US v. Novak, Civ. No. 88-5010.
| Decision Date | 20 May 1988 |
| Docket Number | Civ. No. 88-5010. |
| Citation | 86 BR 625 |
| Parties | UNITED STATES of America, Farmers Home Administration, Plaintiff/Appellant, v. Leonard James NOVAK and Martha Mae Novak, Defendants/Appellees. |
| Court | U.S. District Court — District of South Dakota |
Robert J. Haar, Asst. U.S. Atty., Sioux Falls, S.D., for plaintiff/appellant.
Max A. Gors, Gors, Braun and Zastrow, Pierre, S.D., for defendants/appellees.
Pursuant to 28 U.S.C. § 158(a), the Appellant (FmHA) appeals a bankruptcy court order modifying the Appellees' (Novaks) final amended Chapter 11 plan of reorganization. Both parties have submitted their respective arguments and authorities pursuant to Bankruptcy Rule 8009. Oral argument on the issue raised by this appeal was held May 19, 1988, at 1 p.m.
Novaks filed their Chapter 11 petition for reorganization on September 14, 1984. On May 16, 1985, the bankruptcy court, the Honorable Peder K. Ecker presiding, entered an order confirming the Novaks' final amended plan.
The property subject to the terms of the confirmed plan included 800 acres of farmland located in Bennett County, South Dakota. The first mortgage on this land was held by the Federal Land Bank of Omaha in the amount of $97,384.62. A second mortgage was held by FmHA. By stipulation the parties agreed that the value of the 800 acres equaled $180,000, or $225 per acre. This valuation left FmHA with a secured claim of $82,615.38, arrived at by subtracting the $97,384.62 first mortgage of the Federal Land Bank from the $180,000 land value.
The designated record reflects that the Novaks had three loans with FmHA, with a total principal and interest due of $372,193. Under the provisions of the confirmed plan, FmHA's secured claim of $82,615.38 was to be recouped over the course of thirty-five years at a scheduled amortized annual payment of $5,045.44. The undersecured portion of FmHA's claim equaled $289,577.62 ($372,193.00 minus $82,615.38). Under the plan, this amount was to be paid a dividend of ten percent over ten years with no interest at an annual payment rate of $2,895.77.
Following confirmation of the plan, the Novaks, as disbursing agents, made two payments to FmHA. The first payment of $5,213.15 was made on May 16, 1986; the second payment of $3,000 was made on June 13, 1986. The total of the two payments equaled $8,213.15.
On August 20, 1987, the Novaks moved to modify the confirmed plan only as it related to the secured and undersecured claims of FmHA (denominated in the confirmed plan as "Class 6" claims). The motion to modify was based upon the fact that the land subject to the second mortgage held by FmHA had declined in value. In connection with their motion to modify, Novaks moved the bankruptcy court to determine the value of the property of Novaks' estate and of the FmHA's security in that property.
Hearing on the motion to modify was held on November 24, 1987. The bankruptcy court found that following the confirmation of the Novaks' plan in May of 1985, there had been a downward shift evaluation of the real estate subject to the plan.1 Relying on a line of cases dealing with a percentage of consummation, the bankruptcy court went on to find that there had not been substantial consummation of the plan pursuant to 11 U.S.C. § 1127. Specifically, as to this question, the bankruptcy court concluded that the amount of payments under the plan (which equaled four percent of the total payments due) was not a majority of consummation, i.e., in excess of fifty percent of the payments contemplated under the plan. Based upon the legal conclusion that the payment of less than a majority of payments under a confirmed plan is less than substantial consummation, the bankruptcy court entered an order on December 10, 1987, modifying the Class 6 portion of the Novaks' Chapter 11 plan.
The question presented is whether the bankruptcy court erred in finding that as a matter of law, the Novaks' Chapter 11 plan had not been substantially consummated.
When the district court reviews a bankruptcy court's final order, it acts as an appellate court. 28 U.S.C. § 158(a); Wegner v. Grunewaldt, 821 F.2d 1317, 1320 (8th Cir.1987). The bankruptcy court's findings of fact cannot be set aside unless clearly erroneous, but the district court may review the bankruptcy court's legal conclusions de novo. Bankruptcy Rule 8013; Wegner, 821 F.2d at 1320; In re Hunter, 771 F.2d 1126, 1129, n. 3 (8th Cir.1985).
11 U.S.C. § 1127(b) provides that:
The proponent of a plan or the reorganized debtor may modify such plan at any time after confirmation of such plan and before substantial consummation of such plan,. . . .
The term "substantial consummation" is defined at 11 U.S.C. § 1101(2) to mean:
The use of the conjunctive in this definition makes it plain that all three elements must be present to warrant a finding of substantial consummation. In re Gene Dunavant and Son Dairy, 75 B.R. 328, 332 (M.D. Tenn.1987). In other words, all three criteria must be satisfied before a plan may be considered substantially consummated. In re Heatron, Inc., 34 B.R. 526 (Bankr.W.D. Mo.1983). In this case, both parties agree that factors (B) and (C) of the statutory definition have been accomplished, thus the only question presented is whether or not there has been a "transfer of all or substantially all of the property proposed by the plan to be transferred." 11 U.S.C. § 1101(2)(A).
The government argues that the doctrine of res judicata should control the outcome of this appeal in that upon confirmation of a plan, that plan and its provisions are binding upon all parties concerned. 11 U.S.C. § 1141(a).2 The government cites Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104, reh'g denied 305 U.S. 675, 59 S.Ct. 250, 83 L.Ed. 437 (1938) for the proposition that in the absence of proof of fraud in the obtainment of a judgment, res judicata should apply to matters which are covered by a plan of reorganization confirmed by a final order of a bankruptcy court. See also 5 Collier on Bankruptcy § 1142(a) (15th ed. 1979).
Novaks assert that the total payments due FmHA under the provisions of the plan equaled $205,548.10.3 At the time of hearing on the proposed modification, Novaks had paid four percent ($205,548.10 divided by $8,213.15) of the total payments due FmHA under the plan. These payments occurred over the first two years of the plan. Novaks argue that these facts do not support a finding of "substantial consummation" as that term is defined at 11 U.S.C. § 1101(2) and applied at 11 U.S.C. § 1127(b). Accordingly, it is Novaks' position that because there had been no substantial consummation, the bankruptcy court's order of modification was appropriate.
The government's argument of res judicata is misplaced. Res judicata acts as a bar only when a court is asked to take an action which would effectively modify or reverse the judgment of another court in a case the first court is not reviewing on appeal. In re A.J. Mackay Co., 50 B.R. 756, 758 (Bankr.D.Utah 1985). That is not the case here. Although it is true that there are limits on a bankruptcy court's power to revoke a plan that it has previously confirmed (see, e.g. 11 U.S.C. § 1144 — Fraud and the Procurement of Order of Confirmation), the section of the code which is at issue herein specifically authorizes intervention by a court to modify a post-confirmed plan. 11 U.S.C. § 1127(b).
The controlling statute in this case is 11 U.S.C. § 1127(b). The predecessor to section 1127 was section 229 of the Bankruptcy Act, 11 U.S.C. § 529 (repealed). Former section 229 was added to the Bankruptcy Act by Congress in 1952 to:
Clarify the . . . uncertainty as to the point in the reorganization proceeding at which rights vest under the plan sufficiently to make it equitable to cut off further right to amend or modify the plan as to matters materially and adversely affecting the rights of creditors or stockholders.
H.R. Report No. 2320, 82d Congress, 2d Sess. 16 (1952), 1952 U.S. Code Cong. & Admin.News 1960, 1976-77. Congress has long recognized that the process of reorganization is involved and complex and, after confirmation, requires a prolonged period of time for its consummation. Id.
It is generally difficult to determine in a particular case when the transfer of property has occurred to such an extent as to vest rights which may subsequently not be taken away. . . . If the time of substantial consummation of the plan is held to be determinative, uncertainty now exists as to the exact time when substantial consummation has occurred. . . . These uncertainties make it difficult to get credit, make contract, and receive such commitments . . . as may be necessary to consummate the plan.
Id. Given these difficulties, Congress added section 229 which provided for an application to be made to the court or an order declaring the plan substantially consummated. 1952 U.S. Code Cong. & Admin. News 1978. Thus, a precise date was fixed at which a plan was substantially consummated; thereafter, any alterations or modifications of the plan were prohibited if they materially and adversely affected participation in the plan of any class of creditors or stockholders.
The case law surrounding the interpretation of the term "substantial consummation" as used in section 1127(b) and defined at 1101(2) is limited. Even more limited is the law surrounding the meaning of the terms "all or substantially all" as those words are used in subsection (A) of section 1101(2)...
To continue reading
Request your trial