The Bottom Line:
The Bankruptcy Court for the Southern District of New York ruled out the possibility of a partial or limited plan revocation under Section 1144 of the Bankruptcy Code. 11 U.S.C. § 1144. Morgenstein v. Carpenter (In re Motors Liquidation Co.), No. 11-9409, 2012 Bankr. LEXIS 74 (Bankr. S.D.N.Y. Jan. 18, 2012). Although the general rule is that a confirmation order is inviolable, Section 1144 allows for revocation in certain instances—namely, where a debtor commits fraud on the court. Reviewing the Class Plaintiffs’ claim for a partial revocation due to an allegation that Motors Liquidation Company committed fraud on the court while confirming its restructuring plan and establishing the claims bar date, the court held that, based on the plain language and purpose of Section 1144, the Bankruptcy Code allows only a complete and absolute revocation of a plan confirmation order, not partial.
What Happened:
A group of owners of 2007 and 2008 Chevrolet Impalas (the “Class Plaintiffs”) sought to assert a claim resulting from an alleged design defect in the spindle rods linking the rear wheels of the vehicles. The Class Plaintiffs alleged that, as a result of this defect, there was “excessive and premature wear and tear” on their tires which then had to be replaced at the owners’ expense. 2012 Bankr. LEXIS 74 at *6-7. The vehicles were produced by General Motors Corp. prior to its bankruptcy reorganization. Out of the reorganization of General Motors Corp. came Motors Liquidation Company (“Old GM”). Old GM, along with the Motors Liquidation Company GUC Trust (the “GUC Trust” which is a trust fund formed for the benefit of the general unsecured creditors of Old GM), were created out of a sale of a significant portion of Old GM’s assets to a newly formed corporation General Motors Corp. Old GM and the GUC Trust hold certain assets and certain pre-petition claims that were made against the previous General Motors Corp (including the claims of the Class Plaintiffs). The Class Plaintiffs brought an adversary proceeding against Old GM and the GUC Trust alleging roughly $180 million in damages due to the estimated costs of repair of their vehicles. These claims were barred by an order of the court effective November 30, 2009. The court confirmed the reorganization plan on March 29, 2011. The Class Plaintiffs filed their adversary complaint on September 26, 2011. In order to circumvent the court ordered claims bar date, the Class Plaintiffs moved for a “limited revocation of the confirmation order,” under section 1144 of the Bankruptcy Code (“Section 1144”), for fraud on the court in debtor’s procurement of the confirmation order. The Class Plaintiffs alleged that Old GM “falsely omitted disclosure of its obligations to an entire class” of Impala owners by failing to disclose that it was aware of the defective spindle rods and their impact on the Class Plaintiffs; 2012 Bankr. LEXIS 74 at *4, however, the Class Plaintiffs only sought partial revocation of the plan confirmation, i.e., to the extent that the Plan discharged their claims.
In response, Old GM and GUC Trust moved to dismiss the complaint. It contended that Section 1144 does not allow for limited or partial revocation of a plan confirmation order. The Old GM and GUC Trust further alleged that even if partial revocation were allowed under Section 1144, there was no such fraud on the court, and the Class Plaintiffs failed to allege sufficient facts to demonstrate any such fraud. Finally, they assert that the Class Plaintiffs’ complaint is equitably moot.
In granting the motion to dismiss the Class Plaintiffs’ complaint, the bankruptcy court began by analyzing Old GM and GUC Trust’s argument that Section 1144 only allows for total revocation of a confirmed plan. The court focused on the text of Section 1144 which holds:
On request of a party in interest at any time before 180 days after the date of the entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud. An order under this section revoking an order of confirmation shall—
(1) contain such provisions as are necessary to protect any entity acquiring rights in good faith reliance on the order of confirmation; and
(2) revoke the discharge of the debtor.
11 U.S.C. § 1144. The court noted that there was nothing in the language of the section that would lead one to believe that Congress intended to allow a partial, or in part, revocation of the plan. Further, the court reasoned that the word “revoke” connotes an absolute or total construction, rather than a selective or partial interpretation. The court reviewed legal and lay definitions of “revoke” and noted that they concur with his interpretation tending toward only an absolute rescission of the confirmation order. Congress chose to allow only “revocation,” where it might have allowed for “modification” of the plan. Importantly, the court noted, Congress allowed for a debtor under certain circumstances to “modify” a confirmed plan before the “substantial consummation” of the plan. 2012 Bankr. LEXIS 74 at *14 (citing 11 U.S.C. § 1127(b)). The decision to use “revoke” where Congress could easily have used “modify” strongly implies an intent to only allow a total rescission of a plan. The Class Plaintiffs pointed to Section 1144’s clause 1‒which allows for provisions to protect an entity that acquired rights in good faith in reliance on the confirmation order‒to demonstrate that the Bankruptcy Code allows for more limited modification of the confirmation order. The court, however, noted that purpose of this clause actually cuts against the Class Plaintiff’s argument; the provision merely addresses the importance of protecting the bargained for rights of stakeholders following a plan confirmation.
The court also reasoned that there is no evidence that Congress intended Section 1144 to allow a court to revoke a plan only as it implicates a certain creditor, claim, or classes, of claims. Section 1144 only addresses itself to the entire order that is procured by fraud. In reviewing case law concerning the interpretation, the court found no courts who favored a partial or limited construction of the revocation of plans under Section 1144. See, e.g., Paul H. Shield, MD, Inc. Profit Sharing Plan v. Northfield Laboratories Inc. (In re Northfield Laboratories Inc.), 2010 Bankr. LEXIS 2635 (Bankr. D. Del. Aug. 27, 2010) (the plain language of the section only allowed for “revocation of an entire confirmation order.”).
The court further observed that, while case law is scant concerning the issue, courts have consistently commented to that partial revocation of a plan is not allowed under Section 1144, though none have definitely decided the issue. These courts have further noted that there is no authority at all suggesting that partial confirmation should be allowed under Section 1144.
Finally, the court analogized a confirmed plan to principles of contract law, noting that partially revoking a plan raised the same reliance concerns as partially rescinding a contract; that is, the expectations of the parties who gave consent to the plan may be upset due to a selective revocation of portions of the confirmation order.
As such, the court held that partial or limited revocation of a plan was not allowed and the Class Plaintiffs could not seek partial revocation. The court granted the defendant’s motion to dismiss the complaint.
Why the Case is Interesting:
The decision effectively eliminates an avenue to attack against a confirmed plan as it relates to an individual group of creditors. Since a partial revocation would not restore the status quo ante, but an altered state with additional claims diluting the payouts in a previously negotiated plan, it would disrupt the expectations of the stakeholders arguably more than a total revocation. The all-or-nothing approach to confirmed plans allows stakeholders to rest assured that their expectations for negotiated plan outcomes will not be upended by later arriving claimants seeking payouts based on claims of fraud. A claimant seeking to beat the claims bar date will have to challenge the entire plan confirmation and demonstrate a debtor’s fraud in obtaining the whole plan. The absolute revocation interpretation of the Code protects the bargained for expectations of stakeholders in a bankruptcy reorganization and allows them to enter into post-confirmation trades and transactions assured that their claims will not be later altered by this form of collateral attack on portions of the confirmation order. On the other hand, parties who were unaware of their claims at the time of confirmation of a plan for a debtor who fraudulently hid the nature of the claims will have to demonstrate fraud as to the entire plan and not simply as to their claims in order revoke the plan, levy their claims against the debtor, and recover their losses.