Orange Tree Associates, Ltd., In re

• Decision Date: 20 April 1992
• Docket Number: No. 90-56181,90-56181
• Citation: 961 F.2d 1445
• Parties: , Bankr. L. Rep. P 74,556 In re ORANGE TREE ASSOCIATES, LTD., Debtor. DALE C. ECKERT CORPORATION, Appellant, v. ORANGE TREE ASSOCIATES, LTD.; New West Federal Savings and Loan Association, successor to American Savings and Loan Association, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1445

961 F.2d 1445

60 USLW 2746, Bankr. L. Rep. P 74,556

In re ORANGE TREE ASSOCIATES, LTD., Debtor DALE C. ECKERT CORPORATION, Appellant, v. ORANGE TREE ASSOCIATES, LTD.; New West Federal Savings and Loan Association, successor to American Savings and Loan Association, Appellees.

No. 90-56181.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 8, 1991.

Decided April 20, 1992.

Kevin P. Duthoy, Bewley, Lassleben & Miller, Whittier, Cal., for appellant Dale C. Eckert Corp.

Theodor C. Albert, Buchalter, Nemer, Fields & Younger, Newport Beach, Cal., for appellee New West Federal Sav. and Loan Ass'n.

Judith Ilene Bloom, Tobin & Tobin, Los Angeles, Cal., for appellee Orange Tree Associates, Ltd.

Before: BROWNING, ALARCON and T.G. NELSON, Circuit Judges.

JAMES R. BROWNING, Circuit Judge:

I

Orange Tree Associates is a limited partnership formed to develop a 100-unit condominium complex in Long Beach, California. Before the condominium project was completed, Orange Tree filed a petition for Chapter 11 bankruptcy in the Los Angeles bankruptcy court.

Orange Tree's principal creditors were the bank that financed the project, whose successor in interest is appellee New West Federal Savings and Loan, and appellant Dale C. Eckert Corporation, the general contractor. ¹ New West had first claim to the condominium project under a deed of trust. Eckert held a $765,763 mechanics lien for construction work. The amount due New West under its deed of trust far exceeded the market value of the project, making Eckert's claim virtually worthless. Further, Orange Tree disputed Eckert's $765,763 claim against the Orange Tree estate. Eckert filed a Chapter 7 petition in the San Bernardino bankruptcy court.

The Eckert trustee agreed to exchange Eckert's disputed, secured claim of $765,763 for an undisputed, unsecured claim of $75,000. Orange Tree had proposed a reorganization plan under which unsecured creditors would be paid slightly more than 10 cents on the dollar. If the plan were adopted, Eckert would realize about $8,000 in satisfaction of its $765,763 claim. After the notice and hearing required by 11 U.S.C. § 1128, the Los Angeles bankruptcy court entered an order on June 6, 1988 in the Orange Tree bankruptcy confirming the reorganization plan pursuant to 11 U.S.C. § 1129. The Eckert trustee voted for the plan.

One of Eckert's major creditors, a subcontractor owed more than $200,000 for work on the condominium project, learned of the compromise and the reorganization plan and considered them unfair. The subcontractor informed the Eckert trustee of its theory that New West was a joint venturer on the condominium project with Orange Tree and therefore could not also be the senior lien holder. If New West's deed of trust were set aside on this ground, Eckert could collect its claim. The Eckert trustee decided nonetheless not to challenge the New West deed of trust. ²

On September 22, 1988, more than two months after the Orange Tree reorganization plan had been confirmed, the Eckert trustee and Orange Tree filed a joint motion in Eckert's bankruptcy in the San Bernadino bankruptcy court seeking approval of the compromise of Eckert's claim pursuant to Bankruptcy Rule 9019(a). ³ The subcontractor objected on the ground the compromise was unfair to the Eckert estate. The subcontractor offered to pay the Eckert estate more than the $8,000 it would receive from the compromise and to hire special counsel to pursue Eckert's claim against Orange Tree for the benefit of the estate. The San Bernardino bankruptcy court accepted the offer, rejected the compromise, and authorized the subcontractor to hire special counsel.

Special counsel for the Eckert estate filed a complaint on March 3, 1989 in the Orange Tree bankruptcy in Los Angeles bankruptcy court seeking to overturn the order confirming the Orange Tree reorganization plan on the ground of fraud in its procurement. ⁴ The Los Angeles bankruptcy court dismissed the complaint, in part because it was filed after the 180-day limitations period provided by 11 U.S.C. § 1144. The Bankruptcy Appellate Panel (BAP) affirmed on this ground. Eckert filed this appeal. ⁵ We affirm.

II

An order confirming a Chapter 11 reorganization plan may be revoked only in accordance with 11 U.S.C. § 1144:

On request of a party in interest at any time before 180 days after the date of the entry of the order of confirmation, and after notice and a hearing, the court may revoke such order if and only if such order was procured by fraud....

(emphasis added). ⁶

If the only facts were those already mentioned, affirmance would be required because the complaint was not filed within 180 days of the entry of the confirmation order on June 6, 1988. On September 6, 1988, however, the Los Angeles bankruptcy court entered a "Modified Order Confirming Debtor's First Amended Plan of Reorganization." This Modified Order is in the same format, and repeats much of the text of the June 6 "Order Confirming Debtor's First Amended Plan of Reorganization." Apparently, Orange Tree obtained the Modified Order after a title insurance company expressed concern about ambiguities in the original order.

The Modified Order may have clarified some ambiguities, but it created another: There were now two orders confirming the plan, one entered June 6, the other September 6. Eckert contends the 180-day period in section 1144 should run from the later order, making Eckert's March 3, 1989 complaint timely. New West contends the 180 days ran from the first order, requiring dismissal of the complaint. We agree with the bankruptcy court and the BAP that the 180-day period ran from the June 6 order.

Congress has determined that a 180-day limitations period strikes the appropriate balance between the strong need for finality in reorganization plans and the interest in affording parties in interest a reasonable opportunity to discover and assert fraud. In recognition of the strength of the interest in finality of reorganization plans, courts have held uniformly that strict compliance with section 1144 is a prerequisite to relief. See Newport Harbor, 589 F.2d at 22, and the cases cited therein. ⁷ Expiration of the limitations period bars a motion to set aside the confirmation of a reorganization plan even if the fraud is not discovered until the period has passed. See In re Medical Analytics, 532 F.2d 879 (2d Cir.1976) (adopting the opinion of Judge Conner at 410 F.Supp. 922 (S.D.N.Y.1975)). There is a compelling reason for finality of reorganization plans. A Chapter 11 proceeding is

focused towards rehabilitating a business, which if successful, is to the benefit of all persons who had dealings with the debtor. Such plans are not easily devised, and once accomplished a short time for challenging such plan is necessary to keep alive the potential life of that business. Uncertainty of continued operations, injected by a Sword of Damocles in the form of fraud allegations which can be filed at any time in the future, would render meaningless the whole purpose of a Chapter XI proceeding.

Newport Harbor, 589 F.2d at 23 n. 6. As Judge Learned Hand said in Vogel v. Mohawk Elec. Sales Co., 126 F.2d 759 (2d Cir.1942), unless a reorganized debtor can assure new creditors "as to the amount of his actual liabilities without a contingent addition of the old debts, he will start with a handicap in a race which he has already once lost." Id. at 761.

When the June 6 order was entered, parties in interest were on notice they had a limited time to seek revocation on the ground of fraud. They could not rely on the fortuity that later events might extend the deadline. Eckert's complaint was directed solely to fraud in the procurement of the June 6 confirmation order. The complaint alleges the vote on the reorganization plan was tainted because Orange Tree and New West did not disclose their true relationship, and because ballots were tabulated incorrectly. The only vote taken preceded entry of the June 6 order; no new vote was taken before entry of the September 6 order. Since the second confirmation order was unrelated to the alleged fraud, entry of that order provided no excuse for extending the limitations period for challenging the initial order. ⁸

Entry of the order confirming a reorganization plan is the key event in a Chapter 11 bankruptcy, discharging the debtor from pre-confirmation debt and substituting the obligations imposed by the plan. The confirmation order may be revoked upon the request of a party in interest "if and only if such order was procured by fraud" and "[a]n order ... revoking an order of confirmation shall ... revoke the discharge of the debtor." 11 U.S.C. § 1144. In referring to "the date of the entry of the order of confirmation" (emphasis added), section 1144 makes clear it contemplates the entry of only one such order, unless the order is revoked for fraud or the plan is modified after confirmation pursuant to the procedures set forth in section 1127(b). See also 11 U.S.C. § 1129(c) ("except as provided in section 1127(b) of this title, the court may confirm only one plan, unless the order of confirmation in the case has been revoked under section 1144 of this title"). As we have noted, entry of the September 6 order was not preceded by compliance with the conditions imposed by section 1127(b) for modification of a confirmed plan.

Eckert argues the September 6 order materially affected its rights and the section 1144 limitations period therefore must be extended to allow a reasonable opportunity for challenge. But for the reasons already stated, the "court has no power to extend the time within which the motion [to revoke a confirmation plan] may be made." 9 Collier on Bankruptcy p 11.02 at 648 (14th ed. 1978). ⁹

We note, however, that the September 6 order did not materially affect Eckert's rights. If it had, Eckert's remedy was not to seek revocation of the reorganization plan for fraud,...