On Monday, the U.S. Supreme Court affirmed the First Circuit Court of Appeals in Bullard v. Blue Hills Bank.
In Part 1, we summarized the decision. Here in Part 2, we’ll provide some humble criticism.
As a recap, the Supreme Court held that, unlike a confirmation or dismissal, an order denying confirmation of a Chapter 13 plan is not final because it doesn’t terminate the “entire process of attempting to arrive at an approved plan.” Although the Court’s view of finality seems to turn on whether an order results in the sort of “significant consequences” that justify immediate appeal, as of right, the Court adopts a rigid rule: Orders approving confirmation are final; orders denying confirmation are not final.
It’s easier for us to criticize Bullard than propose a workable alternative to its rigidity. However, we have 5 problems with Bullard, especially in the Chapter 11 context where unsettled confirmation issues abound and tend to favor creditors.
Problem 1: The “exclusive” right to freely amend plans is illusory.
The Supreme Court’s holding rests on the assumption that a plan proponent has the exclusive right, following a confirmation denial, to “modify freely” its bankruptcy plan. Unfortunately, that assumption glosses over the situation where “an acceptable, confirmable alternative may not exist.” Chapter 11 plan proponents, at least, frequently find themselves in a situation where their only confirmation option is the very option that the bankruptcy judge rejected. Therefore, any “exclusive” right to “modify freely” is illusory for them.
To be sure, that is not an academic or hyper-technical concern. Here are some pressing, real-world examples:
Example 1: Assume that the feasibility of a single asset real estate debtor’s plan hinges on the debtor paying no more than a 4% plan interest rate. If a court concludes under Till that the rate should be 6% and, therefore, denies confirmation, then there is very likely no plan modification that will save the debtor.
Example 2: Assume that an individual Chapter 11 debtor can’t possibly pay his creditors in full. Therefore, short of consent, his plan will hinge on the court adopting the minority rather than the majority rule regarding the absolute priority rule. If a court (in a Circuit that has not weighed-in on either view) denies confirmation based on the majority rule, then, again, there is likely no saving plan modification.
Example 3: Assume that the feasibility of a debtor’s plan hinges on the court issuing a post-confirmation channeling injunction in favor of a non-debtor who has agreed to fund the plan. If the court denies confirmation because the injunction is inappropriate and, thus, the plan is not feasible, then, once again, a plan modification won’t help.
Example 4: Assume that the debtor’s business depends on its ability to assume a critical executory contract under its plan. If the court denies confirmation because the debtor is prohibited from assuming the contract under, say, § 365(e)(2), then a plan modification is still of no use.
In each of the examples, the debtor practically, if not literally, has no (as the Court phrased it) “acceptable, confirmable alternative.”
“You must pay at least 6%.” “You can’t confirm a plan without paying your creditors in full.” “A channeling injunction is unavailable to you.” “You can’t assume your essential contract.” Each of those holdings, whether raising a question fact or an issue of law, would alter the status quo and settle and/or curtail the rights and obligations of the parties if the holdings are erroneous but left without appellate review. Indeed, they would alienate the rights of the debtor (and the obligation of creditors to respect those rights) if, but for the court’s error, the rejected plan provision would be available to the debtor under the Code. Further, the issue is just as serious for debtors who do have other “acceptable, confirmable” alternatives. That is because even an erroneous shrinking of a debtor’s available confirmation options is a “significant consequence” justifying immediate appeal.
Further, confirmation proceedings are seldom so limited and one-directional. For example, a single plan might propose a 4% interest rate and provide for the assumption of the executory contract. What if the Court (i) holds that assumption of the contract is consistent with the Code but (ii) denies confirmation because the feasibility-killing Till rate should be 6%? In that situation, neither the non-debtor party to the contract nor the debtor can appeal immediately, as of right.
Essentially, Bullard holds that any finding of fact or conclusion of law located in an order denying confirmation is wholly left to the discretion of the courts until such time, if ever, that some other plan is confirmed or the case is dismissed. Given the complexity of, the number of constituencies in, and fragility of negotiations, term sheets, and deadlines arising out of a Chapter 11, time is of the essence–waiting around for a dismissal or some other form of “finality” is usually not workable in a hotly-contested reorganization case.
Problem 2: The interlocutory appeal process is a questionable “safety valve.”
At least 3 layers of courts told Bullard that his appeal presented pure, important, and divided questions of law. They also acknowledged that the confirmation denial presented significant consequences for Bullard.
Even Chief Justice Roberts, writing for a unanimous Court, agreed that “[s]ometimes, of course, a question will be important enough that it should be addressed immediately. Bullard’s case could well fit the bill: The confirmability of his hybrid plan presented a pure question of law that had divided bankruptcy courts in the First Circuit and would make a substantial financial difference to the parties.”
Nevertheless, the interlocutory appeal process failed Bullard–the very “safety valve” that the Court relied on to soften the blow of Bullard. To be sure, the Court was undeterred by the failure, concluding that it did “not undermine [the Court’s] expectation that lower courts will certify and accept interlocutory appeals from plan denials in appropriate cases.”
However, the way that Bullard played-out in the Courts begs the question: If Bullard’s case was not an appropriate case for interlocutory review, then what case would be an appropriate case? More importantly, will the universe of “appropriate” cases contract when courts begin applying Bullard to [all?] bankruptcy finality questions?
Problem 3: The Supreme Court glosses over the quandary that Bullard sanctions.
The Supreme Court characterizes the above problem as a “practical” problem and even acknowledges that Bullard made “good points” when arguing that a rigid rule could leave a plan proponent with “no effective means of obtaining appellate review of the denied proposal.” Nevertheless, the Court’s tone is, as Robert Mann of SCOTUSBlog suggests, “pitiless, if not in fact callous.”
Under the Supreme Court’s rigid holding, a debtor is limited to an uncertain, imperfect, and wholly discretionary interlocutory appeal or, barring that, the (as Professor Tabb puts it) “Scylla of accepting outright dismissal of the case [and then appealing] or the Charybdis of trying to confirm an alternative plan [and then appealing].”
Under either option, the debtor is betting its fate in bankruptcy on an end of the line appeal and/or placing itself in the bizarre, if not unethical, position of attacking the new plan that it advocated just so it can bootstrap the old plan into an appeal–a new plan that may take on an irreversible life of its own. In short, it’s absurd.
Problem 4: The Supreme Court arguably trivializes the quandary too.
Not only does the Supreme Court gloss over the problem, but it arguably trivializes it. Professor Tabb cuts to the chase in translating Chief Justice Roberts’ message for debtors like Bullard: (i) “too bad, you can’t always get what you want” and (ii) never fear, “bankruptcy courts . . . rule correctly most of the time” [that’s a direct quote from Bullard!].
On the one hand, one could argue that the further a bankruptcy issue gets from the bankruptcy court, the more likely that it’s going to be decided incorrectly. Additionally, let’s not fool ourselves: For practical reasons and good reasons, there’s a certain “presumption of regularity” that arises when an appellate court is asked to grade a bankruptcy judge’s paper.
On the other hand, the Court’s expression of confidence in the bankruptcy courts is arguably a backhanded trivialization of the important issues that arise in bankruptcy. The Court is not subtle: “And even when [bankruptcy judges] slip, many of their errors—wrongly concluding, say, that a debtor should pay unsecured creditors $400 a month rather than $300—will not be of a sort that justifies the costs entailed by a system of universal immediate appeals.” Wow.
Finally, you don’t need to be an Article III snob to agree with Brundstad’s suggestion that “a robustly available right to appeal to an Article III tribunal is one of the essential attributes of the constitutionality of the bankruptcy system.” Will certifying courts raise the bar for interlocutory appeals in light of the Supreme Court’s ringing endorsement of bankruptcy judges and (arguable) minimization of bankruptcy issues?
Problem 5: The response to “unfair asymmetry” doesn’t work in bankruptcy.
In response to Bullard’s “unfair asymmetry” argument, the Court suggests that creditors who support a plan can also be burdened by having to wait to appeal, as if to say that the majority rule is acceptable as long as it doesn’t discriminate as to which parties it forces to wait. That might make sense in a two-party civil dispute, but it overlooks that the emphasis in bankruptcy is on the best interests of all constituencies. Indeed, if 999 out 1,000 creditors voted to accept a plan, but 1 holdout creditor had its objection sustained, then it’s hardly comforting to the debtor and the 999 other creditors that they’ll suffer the “asymmetry” equally while they wait to appeal.
It’s interesting how Chapter 13 cases like Till and now Bullard have had or likely will have a significant impact on Chapter 11. It’s possible, but unlikely, that there are enough differences between Chapter 13 and Chapter 11 that courts will limit Bullard to Chapter 13. However, assuming that Bullard resolves confirmation finality for all debtors, any Chapter 11 lawyer who has been on the losing end of a 30 page order denying confirmation will see Bullard exactly as it is: A significant win for creditors.
As Bullard illustrates, pursuing an interlocutory appeal is, by no means, a guarantee that you’ll get your day in appellate court one way or the other. And as long as Circuit-splits continue to favor creditors, unsettled Chapter 11 issues could remain trapped inside orders denying confirmation, subject only to the discretion of courts in the interlocutory process or the intervention of some other, dangerous, and final resolution of a bankruptcy case.
Ultimately, we do not see how it is wise to transform a flexible, non-technical doctrine of finality, that has evolved over 100+ years, into a rigid, one-size-fits-all doctrine. However, we also do not see how it would be practical to make all confirmation denials immediately appealable. For the lack of a better solution, the doctrine should continue as a flexible one, with a case-by-case determination of whether a particular appeal presents “significant consequences” that require immediate review.
In our next post, we’ll discuss the ABI Commission’s recommendations on third-party releases.