In re Winom Tool and Die, Inc.

• Decision Date: 01 November 1994
• Docket Number: Bankruptcy No. 89-11954.
• Parties: In re WINOM TOOL AND DIE, INC., Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan

173 B.R. 613 (1994)

In re WINOM TOOL AND DIE, INC., Debtor.

Bankruptcy No. 89-11954.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

November 1, 1994.

Michael A. Mason, Trustee of Winom Tool and Die, Inc., Michael A. Nedelman, Southfield, MI, for Zacova Industries, Smith Brothers Tool Co. and Conas Equipment.

Leslie K. Berg, Asst. U.S. Trustee.

OPINION REGARDING OBJECTION TO PROPOSED SETTLEMENT

ARTHUR J. SPECTOR, Bankruptcy Judge.

The Debtor filed for relief under chapter 11 of the Bankruptcy Code on August 21, 1989. The Court entered an order confirming the Debtor's plan of reorganization on July 11, 1992. On April 26, 1994, the case was converted to chapter 7 pursuant to 11 U.S.C. § 1112(b)(8). On June 21, 1994, the chapter 7 trustee filed a settlement stipulation signed by the trustee and General Motors Corporation, under the terms of which General Motors agreed to make payment "on all accounts payable due" the Debtor, subject to General Motors' right to set off from these accounts various amounts that the Debtor owed General Motors. Settlement Stipulation with General Motors at pp. 1-2. The settlement was conditioned on court approval, and the trustee served notice of the settlement on all parties in interest, providing them with an opportunity to object.

Three parties — Zacova Industries, Inc., Smith Brothers Tool Co., and Conas Equipment— availed themselves of this opportunity by collectively filing an objection to the proposed settlement. The objecting parties, who did not hold claims against the Debtor or the estate prior to confirmation but who advanced credit to the Debtor between confirmation and conversion, contended that the claims against General Motors which the trustee seeks to compromise are not estate property. If that contention is correct, then of course the trustee does not have the authority to settle the claims. More important to the objecting parties, who obtained judgments against the Debtor, a determination that the claims at issue are not a part of the chapter 7 estate would enable them to pursue their declared objective of levying those assets without accounting to the trustee for the proceeds of the levy. Because I agree with the objecting parties that the accounts receivable do not belong to the estate, their objection will be sustained.

Section 1141(b) of title 11 states that, "except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor." Property which vests in the debtor pursuant to this statute is removed from the estate. See, e.g., In re Chattanooga Wholesale Antiques, 930 F.2d 458, 462 (6th Cir.1991); In re Jones, 152 B.R. 155, 180 (Bankr.E.D.Mich.1993) (citing § 1327(b), which is identical to § 1141(b), for the proposition that, "unless there is a contrary provision in the chapter 13 plan or the order confirming it, property ceases to be property of the estate upon confirmation").

Since neither the Debtor's plan nor the order confirming it "otherwise provided," ownership of all property in the chapter 11 estate was transferred under § 1141(b) from the estate to the Debtor when the plan was confirmed. The trustee conceded as much, but argued that § 1141(b) was rendered irrelevant when the case was converted. He based this assertion on 11 U.S.C. § 348(a), which provides in pertinent part that "conversion . . . constitutes an order for relief under the chapter to which the case is converted, but, except as provided in subsections (b) and (c) . . ., does not effect a change in the date of the filing of the petition, the commencement of the case, or the order for relief." The trustee interprets this language as requiring that the case be deemed a chapter 7 which was filed on the original chapter 11 filing date. See Trustee's Response to Objection at ¶ 7A. And since this case is deemed to have been a chapter 7 throughout its life, the trustee's argument continues, those provisions which are specific to chapter 11 — and in particular, § 1141(b) — do not apply. Id. See 11 U.S.C. § 103(f) (stating that, with an exception not relevant here, "subchapters I, II, and III of chapter 11 . . . apply only in a case under such chapter"). Consequently, "the confirmation of the Debtor's Chapter 11 plan is undone." Id. at ¶ 7B.

The validity of the trustee's construction of § 348 has most frequently been addressed by courts in the context of a conversion to chapter 7 from chapter 13. Whereas this case calls into question whether property removed from the estate by § 1141(b) remains outside of the estate following conversion, the chapter 13/7 cases deal with the issue of whether the debtor's post-petition property acquisitions, added to the estate by virtue of 11 U.S.C. § 1306(a), remain estate property after conversion. Some such cases held that property entering the estate under § 1306(a) is part of the chapter 7 estate, rejecting the trustee's interpretation of § 348. See, e.g., In re Calder, 973 F.2d 862, 866 (10th Cir. 1992); In re Lybrook, 951 F.2d 136, 137-38 (7th Cir.1991); In re Schmeltz, 114 B.R. 607, 610, 20 B.C.D. 864, 23 C.B.C.2d 527 (Bankr. N.D.Ind.1990); In re Tracy, 28 B.R. 189, 190, 10 B.C.D. 541, 8 C.B.C.2d 440 (Bankr.D.Me. 1983). Others support the trustee's argument, interpreting § 348 as mandating that the court disregard § 1306(a) for purposes of determining what property belongs to the chapter 7 estate. See, e.g., In re de Vos, 76 B.R. 157, 159 (N.D.Cal.1987); In re Tucker, 133 B.R. 819, 820-21 (Bankr.W.D.Tex.1991); In re Figgers, 121 B.R. 772, 774-75 (Bankr. S.D.Ohio 1990); In re Payne, 88 B.R. 818, 821 (Bankr.E.D.Tenn.1988); In re Erchenbrecher, 85 B.R. 42, 44 (Bankr.N.D.Ohio 1988); In re Redick, 81 B.R. 881, 883-84, 16 B.C.D. 1328, 18 C.B.C.2d 254 (Bankr. E.D.Mich.1987); In re Lennon, 65 B.R. 130, 132-35, 15 C.B.C.2d 756 (Bankr.N.D.Ga. 1986); In re Lepper, 58 B.R. 896, 898, 14 C.B.C.2d 1040 (Bankr.D.Md.1986); In re Peters, 44 B.R. 68, 70, 11 C.B.C.2d 881 (Bankr. M.D.Tenn.1984); In re Hannan, 24 B.R. 691, 692, 9 B.C.D. 1151, 7 C.B.C.2d 750 (Bankr. E.D.N.Y.1982). However, the interpretation of § 348 offered by these latter decisions does not withstand scrutiny.

Section 348(a) can be summarized as establishing two rather simple postulates. First, conversion is an order for relief. Second, except as otherwise stated in the statute, references in the Code to the date of the filing of the petition, the commencement of the case, or the order for relief, should be understood to mean the original (i.e., the preconversion) date for those events. Although these two basic principles are consistent with the trustee's contention that this case must be analyzed as though it has always been a chapter 7 proceeding, they are also consistent with the view that the court must take cognizance of the pre-conversion status of the case. See Lybrook, 951 F.2d at 137 (describing the competing interpretations of § 348 as "equally good alternatives"); 1 D. Epstein et al., Bankruptcy § 2-17 (1992) ("Section 348 does not provide a clear answer to the question" of whether the petition is deemed to have been filed under the converted chapter.).

The reason that § 348(a) neither advances nor refutes the trustee's argument is that it is essentially a nonsubstantive statute, the consequences of which can be understood only by applying its rules to other sections of the Code that make reference to the date of the filing of the petition, the commencement of the case, or the order for relief. Wherever those terms are found in the Code, § 348(a), (b) or (c) specifies the appropriate date for purposes of that Code provision. See In re Wanderlich, 36 B.R. 710, 713-14, 11 B.C.D. 467 (Bankr.W.D.N.Y.1984); Tracy, 28 B.R. at 190. Contrary to the trustee's argument, then, there is nothing in § 348(a) which compels the conclusion that the court must pretend that a converted case was originally filed in the chapter to which it was converted. See Schmeltz, 114 B.R. at 610; In re Ford, 61 B.R. 913, 916, 14 C.B.C.2d 1399 (Bankr.W.D.Wis.1986); Tracy, 28 B.R. at 190. There are, however, a number of considerations which support the conclusion that the provisions of chapter 11 are relevant for purposes of determining what property comprises this chapter 7 estate.

By taking the position that conversion to chapter 7 reverses what would otherwise be the consequences of a confirmed chapter 11 plan, the trustee is in essence arguing that conversion under § 1112(b) constitutes a de facto revocation of the order confirming the plan. Yet 11 U.S.C. § 1144 states categorically that such an order may be revoked "if and only if it was procured by fraud," which was never alleged in this case. It is highly unlikely that Congress would so narrowly and explicitly limit the circumstances under which a confirmed plan can be revoked, only to provide for an exception to that rule — in the form of §§ 1112 and 348 — which is neither explicit nor self-evident. See In re T.S.P. Indus., 117 B.R. 375, 377-78, 20 B.C.D. 1401 (Bankr.N.D.Ill.1990); see also Jones, 152 B.R. at 168 (collecting cases for the proposition "that statutes are to be read harmoniously whenever feasible").

Nor should there be any great mystery as to why § 1144 is so circumspect. Any number of scenarios can and do play out under the terms of a confirmed plan. Credit is extended, assets are sold, corporate entities are created or merged, and so on. Presumably mindful of the intricate chain of events that is often set in motion by the order of confirmation, Congress made the considered choice that only fraud would warrant an attempt to "unscramble the egg," and even then only within the 180-day time frame imposed by § 1144. Cf. In re Nardulli & Sons Co., 66 B.R. 871, 881 (Bankr.W.D.Pa. 1986) ("Absent fraud, parties must be able to rely on the confirmed plan. . . . Otherwise, a confirmed Chapter 11 debtor would be stillborn on the confirmation date. No...