Bright-Line Rule: No Modification Of Substantially Consummated Chapter 11 Plan

• Published date: 25 May 2022
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Debt Capital Markets, Financial Services, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Mr Mark Douglas and Charles M. Oellermann

To promote the finality and binding effect of confirmed chapter 11 plans, the Bankruptcy Code categorically prohibits any modification of a confirmed plan after it has been "substantially consummated." Stakeholders, however, sometimes attempt to skirt this prohibition by characterizing proposed changes to a substantially consummated chapter 11 plan as some other form of relief, such as modification of the confirmation order or a plan document, or reconsideration of the allowed amount of a claim. The U.S. Bankruptcy Court for the District of Delaware recently addressed one such request in In re Northeast Gas Generation, LLC, 2022 WL 828263 (Bankr. D. Del. Mar. 18, 2022). Long after substantial consummation of a chapter 11 plan that gave an impaired secured creditor 100% of the reorganized debtor's equity and reinstated a portion of its secured debt, the secured creditor sought to reopen the bankruptcy case and obtain an order increasing the amount of its reinstated debt in the guise of "reconsideration" of the amount of its allowed claim. The bankruptcy court denied the request, ruling that the Bankruptcy Code bars modification of a confirmed chapter 11 plan after it has been substantially consummated, even if the proposed changes would not "materially and adversely" impact other stakeholders.

Modification of a Chapter 11 Plan

Section 1127(a) of the Bankruptcy Code states that the proponent of a chapter 11 plan on which votes have been solicited from creditors or interest holders "may modify such plan at any time before confirmation," unless the proposed modification violates the Bankruptcy Code's requirements regarding the classification of claims and interests or the contents of a plan. 11 U.S.C. ' 1127(a) (emphasis added).

Section 1127(b) provides that the proponent of a plan or the reorganized debtor "may modify such plan at any time after confirmation of such plan and before substantial consummation of such plan," again unless the proposed modification violates the Bankruptcy Code's requirements regarding the classification of claims and interests or the contents of a plan. 11 U.S.C. ' 1127(b) (emphasis added). It further states that "[s]uch plan as modified ... becomes the plan only if circumstances warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of [the Bankruptcy Code]."

Under section 1127(d), a creditor or interest holder who accepts or rejects a chapter 11 plan prior to its modification is deemed to accept or reject, "as the case may be, such plan as modified, unless within the time frame fixed by the court, such holder changes such holder's previous acceptance or rejection."

Section 1141(a) of the Bankruptcy Code provides that the terms of a confirmed chapter 11 plan are binding on all parties.

Under section 1101(2), "substantial consummation" of a chapter 11 plan occurs when: (i) substantially all of the property to be transferred under the plan has been transferred; (ii) the debtor or its successor has assumed the business or management of substantially all of the property dealt with by the plan; and (iii) distributions under the plan have commenced.

Special rules regarding post-confirmation plan modifications apply to individual chapter 11 debtors...