Opinion
Case No. 00-14533-RGM
February 5, 2002
MEMORANDUM OPINION
This chapter 11 case is before the court on the motion of the United States Trustee to revoke the order of confirmation. The United States Trustee moved to revoke the order of confirmation twenty days after entry of the confirmation order asserting that ballots were incorrectly counted. There is only one class of creditors in this case. The summary of ballots submitted by the debtor states that the requisite one-half in number and two-thirds in amount of claims approved the chapter 11 liquidating plan. However, the votes of two insiders were included in the affirmative votes. When the insiders are removed from consideration, as they must be pursuant to § 1129(a)(10), the class would have rejected the liquidating plan and the plan could not have been confirmed.
The motion requested that the confirmation order be "vacated" which would have the same effect as revoking it. The motion did not merely request that an error, either clerical or substantive, be corrected without otherwise affecting confirmation. The court will treat the motion as a request to revoke the order of confirmation.
The debtor argues that some of the claims voted by an insider should be counted. The debtor argues that the insider, who was a guarantor of certain debts, purchased the claims after the filing of the petition and before the balloting. The debtor asserts that there was no improper motive and concludes that because the claims were not originally held by an insider and were not acquired by an insider for an illicit purpose, her votes should not be excluded from the balloting. Section 1129(a)(10), however, is clear on its face. It provides one requisite for confirmation:
If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider.
The statute is clear and unambiguous. Class acceptance may not be obtained by use of insider acceptances. An insider may neither vote a claim nor be the holder of a claim voted.
The United States Trustee filed a motion under Federal Rule of Bankruptcy Procedure 9024 which, with some modifications, incorporates Federal Rule of Civil Procedure 60(b). He asserted that the plan was confirmed in error. In particular, he asserted that the order should be vacated under Rule 60(b)(1) because it was entered by mistake, inadvertence or excusable neglect or under Rule 60(b)(6) because there are other reasons justifying relief. Notably, the United States Trustee did not allege fraud, misrepresentation or misconduct under Rule 60(b)(3).
The debtor argues that the United States Trustee must commence an adversary proceeding to revoke a chapter 11 order of confirmation. F.R.Bankr.P. 7001(5). The argument goes not so much to the form of the action, as the basis for the action. An adversary proceeding to revoke a chapter 11 order of confirmation must be founded on Section 1144 of the Bankruptcy Code which limits the grounds upon which a confirmation order may be revoked. Revocation, which is permissive and not mandatory, is available "if and only if [the confirmation] order was procured by fraud". 11 U.S.C. § 1144. Rule 60(b), while including fraud as one ground of relief, also permits relief in numerous other circumstances.
In this case, there was no fraud in procuring the confirmation order. It is true that the debtor improperly tabulated the ballots and improperly included the insiders' votes. However, there is neither allegation nor evidence that the error was other than an unintentional mistake on the part of counsel. There was full and open disclosure of the votes. The summary of the ballots and the ballots themselves were filed with the court four days before the confirmation hearing as required by the order setting the confirmation hearing and were available for review by the United States Trustee and all other parties. The plan is a liquidating plan. The principal assets are cash on hand and a certificate of deposit, with a total value of about $76,000. Distribution is expected to occur within 30 days. There is also some residual computer equipment of nominal value. The corporation will not receive a discharge. 11 U.S.C. § 1141(d)(3). Neither the debtor corporation nor the insiders receive a special benefit from confirmation. The same distribution would result in a chapter 7 liquidation, although later and with different expenses. While the error should not have been made, it was an innocent mistake and was not the result of an improper motive. The confirmation order was not procured by fraud. In the absence of fraud, the court has no authority under § 1144 to revoke the order of confirmation.
That does not end the inquiry. The United States Trustee argues that relief is also available under Rule 60(b) as made applicable by F.R.Bankr.P. 9024 and that relief available under Rule 60(b) is broader than under § 1144. The broader scope of relief available under Rule 60(b) is essential to the success of the United States Trustee. Having already determined that no fraud was perpetrated, the only remaining grounds for relief under Rule 60(b) are non-fraud grounds, grounds that exceed the scope of § 1144.
F.R.Bankr.P. 9024 provides that Rule 60 applies in cases under the Bankruptcy Code except that "a complaint to revoke an order confirming a plan may be filed only within the time allowed by § 1144." Rule 9024 is susceptible to two interpretations. It could be read, as the United States Trustee urges, that Rule 60 is applicable to all orders entered in a bankruptcy case including a confirmation order, that is, a confirmation order may be revoked for mistake, inadvertence, surprise, excusable neglect, newly discovered evidence or any other reason permitted by Rule 60. It could also be read, as the debtor urges, that in light of § 1144, Rule 60 is limited as to confirmation orders by the provisions of § 1144, that is, while a confirmation order may be modified in accordance with Rule 60, it may only be vacated or revoked under Rule 60(b)(3) for fraud.
The reference to § 1144 in F.R.Bankr.P. 9024 is not particularly helpful in resolving this matter. The Advisory Committee's note only states that § 1144's 180-day time period to seek revocation of a confirmation order "may not be circumvented by invocation of F.R.Civ.P. 60(b)." While this is a valuable clarification as to when revocation may be sought, it also seems to imply that Rule 60(b) is available to revoke a confirmation order on any ground permitted by Rule 60(b) provided that the motion is made within the 180-day time period. But, the note, as does F.R.Bankr.P. 9024, refers to a complaint. Relief under Rule 60(b) is by motion, not complaint. The third exception to the application of Rule 60(b) could simply have made Rule 60 inapplicable to revocation of confirmation orders and thereby left the matter to the code provisions and the bankruptcy rules applicable in adversary proceedings. It did not and the ambiguity was created.
The United States Supreme Court has the power to prescribe by general rules the practice and procedure in cases under Title 11. 28 U.S.C. § 2075. However, "such rules shall not abridge, enlarge, or modify any substantive right." 28 U.S.C. § 2075. The United States Trustee's interpretation enlarges the rights of parties to obtain revocation of orders of confirmation. Section 1144 permits revocation of a chapter 11 order of confirmation "if and only if" the order was procured by fraud. Rule 60(b) would permit revocation of confirmation orders not only on the basis of fraud but also on mistake, inadvertence, excusable neglect, newly discovered evidence and other grounds permitted by Rule 60(b), all of which are excluded by § 1144 of the Bankruptcy Code. In construing F.R.Bankr.P. 9024, it should be construed consistent with the authority vested in the Supreme Court — that Rule 60(b) is not available to obtain revocation of orders of confirmation. In re Emergency Beacon Corporation, 48 B.R. 356, 359-361 (S.D.N.Y. 1985) (decided under Bankruptcy Act of 1898). This does not mean that Rule 60 is inapplicable to confirmation orders. An occasion may arise when a confirmation order should be modified or an error in a confirmation order corrected. As long as the order is not being revoked, the provisions of Rule 60(a) and (b) are available.
In this case, even if relief under Rule 60(b) were available, it would not be granted. Relief under Rule 60(b) is available if there is mistake, inadvertence, surprise or excusable neglect or if there is any other reason justifying relief from the operation of the judgment. The mistake here is that neither the United States Trustee nor any other party contested an issue that was before the court at the confirmation. The issue was apparent on the face of the papers filed with the court. In order for a party objecting to confirmation to have been successful, it would have only been necessary to have brought the matter to the attention of the court. No reason for overlooking this issue was suggested; no excuse was presented.
Granting relief under Rule 60(b) ought not be futile. For example, there should be a meritorious defense before a default judgment is set aside. Heyman v. M.L. Marketing Co., 116 F.3d 91, 94 n. 3 (4th Cir. 1997); National Credit Union Admin. Bd. v. Gray, 1 F.3d 262 (4th Cir. 1993). This is not a default situation, but it is clear that the plan should not have been confirmed. This is not the whole picture. The confirmed plan is a liquidating plan. Most of the funds that will be distributed to creditors are in a certificate of deposit that matures within 30 days. Those funds will be distributed to creditors promptly. While there are a few administrative matters to be resolved, the case should be fully administered in the near future. All funds should be fully disbursed and a final report should be filed within 60 to 90 days. If the order of confirmation were revoked, it is most likely that the case would be converted to a proceeding under chapter 7. A chapter 7 trustee would become involved and liquidate the certificate of deposit. It is more likely than not that creditors would not receive a distribution for at least 12 months. This is in part due to the time necessary to obtain conversion of the case to a proceeding under chapter 7, the time necessary to hold a § 341 meeting, the time within which claims may be filed against the estate, and the time necessary to prepare and obtain approval of the trustee's final report. While all of these are very simple tasks, they require proper notice and the passage of time.
While no other plan substantially different from the current plan would likely be presented if the confirmation order were revoked, the debtor may attempt to obtain confirmation by meeting the concerns of the rejecting creditors or obtaining additional approvals that would, without consideration of insider claims, result in confirmation of this or a substantially similar plan. These actions would cause additional expense and delay.
Some creditors would be prejudiced by conversion to chapter 7. Some creditors will inevitably not file a proof of claim in the converted chapter 7 case and will not share in the distribution. In a chapter 11 case, scheduled creditors — with certain exceptions — are not required to file proofs of claims and will participate in the distribution. F.R.Bankr.P. 3003(b). While their failure to file proofs of claims would result from their own actions or inaction, there is no good reason in the circumstances presented here to add one more hurdle for them to surmount.
While the confirmation order ought not have been entered, the end result — except for the time involved — will be substantially the same whether the confirmation order is revoked or left in place. Creditors will be no better off by converting this case to a proceeding under chapter 7. They will, in fact, be delayed in receiving their distribution and will probably receive somewhat less because of the trustee's commission and costs of administration.
For all of these reasons, even if Rule 60(b) were applicable, it does not appear in the best interest of the creditors to revoke the order of confirmation. The mistake was one that should not have been made and, once made, should have been caught. It was apparent to anyone who looked at the papers and was familiar with the case. It was a matter essential to confirmation. Those involved simply made a mistake which resulted in confirmation. At this point, however, it does not appear that any other resolution of this case will bring a better result.
The trustee's motion to revoke the order of confirmation will be denied.