We’ve had a slow start in 2018 and figured that we’d get back to basics with First National Bank of Oneida v. Brandt, an Eleventh Circuit Court of Appeals Chapter 11 confirmation decision from last month. Ultimately, the Court remanded to the district court on one issue: what’s the impact on a confirmed individual Chapter 11 plan of a § 349 dismissal of the bankruptcy case without a discharge? Even more simply, does a dismissal of the bankruptcy case vacate a prior confirmed plan in an individual case? We think not but the Court left open the issue. Here’s how it went down:
Brandt filed an individual Chapter 11 case back in 2009. On the petition date, he owed $1.3 million in secured real estate debt to Oneida. Oneida filed multiple proofs of claims, each asserting that Oneida was oversecured. Brandt didn’t object to the claims. As a part of Brandt’s confirmed Chapter 11 plan, he classified all of Oneida’s real estate loans in a single class to the extent that they were allowed as secured claims under § 506. He also signed a post-petition note for $150,000 to cover post-petition interest. And he had a separate deficiency class requiring secured claimants to assert their entitlement, if any, to an unsecured deficiency claim within 30 days after the confirmation hearing. Oneida never made that assertion.
Brandt defaulted under the plan a year or so later. Oneida obtained stay relief–it appears that the bankruptcy court kept the case open pending completion of plan payments. Oneida then sold the collateral, applied the $150,000 in proceeds to the debt, and sought a deficiency judgment of over $1 million. After a few rounds, the district court dismissed the deficiency suit for the pre-petition amounts on the basis that Oneida, having failed to assert its entitlement to a deficiency claim in compliance with the plan, had no deficiency claim on those amounts and was limited to enforcing the post-petition note.
Oneida appealed to the Eleventh Circuit. However, after the appeal had been fully briefed, but before the Court could rule, Brandt sought and obtained the dismissal of his bankruptcy case, all without a discharge of his debts. Recognizing that the dismissal might materially impact the issues on appeal, the Court remanded the matter to the district court to determine the impact of the case dismissal on the confirmed plan. However, the Court did give the district court some food for thought on that issue.
First, it recognized that a confirmed plan is binding on the debtor and his creditors under § 1141 in much the same way that a contract is binding.
Second, it recognized that a plan typically subsumes a pre-petition debt and creates a new contract between the parties–but see below.
Third, whereas a confirmed plan in a corporate case results in an immediate discharge of pre-petition debt, an individual discharge must, after the 2005 changes to § 1141, await completion of plan payments.
Fourth, Brandt dismissed his Chapter 11 case before completing his plan payments or receiving a discharge.
Thus, the issue: in an individual case, does § 349’s emphasis on returning matters to the status quo vacate a prior confirmed plan upon dismissal of the case? The Court cites Jevic in support of its conclusion that returning the parties to their pre-petition status is the emphasis of § 349.
The Court acknowledges that § 349 doesn’t explicitly state that a dismissal vacates a prior confirmed plan, but leaves the issue for the district court to decide.
Although we acknowledge that individuals don’t get discharges until they complete their plan payments, we’re skeptical about whether a dismissal order would vacate a prior confirmation order, particularly given that such result is not spelled out in § 349, which is very specific. (Click the link for a reminder of the explicit impacts of a dismissal). That said, the Court analogized to Chapter 13 cases, the dismissal of which cases appears to undo the Chapter 13 plan. The Court thought so, at least. As readers of this blog know, courts frequently analogize to Chapter 13 when struggling with many of the unresolved issues in individual Chapter 11 cases.
Ultimately, the safest route to avoid any doubt is for the bankruptcy court to use § 349(b) to, “for cause,” limit the dismissal in a manner that explicitly preserves the plan while permitting the dismissal. Alternatively or simultaneously, the court could also provide in the confirmation order–in the same way that sale orders often protect against § 349–that a dismissal will not revoke the confirmation order or render the plan unenforceable. To be sure, the issue of individual cases lingering post-confirmation is an important issue. In Georgia, for example, the bankruptcy courts will often “administratively close” the individual case after confirmation so as to freeze reporting and UST payments pending completion of plan payments. There is no dismissal outright and the Chapter 11 plan is implemented. The debtor will then come back, after finishing his payments, and reopen the case to seek a discharge. Although it is not evident what Brandt’s confirmation or dismissal orders provided, he may have put himself on less than square footing for this issue.
We’ll watch this case and see how the district court handles it.
[The other issue from Oneida is also important and, for us, way more interesting: what is the impact of a confirmed plan on a pre-petition debt? Essentially, it’s a novation, discharge, or release question, which should come down to the language of the plan–the plan might novate or extinguish the pre-petition debt or it might not. In that regard, the Eleventh Circuit arguably oversimplifies the issue when it points out that a plan typically subsumes the pre-petition debt and creates a new contract. We’ll watch for that issue, too, which could also implicate § 506 valuation issues.]
If you’d like to stay on top of this and other important bankruptcy issues, then you can subscribe to Plan Proponent via email here.