DECISION AND ORDER
On March 23, 1995, the Pogoda Group, an unsecured creditor of Leroy Joseph Potts and Regina Marie Potts (the “Potts”), debtors herein, filed its MOTION TO COMPEL COMPLIANCE WITH CONFIRMED CHAPTER 11 PLAN OF REORGANIZATION (“motion to compel compliance”). On August 31, 1995, the court held a hearing on the Pogoda Group’s motion to compel compliance, after which, the court took the matter under advisement.
Background
On March 13,1992, the Potts filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Leroy Joseph Potts (“Mr. Potts”) is both a seller of mobile homes and an owner of several mobile home parks. On April 15, 1993, the Potts filed their Plan of Reorganization (the “Plan”). The Potts, thereafter, filed an Amended Plan of Reorganization (the “Amended Plan”) which was subsequently confirmed by order of the court on January 31, 1994. The current matter before the court involves the Pogoda Group’s motion to compel compliance which was filed on March 31, 1995. In its motion to compel compliance, the Pogoda Group asserted that the Potts’ violated the terms of their Amended Plan when they failed to make two (2) semiannual payments, each in the amount of $6,750.00, which were due on August 10, 1994, and February 11, 1995, respectively. Motion to compel compliance, ¶4. The Po-goda Group asserted that the Potts’ failure to make these payments represented a material default under the Amended Plan, within the meaning of 11 U.S.C. § 1112(b)(8). Id. at 5. Accordingly, the Pogoda Group requested that this court enter an order compelling the Potts to comply with the terms of their Amended Plan by making the two payments totaling $13,500. Further, the Pogoda Group requested that the court automatically dismiss this case should the Potts fail to make the payment in the amount of $13,500 within ten (10) days from the date of the court’s order.
After having examined the Pogoda Group’s motion to compel compliance, the court ordered the Potts to “comply with the terms of the Plan by making two (2) payments, in the total amount of $13,500.00 within ten (10) days from the date of such order, and that this bankruptcy proceeding will be automatically dismissed by the Court unless the Debtors comply with this Order.” Thereafter, on April 10, 1995, the Potts filed a MOTION
In conjunction with the motion to compel compliance, the court has before it at this time the DEBTORS’ MOTION TO MODIFY CONFIRMED AMENDED PLAN OF REORGANIZATION (“motion to modify amended plan of reorganization”), filed by the Potts on May 18, 1995. In their motion to modify amended plan of reorganization, the Potts sought permission from this court to amend paragraph 4.12 of the Potts’ Amended Plan. This provision provides that “the holders of unsecured claims shall be paid the full allowed amount of each such claim, without interest, in six (6) equal semiannual installments, with first such installment payment payable not more than 180 days after the Effective Date of the Plan.” Pursuant to terms in the Amended Plan, the Effective Date of the Amended Plan was February 11, 1994. Accordingly, installment payments as required under paragraph 4.12 of the Amended Plan were due on or before August 10, 1994, February 11, 1995, February 11, 1996, August 10, 1996, and February 11, 1997.
In their motion to modify amended plan of reorganization, the Potts asserted that because of cash flow problems they have been unable to make timely payments on the unsecured claims as provided in paragraph 4.12 of the Amended Plan. Motion to modify amended plan of reorganization, ¶ 5. The Potts maintained that they had made substantial payments on more than ten secured and priority claims pursuant to terms in their Amended Plan. Id. These payments have amounted to more than $8,000 per month since the confirmation of the Potts’ Amended Plan. Id. Because of the financial difficulties the Potts have incurred in attempting to satisfy the terms of their Amended Plan, they have requested that this court pursuant to 11 U.S.C. § 1127(b) allow them to amend paragraph 4.12 of their Amended Plan. Id. at 8. The modified provision of the Amended Plan would read as follows:
4.12 Class 12 — The holders of unsecured claims shall be paid the full amount of each such claim, without interest, in twenty (20) equal monthly installments, with first such installment payment payable on or before July 10, 1995 and payable in consecutive monthly installments thereafter with last such monthly installment payment due and payable on or before February 11, 1997.
Id. at 6. The Potts asserted that the proposed modification was fair and reasonable in that not only does the modification continue to provide for 100% payment to the holders of Class 12 unsecured claims, but it further provides that the holders of the unsecured claims would receive monthly installments with the last such monthly installment due on the same date as the last semi-annual installment which is currently payable under paragraph 4.12 of the Amended Plan as confirmed. Id. at 7.
On May 22, 1995, the Pogoda Group filed an objection to the motion to modify amended plan of reorganization. On July 13, 1995, the court held a hearing on the motion to modify amended plan of reorganization, after which it took the matter under advisement.
Discussion
The court must initially address the Potts’ motion to modify amended plan of reorganization, before even considering the Pogoda Group’s motion to compel compliance. Section 1127(b) of the Bankruptcy Code deals with when a confirmed plan of reorganization may be amended. 11 U.S.C. § 1127(b) provides that:
The proponent of a plan or the reorganized debtor may modify such plan at any timeafter confirmation of such plan and before substantial consummation of such plan,....
11 U.S.C.S. § 1127(b) (Callaghan 1995).
11 U.S.C. § 1101(2) defines “substantial consummation” as follows:
(A) transfer of all or substantially all of the property proposed by the plan to be transferred;
(B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and
(C) commencement of distribution under the plan.
11 U.S.C.S. § 1101(2) (Callaghan). Substantial consummation is met only upon the satisfaction of all three requirements.
Federal Land Bank of Louisville v. Gene Dunavant and Son Dairy (In re Gene Dunavant and Son Dairy),
The case law considering the interpretation of “substantial consummation” as defined in § 1101(2) and used in § 1127(b) is limited. Furthermore, the phrase “all or substantially all” as defined in subsection (A) of § 1101(2) has been given less attention. Two distinct schools of thought have emerged in interpreting the meaning of subsection (A) of § 1101(2). One school of thought employs a rough percentage of payment test, which considers the distributions made to creditors along with transfers of property proposed to be transferred, requiring more than a mere preponderance of both distributions and transfers before “substantial consummation” occurs.
Antiquities of Nevada, Inc. v. Bala Cynwyd Corp. (In re Antiquities of Nevada, Inc.),
Several other courts have criticized the
Heatron
position because it essentially nullifies the specific statutory language of § 1101(2)(C).
United States v. Novak,
The debtor argued that significantly less than half the property proposed in the plan to be transferred to the creditors had been transferred. As support for his position that “substantially all” of the property had not been transferred to his creditors, the debtor relied on Heatron and its rationale. In rejecting the view espoused in Heatron, the court concluded:
The difficulty with the analysis in Heatron is that it makes a nullity of subsection (C). If subsection (A), relating to the transfer of all or substantially all of the property proposed by the plan to be transferred, is interpreted to include distributions to creditors proposed by the plan to be made over a period of time, then the requirement of subsection (C) will always be met when the requirement of subsection (A) are met. If that was the intent of setting forth this definition, then there would have been no need to include a separate requirement for commencement of distribution under the plan. It is a common axiom that a statute should be construed to give meaning to all of its provisions, if possible. (Citations omitted.)
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Although the statutory definition of “substantial consummation” is not entirely clear, the Court concludes that distribution to creditors over a period of time are not the types of transfers of property proposed by the plan to be transferred contemplated in subsection (A). In order to give effect to the provision requiring only commencement of such distributions, it must be concluded that the property transfers contemplated in subsection (A) include other types of transfers such as are often contemplated on or shortly after the effective date of a confirmed plan. Such transfers might include the transfer of a security interest to unsecured creditors, as occurred here, a transfer of stock to creditors or third parties, a transfer of promissory notes to creditors, transfers of property to secured creditors in satisfaction of their claims, or transfers of property by third parties to the debtor.
Thus, subsections (A) and (C) appear to distinguish between transfers of property to or from the debtor at or near the time the plan is confirmed undertaken to shape the new financial structure of the debtor and distributions of dividends to creditors made over a period of time from operating revenues. “Substantial consummation” requires completion or near completion of the former, but only commencement of the latter.
Hayball,
The courts primary function in construing legislation is to effectuate the legislative intent of the statute.
Philbrook v. Glodgett,
After consideration of the guidelines discussed above the court is inclined to adopt the
Hayball
rationale. Should the court have adopted the lump sum payment position as discussed in
Heatron,
it would be disregarding the importance of the independent provisions contained in § 1101(2).
H & L Developers, Inc.,
The second element of § 1101(2), the assumption of business or the management of all or substantially all the property dealt with by the plan, is clearly satisfied. As mentioned above, the Potts’ Amended Plan provides that upon confirmation “the debtors shall be revested with all of their assets, subject only to outstanding liens as provided in this Plan, and shall be entitled to manage their affairs without further order of the Bankruptcy Court.” Amended Plan, Art. VII. Furthermore, nothing in the Potts’ motion to modify amended plan of reorganization suggests that the Potts have been unable to use their assets in satisfying obligations to their creditors.
Finally, it is evident that the third requirement of § 1101(2) has been satisfied, in that, distribution under the plan has commenced. In fact, in paragraph 5 of their motion to modify amended plan of reorganization, the Potts indicate that they have made “substantial ongoing payments on more than ten secured and priority claims pursuant to said confirmed Amended Plan, which said payments have amounted to more than $8,000 per month since the confirmation of [the debtors] Amended Plan herein.”
Accordingly, having found that the Potts’ Confirmed Amended Plan is substantially consummated pursuant to § 1101(2), a modification will not be permitted under § 1127(b).
The court next must address the Pogoda Group’s motion to compel compliance. In its motion, the Pogoda Group asserts that because the Potts have committed a material default in respect to their plan of reorganization, their Amended Plan must be dismissed. Specifically, the Pogoda Group maintains that the Potts violated paragraph 4.12 of their Amended Plan by failing to make two semi-annual payments due to the Pogoda Group.
Section 1112(b) of the Bankruptcy Code provides that a court may either “for cause” convert a chapter 11 case to a chapter 7 liquidation case, or dismiss the case, whichever is in the best interests of the creditors of the estate. “What constitutes ‘cause’ for a conversion or dismissal of a chapter 11'ease under section 1112(b) is subject to judicial discretion under the particular circumstances of each case.”
In re Great American Pyramid Joint Venture,
Section 1112(b) offers ten illustrations detailing when a court may dismiss or convert a case for cause. The provision of relevance to this case is contained in subsection (b)(8) which provides in pertinent part:
[A]fter notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of the creditors and the estate, for cause, including—
(8) material default by the debtor with respect to the confirmed plan;....
11 U.S.C.S. § 1112(b)(8) (Callaghan 1995).
In light of the fact that the Potts have apparently failed to make their required payments to the Pogoda Group, as well as the other unsecured creditors provided for in paragraph 4.12 of their Amended Plan, the court concludes that it would be in the best interests of the creditors at this stage to dismiss this case. Additionally, in dismissing this case, the court notes that while the order confirming the Potts’ Amended Plan entered on January 31, 1994, did discharge the Potts of their pre-confirmation debts, the order
SO ORDERED.