The Magic Behind the Confirmation Order in Chapter 11
The goal of any Chapter 11 bankruptcy case, whether individual or business is simple: get the plan confirmed. The process of negotiating with creditors, making personal budgets, and filling out those pesky monthly operating reports all have the end goal of making a Plan of Reorganization that is fair, reasonable, and most importantly, feasible for the client to complete. But what effect does the confirmation order actually have on the case? What does this mystical magical confirmation order allow to happen if the Debtor defaults? These answers sometimes, are not so clear, even to attorneys.
The confirmation order is the crucial point in the bankruptcy case when plan payments begin, and all the agreements between the debtor and creditors start over. The Chapter 11 Plan creates a new contractual relationship between the debtor and creditor, and the treatment that is provided for in the plan are the new terms. In re Winn-Dixie Stores, Inc. 414 B.R. 764 (M.D. Fla. 2009). The agreement the creditor and debtor had before the confirmation is erased, and the new agreement is controls.
With this in mind, there are really three ways that a debtor default can be dealt with: 1) the case can be re-opened and dismissed; 2) the case can be converted to a Chapter 7 liquidation case; or 3) the contract can be litigated in state court. Generally, courts are reluctant to re-open cases. Good cause must be shown, and usually pretty compelling circumstances have to exist for a court to allow a case to be re-opened. There are two ways cases can be converted, voluntarily or involuntarily. The bankruptcy code, under 11 U.S.C. §1112(b) allows creditors to request that the case be converted if certain circumstances exist, some of which include material default with respect to a confirmed plan, inability to effectuate a plan of reorganization, failure to file tax returns or pay post petition taxes, among several others. It is important to note that with both conversion and dismissal, the court looks at the best interest of the creditors, not the debtors, and creditors are not afraid to pursue these avenues when a debtor has not made plan payments.
The third option relies on the fact that a new contract is created between the creditor and debtor. Because the Chapter 11 plan and subsequent confirmation create a brand new contract, creditors can absolutely pursue action in state court. This means that foreclosure actions can commence, default judgments can be entered, and the creditor can pursue all legal remedies they were prevented from pursuing while the debtor was protected by the bankruptcy.
Bankruptcy is a long and often difficult process, and is not entered into lightly. A lot of debtors come to us and choose chapter 11 to protect themselves from foreclosures, or liquidating. While the primary goal of any chapter 11 is to get the case confirmed, there is no point to confirmation if the debtor defaults. The moral of the story is to make sure the plan proposed is feasible for the debtor, and that the debtor makes plan payments so that the event of a default is not even a concern.
By: Samantha Marriott, Attorney at The Law Offices of Jason A. Burgess, LLC
If you have questions about this or anything else please give us a call at 904-354-5065 or email us at jason@jasonAburgess.com