CASE NO: 03-50139.United States Bankruptcy Court, S.D. Texas, Laredo Division.
April 14, 2008
MEMORANDUM OPINION AND ORDER DENYING MOTION TO CONVERT OR TO DISMISS (Doc. # 204)
WESLEY STEEN, Bankruptcy Judge
I. FACTS
Debtor filed a voluntary petition commencing this case under chapter 11 of the Bankruptcy Code on April 8, 2003. A chapter 11 plan was confirmed in April 2004. Substantial business operations and transfers of assets occurred subsequent to confirmation of the plan. On January 2, 2008, after frustrated attempts in state court to collect the payments required under the plan and frustrated attempts to repossess collateral provided under the plan, GE Capital Small Business Finance Corporation (“GE”) filed a motion to convert this case from chapter 11 to chapter 7. (Doc. # 204). For reasons set for the below, the Court finds that neither dismissal nor conversion is appropriate.
II. LEGAL ANALYSISA. Authority to Dismiss or to Convert
Bankruptcy Code § 1112(b)[1] provides:
[A]fter notice and a hearing, the court may convert a case under this chapter [11 USCS §§ 1101 et seq.] to a case under chapter 7 of this title [11 USCS §§ 701 et seq.] or may dismiss a case under this chapter [11 USCS §§ 1101 et seq.], whichever is in the best interest of creditors and the estate, for cause, including —
. . .
(8) material default by the debtor with respect to a confirmed plan;
Because relief under § 1112(b) is discretionary, not mandatory, the court may decline to convert or dismiss a case under § 1112(b) even in the presence of cause. The court has wide discretion to make an appropriate disposition of the case. 7 Collier on Bankruptcy ¶ 1102.4[1] (15th ed. rev.) (citing H. Rep. 595, 95th Cong., 1st Sess. 405 (1977).).
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B. Post-Confirmation Dismissal/Conversion
As noted, one of the grounds for dismissal or conversion is “material default by the debtor with respect to a confirmed plan.” Dismissal or conversion subsequent to plan confirmation, but prior to plan consummation, is a relatively easy determination. The Court may do whatever is in the best interest of creditors. Dismissal or conversion after consummation of the plan, and after substantial business operations under the plan, is very problematic, even conceptually. For reasons set forth below, arguably conversion or dismissal for material default only applies to plans that have been confirmed but not consummated. The Court could find no authority for that proposition, and happily the Court need not reach that issue in this case since it has discretion with respect to the matter.
The purpose of dismissal is to undo the bankruptcy case, as far as practicable, and restore all property rights to the position in which they were found at the commencement of the case. Dismissal restores the status quo ante. By contrast, conversion transforms the Chapter 11 case into a case under Chapter 7. Conversion is thus a transmutation from an attempt to reorganize to a liquidation.
Sean P. Gates, Conversion of the PostConfirmation Chapter 11 Case: Selected Problems, Needed Reform, and Proposed Amendments,
6 J. Bankr. L. Prac. 219, 220 (1997).
1. Effects of Confirmation
The leading treatise on bankruptcy summarizes the significance of plan confirmation.
Confirmation radically changes the relationship between an estate and parties in interest. Plan confirmation discharges the debtor, revests the estate’s property in the debtor and frees the estate’s property from all prior claims. The only exceptions to this are those stated in the plan or in the order confirming it.
In essence, a valid plan substitutes, in much the same way as a common law novation would, the obligations as stated in the plan for all preconfirmation claims and interests. As to agreed provisions, the plan is a contract between the proponent and those bound by it. Should a confirmed plan later fail, creditors may sue only on the obligations as stated in the plan . . .
7 Collier on Bankruptcy, ¶ 1129.01[1].
If the plan has been substantially consummated, and if there have been substantial business operations under the plan, it is probably impossible to restore the status quo ante or to mutate the bankruptcy estate from a chapter 11 reorganization mode to a chapter 7 liquidation mode. As Collier notes, confirmation does the following:
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• Binds all parties to the confirmed plan (§ 1141(a));
• Revests property of the estate in the debtor (§ 1141(b)); since property of the estate is revested in the debtor, conversion would mutate an empty estate into the chapter 7 process;
• Frees that property of all nonplan claims and interests (§ 1141(c));
• Discharges the debtor of preconfirmation debt (§ 1141(d)); and
• Lifts the automatic stay (§ 362(c)).
Absent specific provision in a plan to the contrary, after a plan has been confirmed conversion of a case to chapter 7 does not create assets for the Chapter 7 estate. Those assets are no longer vested in the estate. In re K M Printing, Inc., 210 B.R. 583, 584 (Bankr. D. Ariz. 1997); but also see In re Smith, 201 B.R. 267 (D. Nev. 1996). Even if the plan provides for revesting, in most cases that concept is probably more theoretical than feasible. In this case, for example, there have been 4 years of business operations since plan confirmation and most of the assets that existed at the time of the confirmation order have been sold or transferred.
The same problem arises in dismissal. It is simply not possible to recreate the status quo ante. It is not possible to unscramble the eggs.
If the bankruptcy court denies dismissal and conversion after confirmation and consummation of a plan, creditors simply resort to their remedies under state law to enforce the plan obligations. In re Jordan Mfg. Co., Inc., 138 B.R. 30
(Bankr. C.D. Ill. 1992).
2. Jurisdiction
There may even be a jurisdictional component to the question. The Fifth Circuit Court of Appeals has addressed the need to cut the bankruptcy umbilical chord with respect to debtors, but the same logic applies to creditors: In re Craig’s Stores of Texas, Inc., 266 F.3d 388 (5th Cir. 2001).
The more persuasive theory of post-confirmation jurisdiction, however, attaches critical significance to the debtor’s emergence from bankruptcy protection. As the Seventh Circuit put it,
Once the bankruptcy court confirms a plan of reorganization, the debtor may go about its business without further supervision or approval. The firm also is without the protection of the bankruptcy court. It may not come running to the bankruptcy judge every time something unpleasant happens.
Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th Cir. 1991). After a debtor’s reorganization plan has been confirmed, the debtor’s estate, and thus bankruptcy jurisdiction, ceases to exist, other than for matters pertaining to the implementation or execution of the plan. In re Fairfield Communities, Inc., 142 F.3d 1093, 1095 (8thPage 4
Cir. 1998); In re Johns-Manville Corp., 7 F.3d 32, 34
(2d Cir. 1993). No longer is expansive bankruptcy court jurisdiction required to facilitate “administration” of the debtor’s estate, for there is no estate left to reorganize. This theory has antecedents in our court’s jurisprudence, which has observed that the reorganization provisions of the former Bankruptcy Act “envisage that out of the proceedings will come a newly reorganized company capable of sailing forth in the cold, cruel business world with no longer the protective wraps of the federal Bankruptcy Court.” In re Seminole Park Fairgrounds, Inc., 502 F.2d 1011, 1014 (5th Cir. 1974). Because it comports more closely with the effect of a successful reorganization under the Bankruptcy Code than the expansive jurisdiction cases, we adopt this more exacting theory of post-confirmation bankruptcy jurisdiction.
In re Craig’s Stores of Texas, Inc., 266 F.3d, at 390.
3. Best Interest of Creditors
The best interest of creditors does not mandate a conversion to chapter 7 in this case. The confirmed plan is res judicata as to issues resolved by the plan, including a compromise in this case among creditors. GE notes that another secured creditor has exercised its rights and repossessed all of its collateral (Doc. # 211). Contrary to GE’s allegations, conversion is not necessary to stop Debtor’s continued use of secured creditors’ collateral without payment.
GE’s principal reason for seeking conversion is that when GE tried to repossess its collateral, Debtor’s principal filed a chapter 13 case and asserted that a co-debtor stay prevented foreclosure on the corporate assets. GE would like to have all of its issues determined in one court, to avoid having to litigate the stay in one court and repossession in another. The Court has lifted the stay to allow GE to continue its state court proceedings against the Debtor and its guarantors to collect on the obligation established in the confirmed chapter 11 plan. GE also asserts that assets have been wasted or improperly transferred. While that is a more compelling argument, the Court interprets Craig’s Stores as an announcement by the Court of Appeals for the Fifth Circuit for creditors, as well as debtors, that at some point reasonably soon after confirmation and consummation of a chapter 11 plan, those parties must leave the security of pervasive bankruptcy jurisdiction for the tender mercies of state court rights and remedies.
III. ORDER
For reasons assigned, the motion to convert or to dismiss is denied.
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