In Re Winom Tool and Die, Inc.
OPINION REGARDING OBJECTION TO PROPOSED SETTLEMENT
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 fifing an objection to thе 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.
Sectiоn 1141(b) of title 11 states that, “[ejxeept 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,
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 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 intо 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 Colder,
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 pre-conversion) 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,
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 thаt make reference to the date of the fifing 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
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 categoriсally 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.,
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.,
Further evidence of Congress’ concern about the prospect of trying to undo a fait accompli is § 1144’s requirement that the revocation order “contain such provisions as are necessary to protect any entity acquiring rights in good faith reliance on the order of confirmation.” 11 U.S.C. § 1144(1). The trustee’s theory regarding the consequences of conversion from chapter 11 to chapter 7 undermines the policy of finality that § 1144 clearly is designed to serve.
In this regard, the trustee claimed that in Redick, supra p. 615, I “observed that the order confirming the plan and the plan had disintegrated upon conversion.” Trustee’s Response to Objection at ¶ 7B. But that assertion is incorrect.
Redick
addressed the question of whether a debtor who converts from chapter 13 to chаpter 7 can recover funds that were paid by the debtor to the chapter 13 trustee pursuant to the terms of a confirmed chapter 13 plan, and which at the time of conversion had not yet been paid to chapter 13 creditors as required by the plan.
Redick,
Whether assets continue to be part of the estate following confirmation of a chapter 11 or 13 plan hinges on whether there is a provision in the plan or confirmation order to that effect.
See supra
p. 2 (citing 11 U.S.C. §§ 1141(b) and 1327(b)). Even if there is no such provision, some courts have held that property which is necessary to carry out the chapter 13 plan remains in the estate notwithstanding § 1327(b).
See
2 K. Lundin,
Chapter IS Bankruptcy
§ 6.16 at n. 205 and accompanying text (2d ed. 1994) (collecting eases). If the estate does retain property post-confirmation, it appears that that property is, in the event of conversion to chapter 7, distributed in accordance with the provisions of chapter 7 rather than the plan of reorganization.
See Chattanooga Wholesale Antiques,
The principle that the distribution scheme of chapter 7 controls over contrary provisions in a pre-conversion reorganization plan is inapplicable here, as I hold that the assets in question do not belong to the chapter 7 estate. 1 But it is unclear from Green and the other cases cited whether the estate retained any property following plan confirmation. To the extent that property remained in the estate post-confirmation, those eases are not on point.
A more fundamental problem with analogizing to these eases concerns the debtor’s discharge. By definition, an otherwise enforceable debt is not rendered invalid until it is discharged. Prior to discharge, then, a provision in a confirmed plan which proposes to reduce the amount of a creditor’s сlaim— e.g., by obligating the debtor to pay just 10% of that claim — only suspends the creditor’s ability to enforce the preconfirmation claim, rather than extinguishing the claim.
See Smith v. No. 2 Galesburg Crown Finance Corp.,
The trustee’s position with respect to the post-conversion validity of § 1141(b) is further undermined by 11 U.S.C. § 349(b). That section states as follows:
Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title—
(1)reinstates—
(A) any proceeding or custodianship superseded under section 543 of this title;
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2), or 551 of this title; and
(C) any lien voided under section 506(d) of this title;
(2) vacates any order, judgment, or transfer ordered, under section 522(i)(l), 542, 550, or 553 of this title; and
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.
On its face, this statute makes clear that dismissal of a case will in certain respects restore the
status quo ante,
effectively voiding transfers of property interests that would otherwise be binding. The fact that § 349 is so explicit in this regard, whereas the section immediately preceding it — § 348 — is devoid of such detail, reinforces the inference that conversion does not “unravel” historical events.
See INS v. Cardoza-Fonseca,
The trustee’s argument that this ease should be treated as though it were always a chapter 7 is also contrary to
Chattanooga Wholesale Antiques, supra
p. 614. In that case, the chapter 7 trustee sought to recover preconversion payments that were made to a creditor under the terms of a confirmed chapter 11 plan.
In contrast to Chattanooga Wholesale Antiques, the assets at issue here have not been transferred by the Debtor to a third party. But that distinction is significant only if one is prepared to accept the proposition that the issue of whether property which leaves the estate under § 1141(b) becomes a part of the converted chapter 7 estate turns on whether the debtor still happens to be in control of that property on the date of conversion. The Bankruptcy Code provides no support for that proposition, and I therefore believe that Chattanooga Wholesale Antiques cannot be distinguished on that basis.
Another factor militating against the trustee’s interpretation of § 348 is its inherent implausibility. At the risk of sounding simplistic, one would expect that a case which was converted from chapter 11 to chapter 7 will be analyzed as just that — a case which was converted from chapter 11 to chapter 7. The notion that conversion gives rise to the legal fiction that the case was always a chapter 7 is conceptually awkward, and there is no readily apparent reason why reality must bе ignored in this fashion.
To the contrary, it appears that the Code implicitly rejects the trustee’s point of view. Section 726(b) of title 11 provides that an administrative expense “incurred under [chapter 7] after ... conversion has priority over [an administrative expense] incurred under any other chapter or [chapter 7] before ... conversion.” If eases that have been converted to chapter 7 are to be treated as though they had always been a chapter 7, there would be no need for this statute to refer to pre-conversion expenses “incurred under any other chapter” because that could never happen: by definition,
all
such expenses would be incurred under chapter 7. The fact that § 726(b) is worded as it is suggests that conversion does not “relate back” to the commencement of the case pursuant to § 348.
See Astoria Fed. Sav. & Loan Ass’n v. Solimino,
The trustee asserted that invalidation of § 1141(b) “is consistent with the effect of conversion on the discharge of [§] 1141(d). Corporations are not entitled to a discharge under Chapter 7. It must, therefore, be concluded that the conversion renders ineffective the discharge provisions of [§] 1141(d) and vitiates the corporate discharge resulting from the plan confirmation, because this is a ease under Chapter 7 of the Code and corporations are not entitled to a discharge under Chapter 7.” Trustee’s Response to Objection at ¶ 7B. This argument assumes that the Debtor’s discharge under § 1141(d) was obtained while the case was a chapter 7 proceeding, rather than while it was a -chapter 11 proceeding. That assumption is true only if the trustee is correct in asserting that the case must be deemed to have been a chapter 7 proceeding from its inception. Thus the fatal flaw in the trustee’s argument is that it assumes the point in controversy.
The trustee also invoked F.R.Bankr.P. 1019(5), which establishes certain filing requirements in cases converted to chapter 7. That rule states in pertinent part as follows:
[E]ach debtor in possession or trustee in the superseded case shall ... file and transmit to the United States trustee a final report and account_ If the conversion order is entered after confirmation of a plan, the debtor shall file ... a schedule of property not listed in the final report and account acquired after the fifing of the original petition but before entry of the conversion order....
The trustee argued that this paragraph supports his contention that it makes no difference “whether the assets were generated pre or post confirmation,” and that all such assets “are property of the estate and therefore part of the converted Chapter 7 estate.” Trustee’s Response to -Objection at ¶ 7C.
Assume that after filing for chapter 11 relief, the debtor acquires an interest in an ERISA-qualified pension plan. The case is subsequently converted to chapter 7. Application of the trustee’s analysis to these facts would lead to the conclusion that the pension plan is estate property, since a literal interpretation of Rule 1019(5) mandates that that asset be disclosed. That conclusion is patently wrong because, even if one assumes that the debtor’s interest would otherwise be within the scope of 11 U.S.C. § 541(a), it is excluded from the estate by operation of 11 U.S.C. § 541(c)(2).
See Patterson v. Shumate,
504 U.S. -, -,
The reason the trustee’s methodology produced the wrong answer in this hypothetical is simple: Rule 1019(5) does not purport to establish ground rules for determining whether a particular asset or class of assets is or is not estate property. Because it does nothing more than require that property acquisitions be disclosed, it would be silly to consult Rule 1019(5) for purposes of interpreting and applying § 1141(b), § 541(c)(2), or any other Code provision which defines the limits of the bankruptcy estate. I therefore see no merit to the trustee’s argument that Rule 1019(5) justifies the conclusion that any post-petition, pre-conversion property acquisition inures to the estate’s benefit. As expressly stated by the Advisory Committee on Bankruptcy Rules, see supra p. 618, Rule 1019(5) is not designed to disrupt pre-conversion actions.
Ironically, there are provisions in Rule 1019 and other bankruptcy rules which actually tend to undermine the trustee’s theory. Pursuant to F.R.Bankr.P. 1019(3), “[a]ll claims actually filed by a creditor [prior to conversion to chapter 7] shall be deemed filed in the chapter 7 case.” Under F.R.Bankr.P. 1019(1)(A), “[l]ists, inventories, schedules, and statements of financial affairs” filed prior to conversion to chapter 7 “shall be deemed to be filed in the chapter 7 case.” See also F.R.Bankr.P. 1007(c) (“Schedules and statements previously filed in a pending chapter 7 case shall be deemed filed in a superseding case_”). These rules would seem to be redundant if converted eases are deemed by virtue of § 348 to have been filed under the chapter to which the case converts.
The trustee subsequently argued that certain Code provisions and bankruptcy rules would be “ineffective” if property vesting in the debtor under § 1141(b) did not revest in the estate upon conversion to chapter 7. He argued, for example, that there would be no point in allowing the chapter 7 trustee of a converted chapter 11 ease an opportunity to assume or reject executory contracts, see 11 U.S.C. §§ 348(c) and 365(d)(1), if all property of the estate remained in the debtor after conversion.
This argument assumes that recognizing the post-conversion validity of vesting under § 1141(b) means that the chapter 7 estate can never “inherit” property interests from the pre-conversion chapter 11 estate. That assumption is wrong for two reasons. First,
Second, to the extent that the plan or confirmation order so provides, property of the chapter 11 estate does not vest in the debtor — and hence would become a part of the chapter 7 estate if the ease converts. I therefore reject the trustee’s assertion that certain Code provisions or bankruptcy rules would be rendered meaningless if conversion did not divest the debtor of property interests acquired pursuant to § 1141(b).
For the reasons stated, I hold that property which vests in the debtor under § 1141(b) does not revest in the estate upon conversion to chapter 7.
See In re Pauling Auto Supply,
The United States trustee filed a statement which suggested that it would be inequitable for a number of reasоns to rule that the Debtor’s post-confirmation property interests remain outside the converted chapter 7 estate. And many courts which have confronted the problem of defining the parameters of a post-conversion estate have taken general policy concerns into consideration. My holding, however, is not based on such considerations.
The primary reason for this is that § 1141(b) is relatively straightforward, does not lead to absurd results if literally applied, and is not contradicted by § 348 or any other Code provision. Under such circumstances, my task is to apply the statute as written.
Cf. In re Columbia Gas Systems,
A second reason why I steer clear of policy considerations is that § 1141(b) does not mandate the vesting of estate property in the debtor. By its own terms, that statute permits the plan or the order confirming it to prеclude such vesting. Accordingly, those courts which are so inclined can routinely specify in confirmation orders that certain (or all) property is to remain in the estate.
Cf. In re Bartlett,
As an alternative to his argument that this case should bе analyzed as though it were always a chapter 7, the trustee asserted that
NLRB v. Bildisco & Bildisco,
With an important exception to be discussed infra, § 541(a)(6) includes as part of the estate “[proceeds, product, offspring, rents, or profits of or from property of the estate.” Under § 541(a)(7), the estate also includes “[a]ny interest in property that the estate acquires after the commencement of the case.” If the trustee is correct in arguing that the post-petition chapter 11 debtor has no identity separate from his status as debtor in possession, then it would follow that any property interests arising post-petition fall within the reach of § 541(a)(6) and/or § 541(a)(7). As will be explained, however, I believe that the trustee’s premise is false.
In
Bildisco,
the Court confronted the issue of “whether the NLRB can find a debtor-in-possession guilty of an unfair labor practice for unilaterally rejecting or modifying a collective-bargaining agreement before formal rejection by the Bankruptcy Court.”
Much effort has been expended by the parties on the question of whether the debtor is more properly characterized as an “alter ego” or a “successor employer” of the pre-bankruptcy debtor, as those terms have been used in our labor decisions.... We see no profit in an exhaustive effort to identify which, if either, of these terms represents the closest analogy to the debt- or-in-possession. Obviously if the latter were a wholly “new entity,” it would be unnecessary for the Bankruptcy Code to allow it to reject executory contracts, since it would not be bound by such contracts in the first place. For our purposes, it is sensible to view the debtor-in-possession as the same “entity” which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have employed absent the bankruptcy filing.
Id.
at 527-28,
This passage does imply that the debtor and debtor in possession are one and the same. But the highlighted portion of the text makes clear that the Court passed on the opportunity to render a definitive analysis of that issue, and that it was limiting its “same-entity” conclusion to the facts before it.
Bildisco
therefore leaves open the possibility that distinctions between the debtor and the debtor in possession may be appropriate in other contexts.
Cf, e.g., In re Fastrax, Inc.,
The debtor in possession is a trustee.
See
11 U.S.C. §§ 323(a) and 1107(a);
see also, e.g., In re Triangle Chemicals,
Suppose, for example, that the debtor in possession exercises his right under 11 U.S.C. §§ 1107(a) and 554(a) to abandon unencumbered property that belonged to the debtor pre-petition. Since abandoned property ceases to be part of the estate,
see, e.g., In re Killebrew,
Consider also § 541(a)(6), which provides that the estate includes “[p]roeeeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.” This statute precludes such earnings from becoming a part of an individual chapter 11 debtor’s estate.
See, e.g., In re Berke,
Stating the principle more generally, the very manner in which the bankruptcy estate is defined necessarily implies that the debtor retains a status separate from his or its status as debtor in possession. Although the estate includes most property in which the debtor held an interest as of the commence
The trustee cited a case which rejected the reasoning in
Doemling. See In re Griseuk,
This argument would be persuasive if
Gri-seuk
were quoting the Code. But as the Supreme Court recognized, the Code does not require that all assets of the chapter 11 debtor be dedicated to the plan of reorganization.
See Toibb v. Radloff,
The second rationale advanced by
Griseuk
for its holding is that the chapter 11 “debtor and the debtor-in-possession are one in the same.”
As for
Triangle Chemicals,
the court there stated that “the probable intent of [11 U.S.C.] section 1101(1) ... [was that] there [be] no distinction between the ‘debtor’ and the ‘debtor in possession’ (where no trustee is appointed).”
In short, property interests may be held by the post-petition debtor in its own right
In this case, those accounts receivable which were generated pre-confirmation were either part of the chapter 11 estate by virtue of § 541(a)(1) or, if generated post-petition, became a part of the estate under § 541(a)(6) or § 541(a)(7). But that is of no avail to the trustee because those accounts subsequently vested in the Debtor under § 1141(b) when its plan was confirmed.
With respect to accounts receivable which may have been generated post-confirmation, many courts have endorsed the view that the estate ceases existence upon plan confirmation if there is no provision preventing estate property from vesting in the debt- or.
See, e.g., Pauling Auto Supply,
Although I conclude that the chapter 11 estate survived confirmation, the fact remains that any accounts receivable created after confirmation could only have been the product of assets belonging to the Debtor (who owned everything), not the debtor in possession (who owned nothing). Thus even if the estate survived confirmation, there is no basis for concluding that post-confirmation accounts receivable (if any) became a part of that estate under § 541(a)(6) or § 541(a)(7).
In what amounts to a second alternative position, the trustee cited
Abbott v. Blackwelder Furniture Co.,
Section 541(a) provides that “[t]he commencement of a case ... creates an estate” comprising the property interests specified therein. Such interests are for the most part described by reference to the “commencement of the case,”
see
11 U.S.C. § 541(a)(1), (2), (6) and (7), or “the date of the fifing of the petition,”
see
11 U.S.C. § 541(a)(5). With exceptions not relevant here, the conversion of a case from one chapter to another “does not effect a change in the date of the fifing of the petition [or] the commencement of the case.” 11 U.S.C. § 348(a).
Abbott
and the other cases cited ride roughshod over these provisions by ruling in effect that for purposеs of § 541(a), conversion is tantamount to the fifing of a new petition in the case to which the case converts. Because the analysis offered by these courts does not heed § 348(a), I reject it.
See In re Williamson,
In concluding, a point which bears emphasizing is that there was no plan provision preventing the Debtor from acquiring (or reacquiring) ownership in the estate property. The plan having been confirmed, it is now too late to question the validity of that transfer of property interests.
See
11 U.S.C. § 1141(a);
see also, e.g., Laing,
As the account receivable is not property of the estate, an order shall enter dismissing the motion for authority to compromise it.
Notes
. The assertion in
In re Midway, Inc.,
. Like any other legal document, a proposed plan of reorganization must be closely scrutinized. Each creditor in reviewing the plan should engage in a series of "what if" questions. What if the debtor defaults? What if the case is converted? What if the case is dismissed? If the creditor does not like the answers to these questions (or if there are no clear answers), she should negotiate for terms that address her concerns. She may, for example, demand a security interest in post-confirmation assets, or stock in the reorganized debtor so as to be in a position to exercise control over management. And of course a creditor may insist on a provision that some or all of the assets of the estate are not to vest in the debtor upon confirmation.
.
Cle-Ware
"strongly disapprove^] the practice of appointing separate counsel as attorney for the debtor-in-possession and at the same time compensating another attorney at the expense of the bankrupt estate in his capacity as counsel for the debtor for [post-petition] services.”
. The court in
Lindberg
did not address the apparent conflict between this assertion and its contention in an earlier case that, "when there is a conversion, the debtors are deemed to have filed a Chapter 7 case at the time the Chapter 13 case was filed."
Resendez v. Lindquist,
. Although this amendment would largely overrule cases like
Calder,
the method utilized by those cases for determining the estate of a converted case would be used if the conversion is “in bad faith.” H.R. 5116 at 84, 103d Cong., 2d Sess. (1994). Moreover, the amendment relates only to conversions from chapter 13. In conjunction with Congress’ longstanding goal of encouraging individual debtors to proceed under chapter 13 rather than chapter 7,
see, e.g., In re Brunson,