Our latest installment of “Breaking the Code” examines section 1144 of the Bankruptcy Code, which governs the revocation of an order confirming a chapter 11 plan of reorganization.
Section 1144 provides that the court may, upon the request of a party in interest any time before 180 days after entry of an order confirming a plan of reorganization, and after notice and a hearing, revoke the confirmation order if and only if that order was obtained by fraud. If a court revokes a confirmation order, section 1144 further provides that the revocation order 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 debtor’s discharge under the Bankruptcy Code.
Exclusive Means for Revocation of a Confirmation Order
Section 1144 provides the exclusive means by which a court may revoke an order confirming a chapter 11 plan of reorganization. In re Longardner & Assocs., Inc., 855 F.2d 455, 460 (7th Cir. 1988); S.N. Phelps & Co. v. The Circle K Corp. (In re The Circle K Corp.), 171 B.R. 666, 668 (Bankr. D. Ariz. 1994). Accordingly, the only basis for revocation of a chapter 11 confirmation order is that such order was procured through fraud.
Although section 1144 provides that a chapter 11 confirmation order may only be revoked if it was “procured by fraud,” the Bankruptcy Code does not define fraud. See Longardner, 855 F.2d at 461 citing In re Braten Apparel Corp., 21 B.R. 239, 256 (Bankr. S.D.N.Y. 1982) (“Congress provided no dictionary for the word ‘fraud’ and left it to the development of judicial gloss to guide delineation of types of conduct generally understood to constitute fraud.”). Courts have generally interpreted section 1144 to require the requesting party to demonstrate actual fraudulent intent in connection with the procurement of the confirmation order. See, e.g., Tenn-Fla Partners v. First Union Nat’l Bank of Fla. (In re Tenn-Fla Partners), 226 F.3d 746, 750 (6th Cir. 2000); Longardner, 855 F.2d at 461; Morgenstein v. Motors Liquidation Co. (In re Motors Liquidation Co.), 462 B.R. 494, 505 (Bankr. S.D.N.Y. 2012); Ogden v. Ogden Modulars, Inc. (In re Ogden Modulars, Inc.), 180 B.R. 544, 547 (Bankr. E.D. Mo. 1995).
Several courts have held that the fraud in question need not be perpetrated upon the party requesting revocation; instead, fraud on the court is sufficient to support the request to revoke a confirmation order pursuant to section 1144. See, e.g., Tenn-Fla Partners, 226 F.3d at 751 (holding that “fraud on the court can justify revocation under [section] 1144”); In re V&M Mgmt., Inc., 215 B.R. 895, 904 (Bankr. D. Mass. 1997) (stating that section 1144 “does not necessarily require proof of pecuniary loss to the plaintiff but instead may be satisfied by anticipated loss to the estate as a whole, prejudice to the estate, or even, in the case of fraud on the court, by harm to the integrity of the judicial process (without proof of economic harm of any sort”); Ogden Modulars, 180 B.R. at 547 (holding that the failure to disclose material information known by an entity that is obligated to disclose such information may constitute fraud for the purposes of section 1144); In re Kostoglou, 73 B.R. 596, 599 (Bankr. N.D. Ohio 1987) (“[M]isrepresentations made to a bankruptcy court concerning the value of property owned by a debtor is the type of ‘fraud’ contemplated by Congress in enacting [section] 1144.”). Additionally, section 1144 varies from the standard for revocation of a chapter 7 discharge in that section 1144 does not require that the fraud in question was committed by the debtor—or the plan proponent—and does not require the party requesting revocation to have been unaware of the fraud at the time of discharge. Compare 11 U.S.C. § 1144 with 11 U.S.C. § 727(d).
Section 1144 provides that a court may revoke the confirmation order if, after notice and a hearing, it determines that the order was, in fact, obtained by fraud. Accordingly, the decision to revoke a confirmation order rests in the discretion of the court, which could decline to revoke the confirmation order even if it found that such order was obtained by fraud. Varde Inv. Partners, L.P. v. Comair, Inc. (In re Delta Airlines, Inc.), 386 B.R. 518, 532 (Bankr. S.D.N.Y. 2008); Westchester Surplus Lines Ins. Co. v. Surfside Resort and Suites, Inc. (In re Surfside Resort and Suites, Inc.), 344 B.R. 179, 190 (Bankr. M.D. Fla. 2007).
In contrast, section 1144 also provides that an order revoking a confirmation order shall “contain such provisions as are necessary to protect any entity acquiring rights in good faith reliance on the order of confirmation.” 11 U.S.C. § 1144(1). Noting this distinction, at least one court held that “if a court cannot fashion a revocation order that protects innocent parties who acquired rights in reliance on the confirmation order, the court is barred from revoking the confirmation order – even if the order was procured by fraud.” Delta Airlines, 386 B.R. at 532 (emphasis in original). Following a similar line of reasoning, courts have consistently applied the doctrine of mootness in the context of revocation under section 1144. See, e.g., Chang v. Servico, Inc. (In re Servico, Inc.), 161 B.R. 297, 301 (S.D. Fla. 1993) (finding a request for revocation of a confirmation order to be moot because the plan had been substantially consummated); Almeroth v. Innovative Clinical Solutions, Ltd. (In re Innovative Clinical Solutions, Ltd.), 302 B.R. 136, 142 (Bankr. D. Del. 2003) (denying a section 1144 request after applying the Third Circuit standard for equitable mootness); S.N. Phelps & Co. v. The Circle K Corp. (In re The Circle K Corp.), 171 B.R. 666, 669 (Bankr. D. Ariz. 1994) (stating that the relevant inquiry when applying the doctrine of equitable mootness to section 1144 is whether the court “can fashion an order that would revoke the debtor’s discharge, restore the status quo existing before confirmation and protect those who relied in good faith on confirmation”). Thus, if a chapter 11 plan of reorganization has been substantially consummated and no effective relief can be fashioned for “innocent parties,” a party’s request to revoke the confirmation order must fail.
Additionally, at least one court has interpreted the phrase “procured by fraud” in section 1144, to call for a requesting party to demonstrate “that at least some of the creditors would have voted differently absent the alleged fraud.” See Delta Airlines, 386 B.R. at 533–34; see also Motors Liquidation, 462 B.R. at 507 (noting that whether creditors would have voted differently in the absence of an alleged fraud was a consideration that the Delta Airlines court “found significant in addressing a similar request for section 1144 relief to advance a private agenda”). Although evidence of such an effect would not necessarily be indicative of fraud, the Delta Airlines court believed it would be instructive, noting that a court should be cautious in exercising its discretion under section 1144 “where none of the plaintiffs seeking to revoke the plan appear to have had the right to vote on confirmation, and none of the voting creditors who were allegedly defrauded into voting for confirmation have joined in or supported the suit to revoke the plan.” Delta Airlines, 386 B.R. at 534.
Further, a court may exercise its discretion under section 1144 if it finds that remedies other than revocation are adequate to remedy the fraud in question. See, e.g., Huse v. Huse-Sporsem, A.S. (In re Birting Fisheries, Inc.), 300 B.R. 489, 505 (B.A.P. 9th Cir. 2003) (“A bankruptcy court has power to remedy an injustice caused by fraud with damages … without upsetting a confirmed plan or the finality of the confirmation order.”); In re V&M Mgmt., Inc., 215 B.R. 895, 904 (Bankr. D. Mass. 1997) (“The court need not and should not revoke a confirmation order if other remedies would clearly be more appropriate. . . . Given the nature of the alleged injury, damages are clearly the appropriate remedy).
The 180-Day Time Limit
The 180-day time limit imposed under section 1144 is strictly enforced and is generally applied even if the underlying fraud is not discovered until after expiration of the 180-day period. See Haskell v. Goldman, Sachs & Co. (In re Genesis Health Ventures, Inc.), 340 B.R. 729, 733 (D. Del. 2006); see also 680 Fifth Avenue Assocs. v. EGI Co. Servs., Inc. (In re 680 Fifth Avenue Assocs.), 209 B.R. 314, 323 (Bankr. S.D.N.Y. 1997). Additionally, the one-year period to seek relief from a final order under Rule 60(b) of the Federal Rules of Civil Procedure is expressly limited by Rule 9024 of the Federal Rules of Bankruptcy Procedure, which explicitly provides that any request to revoke a confirmation order must be made in accordance with section 1144 and, thus, within 180 days after entry of the confirmation order. See Fed. R. Bankr. P. 9024; Fed. R. Civ. P. 60(b); In re Vencor, Inc., 284 B.R. 79, 83 (Bankr. D. Del. 2002).
If a chapter 11 plan of reorganization is modified pursuant to section 1127(b) after entry of an order confirming such plan, the 180-day time period under section 1144 will commence on the date that the order confirming the modified plan is entered. See Berg v. TM Carlton House Partners, Ltd. (In re TM Carlton House Partners, Ltd.), 110 B.R. 185, 188–89 (Bankr. E.D. Pa. 1990). If, however, a confirmation order is modified merely to correct ambiguities or incorporate immaterial changes, the 180-day period under section 1144 will run from the date on which the original confirmation order was entered. Dale C. Eckert Corp. v. Orange Tree Assocs., Ltd. (In re Orange Tree Assocs., Ltd.), 961 F.2d 1445, 1447–48 (9th Cir. 1992) (distinguishing TM Carlton House and finding that the 180-day period under section 1144 ran from the date of the original confirmation order and not the modified confirmation order).
While parties cannot challenge a confirmation order after the 180-day limit simply by characterizing their attack as an independent cause of action, the time limit established by section 1144 does not act as a bar to truly independent causes of action based on wrongful conduct. Haskell v. Goldman, Sachs & Co. (In re Genesis Health Ventures, Inc.), 340 B.R. 729, 733 (D. Del. 2006). An independent cause of action is one “where the alleged fraud could not have been asserted in the bankruptcy proceedings, the underlying factual claims were not actually adjudicated, and the relief sought would not upset the confirmed plan of arrangement.” Farley v. Coffee Cupboard, Inc. (In re Coffee Cupboard, Inc.), 119 B.R. 14, 19 (E.D.N.Y. 1990) quoting In re Newport Harbor Assocs., 589 F.2d 20, 24 (1st Cir. 1978); see also Genesis Health Ventures, 340 B.R. at 733.
The prudent restructuring specialist should always keep section 1144 in mind as it is the exclusive means by which the court may revoke an order confirming a chapter 11 plan of reorganization.