Effect of Confirmation

13.0. EFFECT OF CONFIRMATION

13.1 Chapter 11 Proceeding

A Chapter 11 proceeding may provide for a sale of all, or substantially all of the assets of the estate. However, except as otherwise provided in the plan or in the order confirming plan, confirmation vests all the property of the estate in the debtor.

Several courts have concluded that, since the specific plans revested title in the debtor and since no express provisions prohibited sales, sales of (or substantially all of) assets did not constitute modifications of the plans.

However, a transfer by the debtor that is inconsistent with the Plan may be avoidable in a later converted case, even though the asset was revested in the debtor by the Plan.

Company Policy: You do not need to require an order of the court to sell property if the property is vested in the debtor and if the plan and order do not preclude a sale. The plan and confirmation should be carefully reviewed to verify this fact. However, in any sale of all or substantially all of the assets of the debtor after confirmation of the plan but during the case, we should secure court approval. The sale may be considered a liquidation or modification of plan.

Upon the confirmation of the plan, the automatic stay of Section 362 generally ceases as to preexisting liens on debtor's property: the confirmation usually revests title in the debtor and grants a discharge; at this time, the automatic stay ceases as to property of the debtor. However, if the plan provides that business will be under court supervision by the trustee and that a discharge is not yet granted, the stay is not lifted. On the other hand, a discharge is not granted in a Chapter 12 or Chapter 13 until completion of the plan.

Unless an express plan provision postpones revesting upon confirmation (e.g. "the property of the estate will vest in the reorganized debtor on or when..."), the court will not imply it.

There are differing views on whether a subsequent post-confirmation conversion to Chapter 7 will revest such title in the Chapter 7 estate.

A plan cannot revest title in a debtor if the lien was foreclosed before the case was filed.

Even though the stay ceases as to property of a debtor in a Chapter 11 proceeding upon confirmation, provisions in the plan or confirmation decree stating that the bankruptcy court retains exclusive jurisdiction of the proceedings to determine controversies and disputes, and to effectuate payments may be construed as requiring authorization of the court before foreclosure.

Company Policy: If a mortgagee seeks to foreclose on a Chapter 11 debtor after confirmation of the plan without a lifting of the stay, please call our underwriting personnel. We must verify by review of the plan and confirmation that the court has not retained jurisdiction over claims or the property.

Real estate transfer taxes are prohibited on transfers under a Chapter 11 plan of reorganization. This prohibition extends to state and city deed and mortgage taxes. A liquidating trust created by a Chapter 11 plan receives the same exemption from taxation of stamp taxes, recording taxes, or similar taxes.

A Chapter 11 plan may provide for the cure of default under a mortgage and de-acceleration of same, even after a foreclosure judgment. The plan can also modify due-on-sale clauses in deeds of trust.

The plan may not modify the rights of a holder of a secured claim secured only in real property that is the debtor's principal residence.

According to one view, the Chapter 11 plan extinguishes liens (such as an attachment lien) not preserved in the plan if the lien is "dealt with" by stating that all property of the estate vests in the debtor subject only to other stated liens. According to one view, a lien is extinguished unless preserved in the plan if the lienholder participated in the reorganization and the plan calls for payment to the creditor. If the creditor does not participate in the reorganization (for voting and distribution) the plan may not extinguish its lien; since the creditor could only vote and receive distribution as an unsecured creditor, its lien was never brought into the bankruptcy case and could not be extinguished by the plan. A Chapter 13 confirmation does not extinguish an ad valorem tax lien if the plan provides that holders of allowed secured claims retain the liens securing claims. According to an advisory opinion that was remanded, a lien is not "dealt with by the plan" in a Chapter 11 case where the proof of claim and confirmed plan addressed only arrearages and not the entire secured debt. Thus, the creditors participated in the bankruptcy but did not attempt to collect the entire debt through the bankruptcy. Furthermore, if the lien has not been disallowed or avoided, it survives the bankruptcy. The plan becomes a binding contract between the debtor and the creditors upon confirmation. One case states that the general rule is that "upon confirmation, the property dealt with in the plan is free and clear of all claims and interests of creditors, including liens." Although the creditor did not file a claim and the plan was silent as to its lien, the (tax) creditor?s lien was extinguished by the plan because the plan was an exception to the general provisions of Section 1141(c) ("except as otherwise provided in the plan or in the order confirming the plan..."), since this plan provides that "the property of the estate" was to be free of liens and thereby included all property, not simply property (or liens) dealt with by the plan. If a lien is cancelled by a Chapter 13 plan, the lien remains in place until the debtors complete payments under the plan; if the case is dismissed the lien will be reinstated.

The plan cannot delete portions of a HUD Regulatory Agreement.

A lien extinguished by the Chapter 13 plan is reinstated by a dismissal prior to discharge.

The validity of a lien may be affected by a Chapter 11 plan if the creditor actively participates in the plan confirmation process and actually consents to receiving unsecured treatment; otherwise, an adversary proceeding is normally required to affect the validity of a lien.

A plan cannot restructure a first lien (if the bankruptcy estate has only a lien under state law) on the land at the filing of the Chapter 11 case, although the Chapter 11 trustee was to receive the title post-confirmation.

In order to determine the value of collateral and of the security interest at a confirmation hearing, the court must provide specific notice that it will value collateral at the hearing.

According to one view, the debtor must specifically and expressly retain any preference claims under the plan.

A dismissal of the Chapter 11 bankruptcy case does not affect the finality of the plan or discharge; any order revoking the plan must be made pursuant to a Section 1144 order made within 180 days after the order of confirmation.

A dismissal of a Chapter 11 Bankruptcy will reinstate a lien avoided pre-confirmation, unless the court orders otherwise.

A plan may not be modified after "substantially consummated."

13.2Chapter 12 Proceeding

Unless otherwise provided, the confirmation vests all of the estate in the debtor. Thereafter, it would not be necessary to secure an order of the court to sell some assets vested in the debtor. However, a significant transfer such as a sale of a negative (conservation) easement is accomplished by a modification of the Chapter 12 plan. According to one view, a confirmed Chapter 12 plan avoids liens of participating secured creditors provided for by the plan, unless the plan provides otherwise.

Company Policy: In any sale of all or substantially all of the assets of the debtor after confirmation of the plan but during the case, we require court approval. The sale may be considered a liquidation or modification of the plan. In other sales during the bankruptcy and after revesting under the plan, we prefer to secure a letter from the trustee reflecting no objection to the sale.

13.3Chapter 13 Proceeding

Section 1303 provides that the debtor has the right to sell property of the estate other than in the ordinary course of business. The plan may provide for the vesting of property of the estate in the debtor or any other entity upon confirmation or at a later time. Property of the estate vests in the debtor upon the confirmation unless the plan or the order confirming plan states otherwise.

Local Rules may require the debtor to secure trustee approval or a court order to authorize consumer debt. Local Rules may require a modification of plan to incur debt. Local Rules may require court approval of a sale or refinancing of the debtor?s principal residence (even after confirmation).

Company Policy: If the debtor offers to sell, we do not require an order of sale or court proceeding if the property has vested in the debtor and is not subject to the plan in a Chapter 13 proceeding. Verify that the court has not provided that the property shall remain subject to the court jurisdiction until the discharge. We also prefer to secure a letter from the trustee reflecting no objection to the sale.

A balloon payment, due prior to the Chapter 13 proceeding is not curable in a Chapter 13 plan and payment cannot be extended.

The court can, as part of the plan in a Chapter 13 proceeding, reinstate a loan on the residence of the debtor which had been accelerated.

If the debtor defaults in payments on a residential mortgage to be paid outside the plan, the appropriate relief of the lender is a lifting of the stay even though no default has occurred under the plan.

It has been held that the Chapter 13 plan can modify the interest rate and payment on a loan if it is a loan secured by the debtor's residence and farm.

Post-confirmation loan proceeds do not have to be submitted to the trustee, since they are not future earnings or income.

Confirmation of Chapter 13 plan which dealt with creditors negates a lift of stay granted to the creditor before the confirmation.

If a lien is cancelled by a Chapter 13 plan, the lien remains in place until the debtors complete payments under the plan; if the case is dismissed the lien will be reinstated.

13.4 Effect of Plan on Liens

There are conflicting cases on whether a plan can avoid a lien on land.

Although a confirmed Chapter 11 bankruptcy plan may extinguish a lien, the notice to the creditor must specify the treatment of that claim and allow the creditor to make an informed judgment; otherwise, a notice is not sufficient if the plan and disclosure statement sent did not disclose treatment (and a separate agreement did affect the lien).

If a Chapter 13 plan treats a purchaser after the foreclosure of the debtor?s property as a lienholder rather that the owner, the plan will not be sufficient to revest title in the debtor. The debtor had no existing right to regain title (such as a right of redemption) and the notice of plan did not clearly warn the owner of the effect of a failure to object to the plan.

If a plan does not provide for a secured claim, the property may not vest free and clear and the creditor?s lien will survive the bankruptcy. The lender is not provided for by the plan if it receives no payment on the value of its lien. "As a general matter, a plan ?provides for? a claim or interest when it acknowledges the claim or interest and makes explicit provision for its treatment. If a Chapter 13 plan does not address a creditor?s lien (for instance, by expressly providing for payment of an allowed secured claim and cancellation of the lien), that lien passes through the bankruptcy process intact, absent the initiation of an adversary proceeding. Several courts have held that a plan ?provides for? the lien held by the secured creditor only when it provides for payment to the creditor in an amount equal to its security." "[W]here a debtor?s plan does not expressly preserve a secured creditor?s lien, the confirmation of the plan acts to extinguish the lien provided that (1) the lien holder participated in the debtor?s bankruptcy case by filing a proof of claim and (2) the property is either "dealt from or ?provided for? by the plan."



By James L. Gosdin, Copyright reserved