In re Troutman Enterprises, Inc.
| Decision Date | 26 September 2000 |
| Docket Number | No. 00-8013.,00-8013. |
| Citation | 253 BR 8 |
| Parties | In re TROUTMAN ENTERPRISES, INC., Debtor. National City Bank, Appellant, v. Troutman Enterprises, INC., Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Sixth Circuit |
Arthur R. Hollencamp, Hollencamp & Hollencamp, Dayton, OH, for Appellant.
Donald J. Rafferty, Cohen, Todd, Kite & Stanford, Cincinnati, OH, for Appellee.
Before MORGENSTERN-CLARREN, RHODES, and STOSBERG, Bankruptcy Appellate Panel Judges.
This appeal addresses an obscure area of the Bankruptcy Code: the rights of creditors when a reorganized Chapter 11 debtor defaults under a confirmed plan and the case is converted to Chapter 7. Here, after just such a default, the bankruptcy court granted a creditor's motion to convert to Chapter 7. While that case was pending, other creditors filed an involuntary Chapter 7 petition against the reorganized Chapter 11 debtor based on the failure to pay their plan claims. The court dismissed the petition on the ground that Bankruptcy Code § 348 limits those creditors to asserting their plan claims in the converted case and precludes them from asserting claims against the reorganized debtor. A petitioning creditor appeals. Because we hold that the creditors are entitled to assert the plan claims against the reorganized debtor, the dismissal of the involuntary petition is VACATED and the case is REMANDED for further proceedings.
The two issues raised are: (1) whether appellant National City Bank, one of the petitioning creditors, has standing to appeal without the other petitioning creditors; and (2) whether the bankruptcy court properly determined as a matter of law that the petitioning creditors are not eligible to commence an involuntary proceeding against the reorganized debtor.
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Southern District of Ohio has authorized appeals to the BAP and the order dismissing the involuntary petition is a final order that may be appealed by right under 28 U.S.C. § 158(a)(1). Booher Enters. v. Eastown Auto Co. (In re Eastown Auto Co.), 215 B.R. 960 (6th Cir. BAP 1998). The bankruptcy court's interpretation of the Bankruptcy Code is reviewed de novo. In re Koenig Sporting Goods, Inc., 203 F.3d 986 (6th Cir.2000).
Troutman Enterprises, Inc. filed a Chapter 11 case on April 23, 1992. In 1993, the bankruptcy court entered an order confirming the debtor's amended plan of reorganization. When the reorganized debtor ("Reorganized Debtor") defaulted on its obligations under the plan, a creditor moved to convert the Chapter 11 case to Chapter 7. The bankruptcy court granted the unopposed motion in 1996 and that case is still pending (the "Converted Case").1
In 1999, four other creditors (the "Petitioning Creditors") filed an involuntary Chapter 7 case against the Reorganized Debtor. They based this filing on the Reorganized Debtor's failure to pay their claims under the terms of the confirmed plan (the "Plan Claims"). The Reorganized Debtor moved to dismiss the petition on the ground, among others, that the Petitioning Creditors did not hold claims against it after the conversion. The bankruptcy court granted the motion, holding that the creditors are limited to asserting the Plan Claims in the Converted Case by operation of Bankruptcy Code § 348(d). In re Troutman Enters., Inc., 244 B.R. 106 (Bankr.S.D.Ohio 2000). National City Bank, one of the Petitioning Creditors, filed this appeal.
The Reorganized Debtor contends that National City Bank does not have standing to prosecute this appeal because the other Petitioning Creditors are not participating. A party has standing to appeal an order which diminishes its property, increases its burdens, or impairs its rights. See Marlow v. Rollins Cotton Co. (In re Julien Co.), 146 F.3d 420 (6th Cir. 1998). As the bankruptcy court's decision denies the Bank the right to request involuntary bankruptcy relief, it has standing to appeal that decision. See, for example, In re Eastown Auto Co. (affirming the dismissal of an involuntary petition in an appeal filed by one of three petitioning creditors).
The Petitioning Creditors filed the involuntary petition based on their Plan Claims. As the bankruptcy court noted:
"The confirmation of a plan discharges the debtor from any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). Confirmation also "vests all of the property of the estate in the debtor," and "except as otherwise provided in the plan or in the order confirming the plan . . ., the property dealt with by the plan is free and clear of all claims and interests of creditors." 11 U.S.C. § 1141(b) & (c). Section 1141(a) further provides, "the provisions of a confirmed plan bind the debtor . . . and any creditor . . . whether or not the claim or interest of such creditor . . . is impaired under the plan, and whether or not such creditor . . . has accepted the plan." 11 U.S.C. § 1141(a).
In re Troutman Enters., Inc., 244 B.R. at 109 (alteration in original).
Confirmation, then, had the dual effect of discharging the Petitioning Creditors' preconfirmation debt and replacing it with their Plan Claims. See In re Benjamin Coal Co., 978 F.2d 823, 827 (3d Cir. 1992) (). The plan is essentially a new and binding contract between the Reorganized Debtor and the Petitioning Creditors. In re Xofox Indus. Ltd., 241 B.R. 541 (Bankr.E.D.Mich.1999). See also Guardian Savings and Loan Assoc. v. Arbors of Houston Assocs. Ltd. Partnership (In re Arbors of Houston Assocs. Ltd. Partnership), 172 F.3d 47, 1999 WL 17649, *3 (6th Cir.1999) (unpublished table decision) (). Confirmation of the plan is a final judgment that is entitled to res judicata effect. Still v. Rossville Bank (In re Chattanooga Wholesale Antiques, Inc.), 930 F.2d 458 (6th Cir.1991).
If a reorganized debtor defaults under a plan, creditors have several options, including enforcing the plan terms in any court of competent jurisdiction. In re Xofox, Indus. Ltd., 241 B.R. at 543. A creditor may also look to the Bankruptcy Code, with the nature of the available relief depending on the facts of the case. Potential remedies include the dismissal or conversion of the confirmed case in the event of (1) inability to effect substantial consummation of a plan; (2) material default with respect to a plan; or (3) the termination of a plan pursuant to a condition provided for in it. 11 U.S.C. § 1112(b)(7), (8), and (9). The bankruptcy court may also order the debtor to take actions necessary to transfer property and perform other acts to carry out the plan. 11 U.S.C. § 1142(b). A more drastic measure is set out in § 1144, which provides that a confirmation order that was procured by fraud may be revoked within 180 days after it is entered. 11 U.S.C. § 1144.
As an additional option, plan creditors may, under certain circumstances, file an involuntary bankruptcy proceeding against a reorganized debtor under Bankruptcy Code § 303. Such an involuntary case may be commenced:
11 U.S.C. §§ 303(b)(1) and (2). When this relief is sought, the preliminary question is whether a petitioning creditor holds a claim against the alleged debtor that is "not contingent as to liability or the subject of a bona fide dispute." 11 U.S.C. § 303(b)(1). If there is a legitimate legal or factual basis for the alleged debtor not to pay the claim, then the creditor is not eligible to file an involuntary petition. See In re Eastown Auto Co., 215 B.R. at 965 (6th Cir. BAP 1998).
The unusual and complicating factor in the present case is the Chapter 7 conversion. The bankruptcy court, applying Bankruptcy Code § 348(d), held as a matter of law that post-conversion, the Petitioning Creditors are creditors solely in the Converted Case and no longer hold claims against the Reorganized Debtor. The court held that absent such claims, the Petitioning Creditors were not eligible to file the involuntary petition and so the court dismissed it. The Appellant challenges the bankruptcy court's analysis of this section and its application to this case.
Section 348 provides guidance in a case that has been converted from one chapter of the Bankruptcy Code to another. Under § 348(a), conversion constitutes an order for relief but does not change the date of the order for relief, with exceptions not relevant here. 11 U.S.C. § 348(a). In this case, therefore, the date of the order for relief remains April 23, 1992, the date on which the Chapter 11 case was filed. Section 348(d) states that as an effect of conversion:
(d) A claim against the estate or the debtor that arises after the order for relief but before...
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