Contributed by Matthias J. Kleinsasser
Clang, clang, clang goes the Weil Bankruptcy Blog Breaking the Code trolley—and this month it’s stopping at section 1128(b) of the Bankruptcy Code! Section 1128(b) states that “[a] party in interest may object to confirmation of a plan.” Though weighing in at a paltry eleven words, section 1128(b)’s language contains surprising intricacies.
Who is a “party in interest?”
Although 1128(b) states that a “party in interest” has standing to object to plan confirmation, section 1128 does not provide any guidance as to who or what constitutes a “party in interest.” Section 1109(b), however, defines a party in interest to include the debtor, a trustee, a creditor, an equity security holder, a creditors’ or equity security holders’ committee, or an indenture trustee. Section 1109(b)’s list is not by any means exclusive; instead, courts broadly define a party in interest to include anyone with a financial interest in the case, or, in some cases, a legal interest. Savage & Assocs. v. K & L Gates (In re Teligent, Inc.), 640 F.3d 53, 60 (2d Cir. 2011). Though it would be incorrect to assume that the term “party in interest” means the same thing in every section of the Bankruptcy Code in which it appears, see Krys v. Official Comm. of Unsecured Creditors of Refco Inc. (In re Refco Inc.), 505 F.3d 109, 116 n.9 (2d Cir. 2007), this term should generally be defined broadly. See In re Global Indus. Techs., Inc., 645 F.3d 201, 210-15 (3d Cir. 2011).
There are, however, limits to how broadly a court will interpret “party in interest.” See Teligent, 640 F.3d at 61 (upholding bankruptcy court’s determination that law firm that was not a creditor of the debtor, but “merely a potential debtor of [the debtor’s] debtor” did not have standing to be heard on the approval of a settlement motion under Rule 9019). Furthermore, the fact that a party plainly fits into one of the “party in interest” categories of section 1109(b) does not obviate the basic requirement of Article III standing that a party be “directly, adversely, and pecuniarily affect[ed]” by the action it challenges—i.e., that a party sustain an injury-in-fact. In In re Northwood Properties, LLC, for example, the court rejected the appellees’ argument that they were “grouped into an artificial convenience class . . . in order to orchestrate acceptance of the plan.” Bourne v. Northwood Props., LLC (In re Northwood Props., LLC), 509 F.3d 15, 25 (1st Cir. 2007). Because the reclassification improved the appellees’ financial position by providing for payment in full of their claims, the court held that the appellees “ha[d] no legitimate grounds for objecting to the reorganization plan.” Id.
Rule 3020(b) of the Federal Rules of Bankruptcy Procedure governs objections under section 1128(b). That rule provides that “[a]n objection to confirmation of the plan shall be filed and served on the debtor, the trustee, the proponent of the plan, any committee appointed under the Bankruptcy Code, and any other entity designated by the court, within a time fixed by the court” (emphasis added). Rule 3020(b) also requires that a copy of any objection brought under section 1128 must be transmitted to the U.S. trustee within the time fixed by the court for filing objections. This Rule makes objections to plan confirmation contested matters governed by Rule 9014, meaning that relief must be requested by motion and served in the manner provided by Rule 7004 for service of a summons and complaint, with no response required unless the court directs otherwise. Fed. R. Bankr. P. 9014(a), (b).
Effect of Objection
Though the court must hold the confirmation hearing regardless of whether objections have been filed, practically speaking, a timely objection requires the court to consider seriously whether the proposed plan meets the requirements of section 1129. Though parties are bound by the terms of a confirmed plan, a creditor may attempt to modify the treatment of a claim under the plan by objecting pursuant to section 1128(b) and Rule 3020 prior to entry of the confirmation order. See United States v. Victor, 121 F.3d 1383, 1386 (10th Cir. 1997). An objection can also be a claim against other creditors for claim preclusion purposes. See CoreStates Bank, N.A. v. Huls Am., Inc., 176 F.3d 187, 201 (3d. Cir. 1999). Where a non-adversary party is an “adversary in fact” of a claimant, that claimant may be bound for claim preclusion purposes by a judgment against the non-adversary party. Id. For example, where a creditor successfully objects to a plan on the grounds that another creditor attained its secured status as a result of fraud, any future plan would be prohibited from treating the second creditor as secured. Id. n.14.
Waiver of Objection
A party in interest that fails to timely object to a plan or that fails to prosecute its objection after filing it may waive its right to object to confirmation. See Heins v. Ruti-Sweetwater, Inc. (In re Ruti-Sweetwater, Inc.), 836 F.2d 1263, 1267-68 (10th Cir. 1988) (creditors who failed to timely object to plan could not challenge plan on appeal); In re Apex Oil Co., 118 B.R. 683, 690 (Bankr. E.D. Mo. 1990) (stating that party that filed objection but never appeared before the court and “[did] nothing in furtherance of [its] prosecution” had abandoned objection). The fact that an objecting party has waived its right to object to plan confirmation by not filing a timely objection does not, however, necessarily mean the court cannot consider the objection if it determines in its discretion that consideration is proper. See In re Richard Buick, Inc., 126 B.R. 840, 850 (Bankr. E.D. Pa. 1991) (reviewing untimely objections to confirmation and determining that the presence of dissimilar claims and treatments of secured creditors in a single class precluded confirmation).
Who May Appeal a Confirmation Order?
A party seeking to appeal a confirmation order must satisfy two requirements. First, the party must show that it had the right to object to the plan at time of confirmation—i.e., that it was a party in interest when the confirmation hearing was held. See Certified Class in the Charter Secs. Litig. v. Charter Co. (In re Charter Co.), 92 B.R. 510, 512 (M.D. Fla. 1988). The party must also show that it is a “person aggrieved” under the plan, a more stringent requirement than the injury-in-fact standard typically employed to determine whether Article III standing exists. See In re Combustion Eng’g, Inc., 391 F.3d 190, 215 (3d. Cir. 2004) (explaining that, under “person aggrieved” test, “[a]ppellate standing in the bankruptcy context is more restrictive than Article III standing”). A corollary to the definition of “person aggrieved”—someone whose pecuniary interests are affected by the plan, see Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 642 (2d Cir. 1988)—is that a party may only appeal those provisions of the plan that actually affect its interests. Cf. EFL Ltd. v. Miramar Res., Inc. (In re Tascosa Petroleum Corp.), 196 B.R. 856, 863 (D. Kan. 1996) (agreeing with bankruptcy court that “prudential concerns” prevented creditor from asserting rights belonging to creditors classified in a different class).
Though section 1128(b)’s language appears straightforward, the section contains traps for the unwary. Close attention should be paid to the type of objecting party, the procedures followed, and the timing of the objection to ensure that the objection is properly raised.