Bankr. E.D.N.C.: In re Island Breeze Grill- Binding Effect of Confirmation & Limitations on Standing for Plan Modification

Summary:

The bankruptcy court for the Eastern District of North Carolina denied Signature Capital, LLC's motion to amend or set aside the order confirming Chapter 11 bankruptcy reorganization plan. Signature Capital sought relief under Rule 60(a) and Rule 60(b) of the Federal Rules of Civil Procedure, arguing that the plan failed to recognize a subordination agreement that granted it lien priority over the IRS for certain assets.

Key points:

1. Background: Island Breeze Grill filed for Chapter 11 bankruptcy to reorganize debts associated with its commercial property. The reorganization plan designated the IRS as holding the first priority lien, followed by Signature Capital. This designation was based on public records and testimony during the confirmation hearing.

2. The Subordination Agreement: A 2022 agreement subordinated the IRS's lien to Signature Capital's lien, but it was neither filed with public records nor considered during the confirmation process. Signature Capital discovered the agreement months after the plan was confirmed.

3. Rule 60(a) and (b) Arguments: Signature Capital argued that the omission of the subordination agreement was a clerical mistake (under Rule 60(a)) or excusable neglect/newly discovered evidence (under Rule 60(b)). The court rejected these claims, noting:

   • The confirmation order reflected the court's intent at the time, and altering lien priorities would substantively change the parties’ rights, which is beyond Rule 60(a)’s scope.
   • Signature Capital failed to exercise due diligence in identifying the subordination agreement before the confirmation hearing, negating claims of excusable neglect or newly discovered evidence under Rule 60(b).

4. Bankruptcy Code Precedence: The court emphasized that 11 U.S.C. § 1144 is the sole method to revoke a Chapter 11 confirmation order, and only in cases of fraud. Rule 60(b) cannot override the Bankruptcy Code’s limitations. As Signature Capital did not allege fraud, no relief was available.

5. Plan Modification: The court noted that only the debtor (Island Breeze Grill) or the plan proponent can seek post-confirmation plan modifications under 11 U.S.C. § 1127(b). Signature Capital lacked standing to request modifications.

6. Outcome: The motion was denied, and the court reaffirmed the confirmed reorganization plan, binding the parties to its terms.

This decision underscores the strict limitations on altering bankruptcy confirmation orders and the necessity of due diligence by creditors during the bankruptcy process

Commentary:

It is important to always contrast and conserve the differences and similarities between Chapter 11 and Chapter 13 reorganizations.  For example,  while under under 11 U.S.C. § 1127(b)  only "the proponent of the plan*( or the reorganized debtor"  can seek a modification,  unser under 11 U.S.C. § 1329 the debtor,  trustee or holder of an allowed unsecured claim can seek a modification.  Signature Capital,  holding a secured claim,  would not be able to seek a modification in Chapter 13 either.

Additionally,  while bankruptcy courts seem to repeat as rote Gospel in Chapter 11 cases that  pursuant to §1141(a) a confirmed plan is  a contract which "is binding on the debtor and all creditors, whether or not they have accepted the plan" In re Coastline Care, Inc., 299 B.R. 373, 378 (Bankr. E.D.N.C. 2003),  it often seems much harder to get those same courts to recognize that under §1327(a)  the same,  if not even more expansive since there are no comparable exceptions to §1141(d)(2) or (3),  new binding contract applies.

*  Query for Chapter 11 practitioners- Since under under 11 U.S.C. § 1121,  unlike §1321,  more parties than just the debtor can, in appropriate circumstances,  file the plan,  is the proponent just a synonym for debtor or is it whomever proposed the plan that was ultimately confirmed?

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