more than halfway completed); Jorgenson & 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 National Bankruptcy Conference to propose that section 1101(2) clarify that the " transfer of property " test 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, most cases, including those cited at the beginning of this footnote, have rejected the Heatron approach.] The proposal would streamline the analysis without disrupting the body of case law that has developed on this issue. Second, this amendment would assure that creditors are not deprived of their rights to negotiate meaningful postconfirmation plan changes. In the absence of authorityto permit modifications after substantial consummation, [ FN: See , e.g. ,In re Best Products Inc. , 177 B.R. 791, 802 (S.D.N.Y. 1995) ( " relief requested by the RTC would, if granted, be tantamount to confirmation of a plan that is different than the one that was proposed by the Debtors and approved by 97% of the creditors. The court cannot adopt any modification that materially alters the plan and adversely affects a claimant's treatment " ).] some courts have permitted "clarifications" or "variations" on extant plans [ FN: See , e.g. , Internal Revenue Service v. APT Indus. Inc. , 128 B.R. 145 (W.D.N.C. 1991) (postconsummation order directing IRS in application of trust fund taxes was plan clarification, since plan had not specified application). See also State Gov ’ 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 bona fide modifications. The proposal would eliminate cases that would permit parties to circumvent the 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 (2d Cir. 1993) (restructuring of trust pursuant to settlement of mandatory non-opt-out class action was 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 subject to 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 study of forty-three publicly-held businesses in chapter 11 in the 1980s, Professors LoPucki and Whitford found that a significant number of companies emerged from chapter 11 overleveraged as compared to 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. Rev. 597, 606 (1993). Of the thirty-eight companies in which an entity survived confirmation, twelve filed a subsequent bankruptcy petition. Not all of the refilings necessarily were attributable to an overload of 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 number of cases that result in failure or attempts at successive chapter 11 filings might be reduced by expanding 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; Hon. 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 substantial consummation as a cause of chapter 11 serial filings). The expansion of the time limits on modification also would speak to one of the arguments sometimes used to disallow a subsequent filing. Some courts have developed the conception that a business may not file a subsequent chapter 11 petition that would 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 per se invalid, but cannot be used to avoid conditions of first plan); accord In re Sportpages Corp. , 101 B.R. 528, 529 (N.D.Ill. 1989);In re Roxy Real Estate Co. , 170 B.R. 571 (Bankr. E.D. 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. 1984). 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 debtor’s 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. D. Del. 1990).]

Competing Considerations

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 before confirmation.

Conversely, some have advocated that consensual modifications be available for more than two 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 the vast majority of cases, substantial consummation will be of greatly minimized importance for modification purposes.

 

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