Bankr. E.D.N.C.: In re Archway Homes- Modification of Chapter 11 Plan for Dirt for Debt

Summary: Following a objections to a Chapter 11 plan by the bankruptcy administrator, First Citizens Bank and other creditors, the Debtor negotiated confirmation, which provided, in part pertinent to this decision, that it would be allowed 11 months to actively market and sell to parcels of real property, against which First Citizens held liens. Failure to sell the collateral during that time would allow First Citizens to foreclose. As this period drew towards an end and no sale was imminent, the Debtor, after failing to renegotiate terms with First Citizens, brought a motion to modify the plan, seeking to release some of the property in a “partial dirt for debt”, to which First Citizens objected. Pursuant to 11 U.S.C. § 1127(b), the court held that modification of a confirmed Chapter 11 plan was permissible only: 1. Before substantial confirmation of the plan; and 2. Only if circumstances warrant such modification. “Substantial consummation,” is statutorily defined by 11 U.S.C. § 1101(2), as follows: (A) transfer of all or substantially all of the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and (C) commencement of distribution under the plan. The Confirmation Order in this case specifically defined “substantial consummation” as the commencement of initial plan payments by the Debtor to all creditor classes. While initial payments had commenced to all classes, the Debtor argued both that these payments were made by a third party and not the Debtor and also that not all members of every class had received initial disbursements. The bankruptcy court dismissed this as “disingenuous at best” and held that the plan was substianially consummated. Further, the court found that the newly proposed dirt for debt plan was not warranted by the circumstances of the case, as the only grounds for such change was its own inability to sell the properties. For a copy of the opinion, please see: Archway Homes- Modification of Chapter 11 Plan for Dirt for Debt