"The best laid schemes of mice and men gang ast a-gley;
And leave naught but grief and pain for promised joy"
-- Robert Byrns
"If anything can go wrong, it will"
Plan confirmation is the promised joy after hard fought battles. After all, if a plan has been confirmed, there has necessarily already been a determination that the plan is feasible. But plan confirmation is a beginning as well as an end. And new troubles often follow this new beginning.
- EFFECT OF CONFIRMATION
11 U.S.C. § 1141 addresses the effect of confirmation in a Chapter 11 case. Subsection (a) deals with the binding effect of the plan and order of confirmation, and the identity of the parties found thereby; subsection (b) pertains to the vesting of property in the debtor and the disappearance of the bankruptcy estate; and subsections (c) and (d) deal with the discharge of claims and liens.
- Binding Effect -Res Judicata
According to 11 U.S.C. § 1141(a) and except as provided in 11 U.S.C. § 1141(d)(2) and (d)(3), the provisions of a confirmed Chapter 11 plan bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan, and any creditor, equity security holder, or general partner in the debtor, whether or not the creditor, equity security holder, or general partner has accepted the plan. Thus, once an order is entered confirming a plan, it is a final binding order accorded res judicata effect as to all issues and claims arising thereunder. See Prudence Realization Corp. v. Ferris, 323 U.S. 650, 654-55 (1944) (Bankruptcy Act Case); DNK Properties Crystal Lake v. Mutual Life Ins. Co. of New York, 112 F.3d 257, 259 (7th Cir. 1997) (citing In re Heritage Hotel Partnership I, 160 B.R. 374, 377 (9th Cir. BAP 1993), affirmed 59 F.3d 175 (9th Cir. BAP 1995); Bizzell V. Hemingway, 548 F.2d 505 (4th Cir. 1977); see also Katchen v. Landy, 382 U.S. 323, 334 (1966) ("the ordinary rules of res judicata and collateral estoppel apply to the decisions of bankruptcy courts") (citations omitted); Stoll v. Gottlieb, 305 U.S. 165 (1938).
The binding effect of a confirmed plan often is compared to an order for relief in a Chapter 7 case. See 8 Collier on Bankruptcy, 1141.02 (1997). A Chapter 7 order for relief is a judgment in rem and is binding upon all parties in interest, whether or not they have entered an appearance, either directly or indirectly. Id. Similarly, an order confirming a Chapter 11 plan also is like a judgment in rem in that it determines the rights and liabilities of the parties to the plan and binds all parties in interest, whether or not they have chosen to appear in the case. Id.; see e.g. First Union Commercial Corp. v. Nelson Mullins, Riley & Scarborough (In re Varat Enterprises, Inc.), 81 F.3d 1310, 1315 (4th Cir. 1996).
One question that has arisen in the context of 11 U.S.C. § 1141(a) is who is bound by the confirmed plan. See Daniel G. Clodfelter, Post-Confirmation Issues, 11th Annual Bankruptcy Institute, I-1 (1988). Despite the laundry list of entities set forth in 11 U.S.C. 1141(a), the answer not always is clear.
Court confronting this issue have looked to see whether the party had "notice"of the confirmation process. If so, then the party is bound by the terms of the confirmed plan. See Schreiber v. United States (In re Schreiber) 163 B.R. 327 (Bankr. N.D. Ill. 1994)(a confirmed plan is similar to a contract and all parties are bound by its terms). On the other hand, if a party is not listed on the debtor's bankruptcy schedules and/or did not receive notice of the confirmation hearing, most courts would find that the party is not be bound by the terms of the confirmed plan. In re Turning Point Lounge, Ltd., 111 B.R. 44 (Bankr. W.D.N.Y. 1990).
A minority of courts have upheld the preclusive effect of a confirmation order as binding on creditors even if they did not receive notice of the bankruptcy or confirmation process. This has occurred where the courts thought it unlikely that the votes or positions of the overlooked creditors would have made a difference in the outcome of a case. See e.g., In re Sullivan Ford Sales, Inc., 25 B.R. 400 (Bankr. D.Ne. 1982); In re Safeguard Co., 35 B.R. 44 (Bankr. W.D. Penn. 1983) (unscheduled creditors without knowledge of planned confirmation proceedings are bound by terms of plan containing release of corporate principals). Creditors caught in this Catch-22 situation nevertheless may have some recourse by requesting a denial of the debtor's discharge. See Reliable Electric Co. Inc. v. Olson Construction Co., 726 F. 2d 620 (10th Cir. 1984)(claim of creditor who failed to receive notice of the confirmation process would not be discharged on ground that discharge would deprive creditor of property without due process of law).
In most cases, a creditor's claim is either deemed filed or the creditor has filed a proof of claim. In these situations, courts will hold that the confirmed plan is binding on the creditor. But where a party does not have a pre-petition or administrative claim against the debtor, courts have found that such parties are not "creditors" and therefore are not bound by the plan. See In re Food City, Inc., 110 B.R. 808 (Bankr. W.D.Tx. 1990)(court held that the Securities and Exchange Commission did not qualify as a "creditor" of the bankruptcy estate and thus, would not be barred from enforcing securities losses with respect to any violations arising out of a plan, notwithstanding the entry of a confirmation order).
Another difficult issue in considering the effect of 11 U.S.C. § 1141(a) is who may claim its protection. For example, can the debtor's guarantors avail themselves of the res judicata effect of the confirmation order? The answer is - it depends.
Third party releases are one of the most hotly debated issues concerning the res judicata effect of a confirmation order. In Stoll v. Gottlieb, 305 U.S. at 172, a creditor received a judgment in state court enforcing a guarantee of bonds of a corporation notwithstanding the fact that the guarantee was released pursuant to a confirmed plan of reorganization. The Supreme Court held that the discharge of the guarantee provided in the plan of reorganization could not be collaterally attacked. Interestingly, the Court did not address the issue whether the bankruptcy court had jurisdiction over the guarantors in connection with their guarantee of the debtor's obligations.
The holding in Stoll subsequently has been followed by a number of other courts. See Republic's Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir. 1987)(order of confirmation releasing guarantor barred creditor's action against guarantor where creditor did not challenge bankruptcy court's jurisdiction); Holly's Inc. v. City of Kentwood (In re Holly's, Inc.), 178 B.R. 711 (W.D. Mich. 1995). However, other courts have found that third party releases are invalid as beyond the jurisdiction of the Bankruptcy Court. See e.g. Underhill v. Royal, 769 F.2d 1426, 1432 (9th Cir. 1985)(a confirmed plan cannot release codebtors); Union Carbide Corp. v. Newboles, 686 F.2d 593 (7th Cir. 1982)(per curiam)(under Section 16 of the prior Bankruptcy Act, codebtors could not be released through a debtor's reorganization plan.)
A number of courts recently have displayed a willingness to enforce third party releases. Their philosophy is that if a creditor objects to the third party release, then the creditor should file an objection to confirmation of the plan pursuant to 11 U.S.C.§ 524 and further appeal the confirmation order if the creditor's objection is denied. Trulis v. Barton, 67 F.3d 779, 785 (9th Cir.1995)("creditors who do not wish to release third party debtors pursuant to the principal debtor's plan of reorganization should object to confirmation ... on the ground that the plan is violative of section 524 and not within the power, even jurisdiction of the bankruptcy court .... The point is that only a direct attack is available."); In re Specialty Equipment Cos., 3 F.3d 1043 (7th Cir. 1993)("while section 524(e) has generally been interpreted to preclude the discharge of guarantors, the statute does not by its specific words preclude all releases that are accepted and confirmed as an integral part of reorganization.").
Courts further are willing to permit third party releases when the creditors themselves have expressly or implicitly consented to the release provisions. See In AOV Industries, Inc., 792 F.2d 1140 (D.C. Cir. 1986)(court approved confirmation of a plan containing release of third party codebtors who had contributed funds to the plan so that creditors could receive a payment); In re Specialty Equipment Cos., 3 F.3d at 1043 (affirmative votes of creditors to debtor's plan containing third party releases are bound by the releases.)
A few courts have even approved injunctions barring actions by future claimants against third party codebtors. See In re A.H. Robins, Co., 182 B.R. 128, aff'd 86 F.3d 364 (4th Cir. 1996.), cert. denied, ___ U.S. ___, 117 S.Ct. 483, 136 L.Ed. 2d 377 (1996); MacArthur Co. v. Johns-Manville Corp., 837 F.2d 89 (2d Cir.), cert. denied, 488 U.S. 868, 109 S.Ct. 176, 102 L.Ed. 145 (1988). These extraordinary cases generally involve a "channeling" of claims to a fund, with a bar against pursuit of the funding sources such as insurance policy proceeds. See 8 Collier on Bankruptcy, 1141.02[d] (1997); see also 11 U.S.C. 524(g)( statutory procedure modeled after the injunction/trust in Johns-Manville case).
What if an entity did not have notice of the bankruptcy or did not have an opportunity to contest confirmation of the plan containing a third party release? In such cases, the third party releases may not be enforceable against that creditor. See 8 Collier on Bankruptcy, 1141.02[b] (1997).
Upon confirmation, all property of the bankruptcy estate is vested in the debtor unless otherwise provided in a Chapter 11 plan, or in the order confirming the plan. 11 U.S.C.§ 1141(b). If a plan or order does not provide for this vesting of property in the debtor, then the claims of creditors are not released at confirmation. See Steele v. First Nat'l Bank, 136 B.R. 278 (D.C. Kan. 1991). Thus, in the case of a liquidating plan where the debtor's assets are liquidated, not vested, the claims of creditors are not be discharged.
Section 541 sets forth the "property of the estate" which is vested in the debtor upon confirmation. Generally, this estate property includes all legal and equitable interests of the debtor in property as of the commencement of the bankruptcy case. This would include all causes of action which the debtor could have asserted as of the commencement of the case or which arose during the Chapter 11 case and which are not time barred. It further includes any causes of action which arise postconfirmation and which are specifically allowed in the confirmed plan or in the order confirming the plan. See Eubanks v. FDIC, 977 F.2d 166, 171-172 (5th Cir. 1992)(debtors' postconfirmation claim was barred by res judicata where debtor raised no objection or defense to creditor's claim which arose from same nucleus of operative facts); Oneida Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419 (3d Cir.), cert. denied, 488 U.S. 967, 109 S.Ct. 495, 102 L. Ed. 2d 532 (1988). [See Section II below "Postconfirmation Jurisdiction"].
Once property of the estate vests in the debtor, the automatic stay provisions expire unless otherwise provided in 11 U.S.C. § 262(d)-(f). However, to the extent that property of a Chapter 11 debtor remains part of the bankruptcy estate, for example where a trustee or representative of the Bankruptcy Court retains management and control, the automatic stay provisions continue to apply. See Hillis Motors v. Hawaii Auto Dealers' Ass'n (In re Hillis Motors), 997 F.2d 581 (9th Cir. Hawaii). Thus, if the debtor fails to comply with the confirmed plan and the creditors' committee has ceased to exist, individual creditors must pursue their own remedies. In re Jaggers Aerospace Co., 129 B.R. 265 (M.D. Fla. 1991).
Pursuant to 11 U.S.C. § 1141(c), the debtor's property is vested in the debtor after confirmation of a plan free and clear of all claims and interests of creditors, equity security holders, and of general partners and the debtor unless otherwise provided in 11 U.S.C. §§ 1141(d)(2) and (d)(3), in the plan, or in the confirmation order.
For property to vested in the debtor freed of all claims and interests, the property must be dealt with in the plan. If not, then the property remains subject to the claims and interests of creditors.
Most courts have found the term "interests" to include "liens." See In re Penrod, 50 F.3d 459, 463 (7th Cir. 1994)(§1141(c) must cover liens); Dever v. IRS (In re Dever), 164 B.R.132 (Bankr. C.D.Cal. 1994)("interests" include "liens"); but cf. Bowen v. United States (In re Bowen), 174 B.R. 840 (S.D.Ga.1994)(a lien cannot be released under §1141(c), rather any release of a lien must rely on § 506(d)).
Section 1141(c) and the cases interpreting it hold that unless an existing pre-confirmation lien is preserved or renewed by the confirmed plan, it is extinguished. See, e.g., U. S. v Redmond, 36 B.R. 932 (D. Kan. 1984); In re Arctic Enterprises, Inc., 68 B.R. 71 (D. Minn. 1986) (lien rights extinguished even though creditor had filed pre-confirmation objection to proof of claim and had possession of liened goods; court reasons "claims and interests" include liens); In re Pennsylvania Iron & Coal Co., Inc., 56 B.R. 492 (Bankr. S. D. Ohio 1985) (lien on trailer for storage, maintenance and repair extinguished upon confirmation even though creditor had possession at confirmation); In Re Penrod, 50 F.3d at 459 (if plan of reorganization is silent as to whether preexisting lien is preserved, it is extinguished by confirmation). See also, 134 F.3d 538 (3d Cir. 1998) (set off not provided for in confirmed plan not allowed after confirmation).
However, §1141(c) does not provide for the vesting of property free and clear of all claims unless the property is "dealt with by the plan." See, e.g., In re Be-Mac Transport Co., Inc., 83 F.3d 1020 (8th Cir. 1996) (lien asserted by FDIC was not extinguished by plan confirmation). See also In re Snedaker, 39 B.R. 41 (Bankr. S. D. Fla. 1984) (even when creditor accepted plan, because confirmed plan made no reference to property which was subject to pre-filing garnishment, the property was not affected by the plan or confirmation order and the garnishment lien remained effective post-confirmation).
The case of FDIC v. Union Entities (In re Be-Mac Transport Co.), 83 F.3d at 1020, bears further discussion. There, the Eight Circuit observed that the FDIC did not have a chance to effectively participate in the reorganization process because the bankruptcy court rejected as untimely the FDIC's attempt to amend its claim to change its classification from unsecured to secured. As a result, the Court found that FDIC could only vote on the plan and receive distribution as an unsecured creditor. Thus, the FDIC's lien was not brought into the bankruptcy proceeding and could not be extinguished upon plan confirmation.
Prior to confirmation, foreclosure on property of the estate is barred by the automatic stay of § 362. Section 362(c) does not specifically provide for termination of the automatic stay upon confirmation, but does provide as follows:
Except as provided in subsections (d), (e), and (f) of this section-
(2) the stay of any other act under subsection (a) of this section continues until the earliest of -
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under Chapter 7 of this title concerning an individual or a case under Chapter 9, 11, 12 or 13 of this title, the time a discharge is granted or denied.
Under these provisions, absent a contrary provision in the confirmed plan, confirmation terminates the automatic stay, since confirmation either grants or denies discharge, and vests property of the estate in the debtor. Since the automatic stay is terminated, a default under the plan may result in foreclosure absent a plan provision to the contrary. Thus, in In re Ernst, 45 B.R. 700 (Bankr. D. Minn. 1985), a mortgagee was allowed to foreclose on its mortgage on the debtor's real estate due to a default under the confirmed plan. The court held that the debtor was not required to obtain relief from the automatic stay because the automatic stay had terminated upon confirmation. The court additionally denied the debtor's request to enjoin foreclosure under §105(a), In re Continental Airlines finding that the debtors were not likely to successfully obtain a modification of their plan.
An informative contrast to the decision in Ernst is the decision in Allied Technology, Inc. v. R.B. Brunneman & Sons, Inc., 25 B.R. 484 (Bankr. S.D. Ohio 1982). In Allied Technology, the court found a lessor in violation of the automatic stay for pursuing an action on the lease in state court post-confirmation. The court found that the action was effectively an action based upon a pre-petition claim. The court further found that the automatic stay had not terminated at confirmation, because a discharge was not granted at confirmation. The court based the finding of no discharge on plan language providing for the retention of jurisdiction "to hear and determine all claims" against the debtor.
Section 1141(d)(1)(A) provides that upon confirmation, any debt arising before the date of confirmation, and any debt of a kind specified in 11 U.S.C.§ 502(g),(h), or (i) are discharged, unless otherwise provided in 11 U.S.C.§ 1141(d), in the plan, or in the confirmation order. This discharge applies whether a proof of claim is filed or is deemed to be filed under 11 U.S.C. § 501; the claim is allowed under 11 U.S.C. 502; or the holder of the claim has accept the plan. 11 U.S.C. § 1141(d)(1)(A). See Eubanks v. FDIC, 977 F.2d at 171("It has long been recognized that a bankruptcy court's order confirming a plan of reorganization is given the same effect as a district court's judgment on the merits of a claim for preclusion purposes."); Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.), 898 F.2d 1544, 1550 (11th Cir.), cert. denied, 498 U.S. 959 (1990)("[A] bankruptcy court's order confirming a plan of reorganization is given the same effect as any district court's final judgment on the merits.").
Confirmation of a plan further terminates all rights and interests of equity security holders and general partners unless otherwise provided for in 11 U.S.C. § 1141(d), in the plan, or in the confirmation order. 11 U.S.C. § 1141(d)(1)(B).
Contrary to the general rule under 11 U.S.C.§ 1141(d)(1)(A) that all debts are discharged upon confirmation, certain debts still may remain for which the debtor is liable.
Unless otherwise provided in a confirmed plan of reorganization, postconfirmation claims are not discharged. See Holywell Corp. v. Smith, 503 U.S. 47, 117 L.Ed.2d 196, 112 S.Ct. 1021 (1992); Eubanks v. Federal Deposit Ins. Corp., 977 F.2d 166 (5th Cir. 1992). In Holywell, the plan established a trust and appointed a trustee to liquidate the property of the estate. The Supreme Court found that the taxes attributable to the liquidation of the property arose postconfirmation and thus concluded that the trustee was required to file income tax returns and pay taxes notwithstanding the terms of a confirmed plan.
Despite the establishment of trusts to compensate claims which mature in the future, the appointment of representatives for future claimants and the use of channeling injunctions to discharge future claims, there are limits to the extent that a Chapter 11 plan can affect liabilities arising after confirmation. See Ralph E. Avery, Chapter 11 Bankruptcy and Principles of Res Judicata, 102 Commercial Law Journal, 257, 275 (1997); see e.g. In re Kewanee Boiler Corp., 198 B.R. 519 (Bankr. N.D.Ill. 1996), remanded 1996 WL 556736 (N.D. Ill. 1996)(product manufacturer's Chapter 11 bankruptcy could not constitutionally discharge claims of persons whose causes of action would accrue under state law only postconfirmation, and whose identities could not be ascertained, as the time of confirmation with enough specificity to allow them to be notified); Fairchild Aircraft v. Campbell (In re Fairchild Aircraft Corp.), 184 B.R. 910 (Bankr. W.D.Tx. 1995), vacated 220 B.R. 909 (Bankr.W.D.Tx. 1998)(future claims against Chapter 11 aircraft manufacturer did not constitute bankruptcy claims which were affected by confirmation order where the debtor did not take the necessary steps to establish such future liabilities as claims in bankruptcy proceeding; important to the court in Fairchild was the fact that the debtor possessed sufficient knowledge to predict and estimate the likelihood and amount of future injuries, yet failed to either file claims on behalf of those parties who might be injured postconfirmation due to debtor's alleged prepetition conduct or to seek the appointment of a legal representative for such claimants).
Some environmental claims arising from prepetition and preconfirmation activities are not discharged and can be asserted against the reorganized debtor. Hartham v. Texaco, Inc. (In re Tutu Wells Contamination Litigation), 846 F.Supp. 1243 (D.V.I.1993)(holding that potential CERCLA claims based on prepetition conduct of debtor, which had been reorganized before enactment of CERCLA were not "contingent claims" and therefore, survived debtor's discharge under Chapter 11); In re Chateaugay Corp., 944 F.2d 997 (2nd Cir. 1991); In re Pennsylvania Cent. Transp. Co., 944 F.2d 164 (3d Cir.1991) (holding that hazardous waste cleanup cost claims arising from prepetition and preconsummation activities of the debtor could be asserted against reorganized debtor, notwithstanding consummation order precluding future claims against debtor based on debtor's activities; cleanup claims based on CERCLA which was not enacted until after consummation order had been entered); United States v. Serafini, 135 B.R.219, 221 (M.D.Pa. 1991)(stating that confirmation of third party defendant's prior Chapter 11 "arrangement" under Bankruptcy Act did not discharge any subsequent CERCLA liability arising from prepetition hazardous waste disposal in that CERCLA was not enacted and liability did not exist until after confirmation). See also, Walsh, The Dischargeability of Postconfirmation CERCLA Liability in Bankruptcy, 1 New York University Environmental L.J. 95 (1992). Cf. In re Heldor Indus. Inc., 131 B.R. 578, 586 (Bankr. D.N.J. 1991), rev'd on other grounds, 989 F.2d 702 (3rd Cir. 1993)(categorizing cleanup obligation as general unsecured claim where contamination occurred prepetition); Walsh v. West Virginia (In re Security Gas & Oil, Inc.), 70 B.R. 786, 795 (Bankr. N.D. Cal. 1987)(categorizing state as general unsecured creditor unless state law creates statutory lien in favor of state to secure payment for cleanup.)
II. POSTCONFIRMATION JURISDICTION
A bankruptcy court's jurisdiction does not end once an order is entered confirming a plan of reorganization. Pursuant to 11 U.S.C. § 1142 (b), "[t]he court may direct the debtor and any necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of any lien, that is necessary for the consummation of the plan." This authority includes jurisdiction to -
- implement the terms of a confirmed plan or complete actions pertinent to the administration of the estate;
- resolve objections to claims (Advisory Committee Note to Bankruptcy Rule 3020(d));
- hear avoidance actions;
- order third parties to perform acts necessary to consummate the plan (Official Unsecured Creditors' Comm. of Erie Hilton Joint Venture v. Siskind (In re Erie Hilton Joint Venture), 137 B.R. 165 (Bankr.W.D. Pa. 1992);
- order the officers of a corporate debtor to execute the necessary sales documents for completing a sale of assets (Harlow V. Palouse Producers, Inc. (In re Harlow Props.,Inc.), 56 B.R. 794 (9th Cir. BAP 1985));
- order principals of the debtor to submit to a Rule 2004 examine to determine whether they have complied with the plan (In re Cinderella Clothing Indust., Inc., 93 B.R. 373 (Bankr. E.D.Pa. 1988));
- direct a creditors' committee to employ a firm experienced in searching for missing creditors entitled to plan payments (In re Goldblatt Bros.,Inc., 132 B.R. 736 (Bankr. N.D.Ill. 1991)); and
- order parties to refrain from taking action which interfere with the implementation of the plan (In re Krypton Broadcasting of Ft. Pierce, Inc., 181 B.R. 657 (Bankr.S.D. Fla. 1995)).
8 Collier on Bankruptcy, 1142.03.
The seminal case on postconfirmation jurisdiction in the Fourth Circuit is Goodman v. Phillip R. Curtiss Enter., Inc. (In re Goodman), 809 F.2d 228, 232 (4th Cir. 1987). In Goodman, the Fourth Circuit recognized that bankruptcy courts retain some measure of jurisdiction after confirmation of the plan. However, the Fourth Circuit found this postconfirmation authority limited to matters concerning the implementation or execution of a confirmed plan. Id. (citing 5 Collier on Bankruptcy 1142.01 at 1142-44 15th ed. 1986). [Although the Goodman case was published in 1987, the statutory language of § 1142 construed by the Fourth Circuit has not been amended since that opinion was issued.]
Subsequent cases in the Fourth Circuit have adopted this narrow interpretation limiting jurisdiction of the Bankruptcy Court to plan implementation. See In re Walker, 198 B.R. 476, 481 (Bankr. E.D. Va. 1996); Poplar Run Five Ltd. Partnership v. Virginia Electric & Power Co., 192 B.R. 848, 859 (Bankr. E.D. Va. 1995); In re A.H. Robins Co., Inc., 182 B.R. 128, 133 (Bankr. E.D. Va. 1995).
There also is a wealth of case law in other jurisdictions with holdings similar to Goodman concerning the nature and extent of bankruptcy court subject matter jurisdiction on post-confirmation matters. See e.g., Walnut Assocs. v. Saidal, 164 B.R. 487, 491 (E.D. Pa. 1994) ("[A]lthough the jurisdiction of the bankruptcy court continues until the Chapter 11 case is closed, once a plan has been confirmed, the court's jurisdiction begins to weaken"); North American Car Corp. v. Peerless Weighing & Vending Machine Corp., 143 F.2d 938, 940 (2d Cir. 1944) ("[s]ince at least 1944, courts have recognized the competing interest between retaining jurisdiction after confirmation until entry of the final decree (see Bankr. R. 3020), and ending the 'tutelage' status of a reorganization, a period which may limit and hamper [the corporation's] activities and throw doubt upon its responsibility."). These courts have found a clear delineation between a bankruptcy court's post-confirmation oversight which is restricted to activities related to the bankruptcy and the reorganization and the debtor's general business. See In re Beal Bank, S.S.B. v. Jack's Marine, Inc., 201 B.R. 376, 378 (E.D. Penn. 1996). As noted by one court, "[a]fter confirmation, a newly organized debtor cannot keep "coming running to the bankruptcy judge every time something unpleasant happens." Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th Cir. 1991).
Debtors often will attempt to confer jurisdiction on the bankruptcy court over matters outside plan implementation in their Chapter 11 plans. Unfortunately for debtors, these jurisdiction retention clauses have not gained much ground. Zerand-Bernal Group, Inc. v. Cox, 23 F.3d 159, 164 (7th Cir. 1994)("A court cannot write its own jurisdictional ticket."). Most courts have concluded that when jurisdiction is not readily available at the outset, the parties cannot convert subject-matter jurisdiction on the bankruptcy court. See Ford v. Hamilton Inv., Inc., 29 F.3d 255, 257 (6th Cir. 1994); Portfolio Lease Funding Corp. No. 1 v. Seagate Technology, Inc. (In re Atlantic Computer Sys., Inc.), 163 B.R. 704, 707 (Bankr. S.D.N.Y. 1994); Walnut Assocs.v. Saidal, 164 B.R. at 494-95 (a jurisdiction retention clause cannot be used to grant subject-matter jurisdiction over a proceeding when the proceeding itself is already outside the jurisdictional boundaries defined by statute); Atlantic Computer Sys, Inc., 163 B.R. at 707.
As set forth above, most courts considering matters relating to a confirmed plan generally do so under § 1142(b) or, on occasion and where appropriate, the terms of a plan. Yet, neither § 1142(b) nor the terms of a plan can confer jurisdiction upon a bankruptcy court. 8 Collier on Bankruptcy, 1142.04. Postconfirmation jurisdiction, if it exists, does so only under 28 U.S.C. § 1334. Thus, as a threshold matter in considering a plan-related matter, the court must determine whether postconfirmation jurisdiction exists under 28 U.S.C. § 1334 [ jurisdictional grant of authority to district court and bankruptcy court over "all cases under title 11," or "all civil proceedings arising under title 11, or arising in or related to cases under title 11"]. See Poplar Run Five Ltd. Partnership v. Virginia Electric & Power Co., 192 B.R. at 859 (a court has jurisdiction to enforce its own orders under the doctrine of ancillary jurisdiction); Local Loan Co. v. Hunt, 292 U.S. 234, 239, 54 S.Ct. 695, 696-97, 78 L.Ed. 1230 (1934). See also Susan Block-Lieb, The Case Against Supplemental Bankruptcy Jurisdiction: A Constitutional, Statutory, and Policy Analysis, 62 Fordham L.Rev 721 (1994). These courts have recognized that this exercise of ancillary jurisdiction and a related form, pendent jurisdiction, only can be invoked when granted by statute. Poplar Run Five Ltd. Partnership v. Virginia Electric & Power Co., 192 B.R. at 860 (citing Finley v. United States, 490 U.S. 545, 548, 109 S.Ct. 2003, 2006, 104 L.Ed.2d 593 (1989) ("The Constitution must have given to the court the capacity to take [jurisdiction], and an act of Congress must have supplied it .... To the extent that such action is not taken, the power lies dormant." (citations omitted)); see also 28 U.S.C. § 1367(a) (granting "supplemental jurisdiction" - the collective term for ancillary and pendant jurisdiction of the claims that are "so related to" actions within the district court's original jurisdiction).
Most courts recognize that this grant of "[a]ncillary jurisdiction . . . is strictly limited to cases where a non-bankruptcy forum cannot provide adequate relief or where other equitable factors require the bankruptcy court to exercise ancillary jurisdiction." Zerand-Bernal Group, Inc., 158 B.R. 459, 464-65 (citing Local Loan Co. 292 U.S. at 239, 54 S.Ct. at 696-97); see also Poplar Run Five Ltd. Partnership v. Virginia Electric & Power Co., 192 B.R. at 860 (court lacks ancillary jurisdiction where there is no indication that state court unable to provide adequate relief and where federal interest is minimal).
Once a final decree has been entered closing a case, the scope of postconfirmation jurisdiction is unclear. Most courts find that postconfirmation jurisdiction over the administration of the estate ceases upon the entry of a final decree. See e.g. Poplar Run Five Ltd. Partnership v. Virginia Electric & Power Co., 192 B.R. at 859 (observing that once a plan has been implemented and a final decree entered, the court lacked jurisdiction to hear a proceeding not "related to" the underlying bankruptcy case); Walnut Assocs. v. Saidal, 164 B.R. at 487 (finding that entry of a final decree terminates court's postconfirmation jurisdiction); (Cook v. Chrysler Credit Corp, 174 B.R. 321, 327 (M.D.Ala. 1994)(concluding that there was no "related to" jurisdiction over claims when the bankruptcy case was closed.). Further, one court has held that a bankruptcy court cannot exercise even ancillary jurisdiction if the underlying main bankruptcy case is closed. Zerand-Bernal Group, Inc., 158 B.R. at 464.
Rules 3020(d) and 3021 of the Federal Rules of Bankruptcy Procedure further reinforce the bankruptcy court's postconfirmation jurisdiction. Rule 3020(d) provides:
(d) Retained Power. Notwithstanding the entry of the order of confirmation, the court may enter all orders necessary to administer the estate.
Similarly, Rule 3021 provides:
After confirmation of a plan, distribution shall be made to creditors whose claims have been allowed, to holders of stock, bonds, debentures, notes, and other securities of record at the time of commencement of distribution whose claims or equity security interests have not been disallowed and to indenture trustees who have filed claims pursuant to Rule 3003(c)(5) and which have been allowed.
Laurel Hill Paper Co., 94-12869C-11G (July 2, 1998)(Judge William L. Stocks) (unpublished), pertinent portions of which are attached. In Laurel Hill, the debtor filed a report of substantial consummation, final report and request for final decree more than two years after confirmation of its plan. In response, the creditors' committee filed a motion for order in aid of consummation of plan to clarify the plan definition, to enforce the plan reporting requirements and for related relief. The creditors' committee contended that the debtor's transactions with a related company i.e. the extraordinary credit terms and the conversion of a $875,000 receivable to a long-term debt, were outside the scope of ordinary course of business terms, were outside of operations and conduct permissible under the plan and violated the debtor's contractual duty of good faith and fair dealing. In reply, the debtor argued that the court did not have jurisdiction to consider the motion of the creditors' committee and that the committee was not entitled to the relief sought. The debtor further renewed its request for the court to enter an order finding that the plan had been substantially consummated and requesting that the case be closed. Notwithstanding the fact that the plan had been substantially consummated, Judge Stocks easily found postconfirmation jurisdiction over the proceeding pursuant to 28 U.S.C. § 1334, 11 U.S.C. § 1442 and the debtor's confirmed plan.
In re Hess' Sons, Inc., 218 B.R. 354 (Bankr.D.Md.1998), court determined that it had post-confirmation jurisdiction to determine fees owed to the U.S. Trustee. The court observed that payment of the correct amount to the U.S. Trustee is a matter of allocation of property among creditors and therefore affects distributions required to be made by the debtor. The fact that the fees payable to the U.S. Trustee are statutory and not provided for under our confirmed plan is immaterial. As a statutory duty, such fees concern the implementation and execution of a debtor's confirmed plan.
Peachtree Lane Assocs. v. Granader (In Re Peachtree Lane Assocs.), 186 B.R. 663 (Bankr. N.D Ill. 1995), appeal dismissed, remanded, 188 B.R. 815 (N.D. Ill. 1995), court observed that jurisdiction over adversary proceeding defendants who filed counterclaim against debtor did not end with confirmation of Chapter 11 plan so that court continued to have jurisdiction over post-judgment dispute as to attorneys' fees.
Burstein v. Donaldson (In Re Insulfoams, Inc.), 184 B.R. 694 (Bankr. W.D. Penn. 1995), court had jurisdiction to adjudicate postconfirmation motion by trustee to convert Chapter 11 case to Chapter 7, where trustee's grounds for bringing motion asserted fraud and breach of fiduciary duty by principals of debtor in attaining plan confirmation. According to the court, under 28 U.S.C. § 1334, there need only be a "nexus" between the proceeding and the bankruptcy case. Therefore, a motion seeking to impose personal liability on fiduciaries of the debtor for alleged fraudulent actions causing the debtor to be unable to fulfill its plan obligations to unsecured creditors was sufficiently related to the underlying bankruptcy case to support jurisdiction.
Refrigerant Reclamation Corp. of Am v. Todak (In Re Refrigerant Reclamation Corp. of Am.), 186 B.R. 78 (Bankr. N.D. Tenn. 1995), court determined that postconfirmation jurisdiction exists by reason of plain text of 28 U.S.C. § 1334(b), not because of the provisions of confirmed plan or court order and therefore court retained jurisdiction to determine fact dispute arising after plan confirmation.
In re Walker, 198 B.R. 476, 481 (Bankr. E.D. Va. 1996), bankruptcy court determined that a lender liability suit instituted by a debtor after confirmation of its plan was not "related to" the underlying bankruptcy case and therefore denied the bank's request to reopen the case and remove the state court litigation. Crucial to the court's reasoning was the fact that the bankruptcy court case had been closed and the bankruptcy estate no longer existed.
Poplar Run Five Ltd. Partnership v. Virginia Electric & Power Co., 192 B.R. 848, 860 (Bankr. E.D. Va. 1995), bankruptcy court similarly concluded that a two party dispute between a former debtor and Virginia Power, accompanied with a third party action against the lender's subsidiaries, neither arose in nor related to the former debtor's bankruptcy case. Accordingly, the court found no jurisdictional basis to retain the case.
H&L Developers v. Arvida/J&B Partners (In Re H&L Developers), 178 B.R. 71 (Bankr. E.D. Penn. 1994), bankruptcy court lacks jurisdiction over Chapter 11 debtor's action alleging interference with operation of debtor's business subsequent to confirmation, where action raises state law claims and causes of action, asserts no Bankruptcy Code or other federal law claims, and does not seek to interpret, implement or enforce positions of confirmed plan or confirmation order.
A.R.E. Manf. Co. v. United States, 138 B.R. 996 (Bankr. M.D. Fla. 1992), bankruptcy court lacks subject matter jurisdiction under 28 U.S.C. § 157 to hear proceeding filed by debtor postconfirmation in which debtor alleged that rejection of debtor's bid on government air-conditioning contract under federal procurement law that forbids awarding reprocurement contract to bidding, such as debtor, who defaulted on initial contract if reprocurement contract would be at a greater price than price of initial contract violates discharge injunction of 11 U.S.C. § 524 because issue involves only federal procurement law, proceeding is not within limited retention of jurisdiction set forth in plan, neither facts nor law implicate in any way application of bankruptcy law or prior proceedings in bankruptcy case, debtor's bid was rejected solely because it did not conform to governing federal procurement law, and U.S. has not attempted to collect funds from debtor, nor has debtor been in anyway penalized for having filed bankruptcy.
III. POSTCONFIRMATION CONVERSION
When a plan cannot be carried out, the reorganized debtor and its creditors are left with a variety of options. As discussed above, absent a contrary plan provision, a creditor may exercise state law remedies including foreclosure. Alternatively, in certain circumstances, creditors may seek to compel actions within the bankruptcy court. The reorganized debtor also has option. These options include plan modification and conversion. Plan modification will not be discussed in this paper, but has been thoroughly discussed elsewhere. Substantially less has been written about the effects of conversion.
A. Procedure for Conversion
The procedure for conversion from Chapter 11 to Chapter 7 is governed by Rule 1019, which provides:
When a chapter 11, chapter 12 or chapter 13 case has been converted or reconverted to a chapter 7 case:
(A) Lists, inventories, schedules, and statements of financial affairs theretofore filed shall be deemed to be filed in the chapter 7 case, unless the court directs otherwise. If they have not been previously filed, the debtor shall comply with Rule 1007 as if an order for relief had been entered on an involuntary petition on the date of the entry of the order directing that the case continue under chapter 7.
(B) The statement of intention, if required, shall be filed within 30 days following entry of the order of conversion or before the first date set for the meeting of creditors, whichever is earlier. An extension of time may be granted for cause only on motion made before the time has expired. Notice of an extension shall be given to the United States trustee and to any committee, trustee, or other party as the court may direct.
(2) New Filing Periods. A new time period for filing claims, a complaint objecting to discharge, or a complaint to obtain a determination of discharge ability of any debt shall commence pursuant to Rules 3002, 4004 or 4007, provided that a new time period shall not commence if a chapter 7 case has been converted to a chapter 11, 12, or 13 case and thereafter reconverted to a chapter 7 case and the time for filing claims, a complaint objecting to discharge, or a complaint to obtain a determination of the discharge ability of any debt, or any extension thereof, expired in the original chapter 7 case.
(3) Claims File Before Conversion. All claims actually filed by a creditor before conversion of the case are deemed filed in the chapter 7 case.
(4) Turnover of Records and Property. After qualification of, or assumption of duties by the chapter 7 trustee, any debtor in possession or trustee previously acting in the chapter 11, 12, or 13 case shall, forthwith, unless otherwise ordered, turn over to the chapter 7 trustee all records and property of the estate in the possession or control of the debtor in possession of trustee.
(5) Filing Final Report and Schedule of Postpetition Debts.
(A) Conversion of Chapter 11 or Chapter 12 Case. Unless the court directs otherwise, if a chapter 11 or chapter 12 case is converted to chapter 7, the debtor in possession or, if the debtor is not a debtor in possession, the trustee serving at the time of conversion, shall:
(i) not later than 15 days after conversion of the case, file a schedule of unpaid debts incurred after the filing of the petition and before conversion of the case, including the name and address of each holder of a claim; and
(ii) not later than 30 days after conversion of the case, file and transmit to the United States trustee a final report and account;
(C) Conversion After Confirmation of a Plan.Unless the court orders otherwise, if a chapter 11, chapter 12, or chapter 13 case is converted to chapter 7 after confirmation of a plan, the debtor shall file:
(i) a schedule of property not listed in the final report and account required after the filing of the petition but before conversion, except if the case is converted from chapter 13 to chapter 7 and §348(f)(2) does not apply;
(ii) a schedule of unpaid debts not listed in the final report and account incurred after confirmation but before the conversion; and
(iii) a schedule of executory contracts and unexpired leases entered into or assumed after the filing of the petition but before conversion.
(6) Filing of Postpetition Claims; Notice. On the filing of the schedule of unpaid debts, the clerk, or some other person as the court may direct, shall give notice to those entities, including the United States, any state, or any subdivision thereof, that their claims may be filed pursuant to Rules 3001 (a)-(d) and 3002. Unless a notice of insufficient assets to pay a dividend is mailed pursuant to Rule 2002(e), the court shall fix the time for filing claims arising from the rejection of executory contracts or unexpired leases under §§348(c) and 365(d) of the Code.
B. Grounds for Conversion
Section 1112(a) allows a debtor to convert a case to Chapter 7, without cause, except in three situations. Section 1112(a) states:
(a) The debtor may convert a case under this chapter to a case under chapter 7 of this title unless -
(1) the debtor is not a debtor in possession.
(2) the case originally was commenced as an involuntary case under this chapter; or
(3) the case was converted to a case under this chapter other than on the debtor's request.
Unless one of these situations is present, courts have held the right to voluntarily convert to be absolute. See In re Dieckhaus Stationers of King of Prussia, 73 B.R. 969 (Bankr. E.D. Pa. 1987) (debtor has the right to convert under 1112(a) whether or not conversion is in the best interest of creditors). A majority of courts, however, have held that there is not an absolute right to convert after confirmation, reasoning that the debtor is no longer a "debtor in possession." See Collier on Bankruptcy, 15th ed., para. 1112.02. See also In re T.S.P. Industries, Inc., 120 B.R. 107 (Bankr. N.D. Ill. 1990) ( discussing the issue at length and citing numerous cases holding that post-confirmation debtor is a not debtor in possession.) Contrary to those cases is Judge Potter's decision in Abbot v. Blackwelder Furniture Co., 33 B.R. 399 (W.D.N.C. 1983). Relying on the plain language of section 1101, which defines "debtor in possession" as the debtor except when a trustee has been appointed, the court held that the post-confirmation debtor remained a "debtor in possession" with an absolute right to convert under § 1112(a).
Section 1112(b) governs requests to convert by parties other than a debtor in possession, stating:
Except as provided in subsection (c) of this section, on request of a party in interest or the United States trustee or bankruptcy administrator, and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including -
(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;
(2) inability to effectuate a plan;
(3) unreasonable delay by the debtor that is prejudicial to creditors;
(4) failure to propose a plan under section 1121 of this title within any time fixed by the court;
(5) denial of confirmation of every proposed plan and denial of a request made for additional time for filing another plan or a modification of a plan;
(6) revocation of an order of confirmation under section 1144 of this title, and denial of confirmation or another plan or a modified plan under section 1129 of this title;
(7) inability to effectuate substantial consummation of a confirmed plan;
(8) material default by the debtor with respect to a confirmed plan;
(9) termination of a plan by reason of the occurrence of a condition specified in the plan; or
(10) nonpayment of any fees or charges required under chapter 123 of title 28.
Pursuant to § 102(3), this list of grounds for conversion is not exclusive (the word "including" is not limiting). See, e.g., In re Gonic Realty Trust, 909 F.2d 624, 626 (1st Cir. 1990) (stating: "[t]he court, however, must exercise its sound judgment in reaching a determination and must ascertain that the decision is in the best interest of creditors"). Bankruptcy courts have wide discretion in making determinations to dismiss or convert. E.g., In re Winshall Settler's Trust, 758 F.2d 1136 (6th Cir. 1985).
C. Effect of Conversion
1. Effect on Claims
Rule 1019(3) provides that claims actually filed before conversion are deemed filed after the conversion to Chapter 7. The Rule does not, however, apply to those claims scheduled in the Chapter 11 and deemed filed in the Chapter 11, but not actually filed. See, e.g., In re Dauer, 165 B.R. 146 (Bankr. D. N.J. 1994) (proof of claim was required in converted Chapter 11 case even for undisputed claims scheduled in Chapter 11); In re L. Meyer & Son Seafood Corp., 188 B.R. 315 (Bankr. S. D. Fla. 1995) (creditor whose claim had been "deemed filed" in Chapter 11 case nevertheless had to file proof of claim after conversion to Chapter 7 under Bankruptcy Rule 1019) (creditor's claim barred even though creditor never received notification of bar date in converted case because clerk of court used the wrong mailing matrix).
2. Property of the (Chapter 7) Estate
In recent years, there has been substantial litigation over what constitutes "property of the estate" in a converted post confirmation case. These cases interpret § 348(a), which states:
(a) Conversion of a case from a case under one chapter of this title to a case under another chapter of this title constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) of this section, does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief.
In In re Calania Corp., 188 B.R. 41 (Bankr. M.D. Fla. 1995), the court had before it a motion of a Chapter 7 trustee appointed after a post confirmation conversion. The trustee sought permission to inspect the U.S. mail received by the debtor. Examining at length the question of what constituted property of the estate in the postconfirmation converted the case, the court stated:
First, Section 541 contains the definition of "property of the estate," and provides that the estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." The two key components of this definition for purposes of the case under consideration are that (1) the estate consists of property of the debtor, and that (2) the estate is determined as of the commencement of the case.
The second relevant section of the Bankruptcy Code is Section 348, which contains the provisions regarding the effect of conversion. Although a conversion constitutes an order for relief under the new chapter, Section 348(a) states that the conversion does not effect a change in the date of the commencement of the case. It would therefore appear from the combined operation of Section 541 and Section 348 that the conversion of a case does not affect the scope of the property of the estate in the converted case, since that property had been fixed as of the date of the original filing.
The third relevant section of the Bankruptcy Code is Section 1141, regarding the effect of confirmation in Chapter 11 cases. That section provides that the confirmation of a plan "vests all of the property of the estate in the debtor," unless otherwise provided in the plan or the order confirming the plan. The confirmation of a plan, however, does not necessarily dispose of the bankruptcy case. Instead, the case generally remains pending even after confirmation until the plan is substantially consummated and a final decree is entered. Therefore, it appears that the case continues even though all property of the estate has been vested in the reorganized debtor pursuant to Section 1141(b).
Finally, Section 1112 contains the provisions regarding the dismissal or conversion of Chapter 11 cases. Specifically, Section 1112(b) provides for such dismissal or conversion on the request of a party in interest, for "cause." Subsection 1112(b)(7) and subsection 1112(b)(8) explicitly state that such cause includes the debtor's inability to effectuate substantial consummation of a confirmed plan and the debtor's material default with respect to a confirmed plan. This section, therefore, clearly contemplates the conversion of a Chapter 11 case following confirmation of the Chapter 11 plan.
Based on the foregoing it would be utterly pointless to make a provision for the conversion of an aborted Chapter 11 case to a Chapter 7 case if by virtue of Section 1141 there would not be any assets for the Chapter 7 trustee to administer. A careful analysis of the Code provisions permits only one conclusion that properties which were subject to the confirmed plan that is properties in which the Debtor had a cognizable legal or equitable ownership interest on the date of confirmation will be properties which are clearly acquired by the Debtor post-confirmation will not be subject to administration by the Chapter 7 trustee.
Accordingly, the court allowed the trustee to inspect the mail to determine of it involved property of the estate.
Citing Calania, the court in In re Smith, 201 B.R. 267 (D. Nev. 1996), rejected a debtor's argument that plan confirmation, which vested all property of the estate in the debtor, precluded conversion because there was no longer an estate to convert. Citing §348(a), the court held that although the property of the estate had vested in the debtor upon confirmation, for purposes of the Chapter 7 property of the estate would be determined as of the date of the commencement of the Chapter 11. The court stated that the debtor's argument would render §1112(b)(7-9) meaningless. The court stated:
The only interpretation of the interplay of sections 348, 541, 1141 and 1112(b) that is consistent with the plan language of 1112 if the interpretation of the Calania court. Section 348, which provides that the date of commencement of a plan does not change upon conversion simply means that property constituting the estate of the debtor is determined as of the date of commencement. When a plan is converted, this is the only property that the court has jurisdiction over. A court would not look at property acquired after confirmation in determining the estate for purposes of conversion to Chapter 7 (citations omitted).
In re Smith, 201 B.R. at 274.
Rejecting the decisions in Smith and Calania is In re K & M Printing, Inc., 210 B.R. 583 (Bankr. D. Ariz. 1997). The K & M court held that once a Chapter 11 plan was confirmed, the conversion to Chapter 7 did not revest the property that had vested in the debtor upon confirmation. The court held that although § 348(a) provides that confirmation constitutes an order for relief, it did not create a new bankruptcy estate. In K & M, because the confirmed plan did not provide for the re-vesting of assets upon conversion, the Court held that conversion would not be in the best interest of creditors. Accordingly, the Court dismissed the case, explaining:
What Smith doesn't analyze is the fact debtor is discharged and the rights of debtor and creditor altered by the confirmed plan. The plan is binding and res judicata. Parties may seek enforcement of plan rights in nonbankruptcy forums. If the case is converted to Chapter 7 and the remaining pre-confirmation assets are property of a new estate, does the trustee follow the distribution scheme of section 726 or the binding provisions of the judicially approved plan? If section 726 is chosen, this has the effect of revoking confirmation without the limitations placed on the revocation power by section 1144. ...
The present plan provides that upon confirmation all property vests in debtor, except for specific items to be returned by debtor. . . . There is no provision directing that upon conversion, the Court retains jurisdiction over debtor's property. Accordingly, there is no estate property to administer and conversion is in no party's interest.
Other cases discussing the extent or existence of the estate in a post confirmation converted case include: In re T.S.P. Industries, Inc., 120 B.R. 107 (Bankr. N.D. Ill. 1990) (conversion does not revest property in the estate); In re Pauling Auto Supply, 158 B.R. 789 (Bankr. N.D. Iowa 1993) (may be no estate subject to distribution following post-confirmation conversion); Ohio v. H.R.P. Auto Center, Inc., 130 B.R. 247 (Bankr. N.D. Ohio 1991) (conversion will not create new estate); In re Winom Toll and Die, Inc., 173 B.R. 613 (Bankr. E.D. Mich. 1994) (property which vests in the debtor on confirmation does not revest on conversion).
3. Postconversion Avoidance Powers
With few exceptions, courts have held that in post confirmation converted Chapter 11 cases, the petition date for purposes of avoidance actions under §§ 544, 547, 548, and 549 is the date of the initial Chapter 11 filing. In Fogel v. Russell Transfer, Inc., 852 F.2d 797 (4th Cir. 1988), the court declined to accept a Trustee's policy based argument that in a converted postconfirmation case, the reachback period should run from the date of conversion. The court explained:
The Trustee concedes, as he must, that if a transfer occurs before the Chapter 11 reorganization plan is confirmed then a subsequent conversion to Chapter 7 does not effect section 547. Section 547 continues to date preferences from the date of filing of the Chapter 11 petition. The Trustee distinguishes that situation by the fact that here the Chapter 11 plan had been confirmed. His policy argument is that unsecured creditors who deal with a debtor after Chapter 11 plan confirmation should be identically situated as when they deal with any other person who subsequently makes a Chapter 7 filing. Under the bankruptcy court's and district court's resolution, the two are not identically situated. The unsecured creditors of a person who files a Chapter 7 petition, without having filed an earlier Chapter 11 petition, have the benefit of return of preferential transfers made within ninety days of filing of the Chapter 7 petition. 11 U.S.C. §547(b)(4). The unsecured creditors of a person operating under a confirmed Chapter 11 plan who subsequently converts to Chapter 7 do not get that benefit, under the resolution below of this case, since the ninety day period dates from the filing of the Chapter 11 petition rather than from the conversion to Chapter 7. The Trustee's proposed resolution of dating preferences from the date of conversion to Chapter 7 would end the disparity.
Even under the case cited by the Trustee, therefore, the relevant date for determination of preferences under section 547, in the circumstances of the present case, is the date of filing of the Chapter 11 petition notwithstanding the intervening conversion to Chapter 7. The plain language of the statute, in section 348, reaches the result. Thus, it is not necessary to consider policy arguments in support of various different interpretations. Further, to the extent policy is considered, the Trustee's policy argument is counterbalanced and outweighed by the interest of those creditors who rely on orders of the Court during the Chapter 11 proceeding."
Id. at 799.
The court examined the apparently contrary decision in In re Hoggarth, 78 B.R. 1000 (Bankr. N.D. 1988) which held that the date of conversion, rather than the date of filing of the original Chapter 11 case, was the applicable date for purposes of section 547. The Hoggarth court stated:
When a case is converted to a chapter 7 the trustee inherits certain rights and these rights ought to be no different in situations of conversion than they would be in a case initially commenced under Chapter 7.
78 B.R. at 1002. The Fourth Circuit distinguished Hoggarth, noting that Hoggarth limited its holding to transfers of "non-plan property to non-plan creditors." The Fourth Circuit did not indicate whether it whether actions to avoid transfers of non-plan property to non-plan creditors should date from the date of conversion.
Given the limitations on a Chapter 7 Trustee's avoiding powers, and the limited property which may be property of the estate, creditors will often be better off having a postconfirmation debtor file a new chapter 7, rather than converting the existing case.
Easy street is not around the Chapter 11 block for most debtors. The foregoing issues illustrate just how tough the postconfirmation process can be.