What do you do if a debtor fails to adhere to their confirmed bankruptcy plan?
Related practices and the jurisdictions
A recent decision by the Georgia Court of Appeals explained that when a debtor is in default under a recognized Chapter 11 bankruptcy plan, the creditor is able to defend the rights of the debtor in a state court and, possibly, in bankruptcy court too.
The case of City of Southfield v Shefa, LLC, a person who owned the hotel declared bankruptcy pursuant to Chapter 11 of the Bankruptcy Code in the year 2015. The bankruptcy court confirmed the plan of the debtor in the year 2016. The plan imposed a variety of obligations for the debtor. For instance, this quote from a Georgia Bankruptcy that the plan required that the debtor take out an agreement to mortgage Southfield town Southfield to guarantee the debtor’s obligations to make structural improvements on his house. The mortgage also obliged the debtor to be current with his tax obligations and provided the appointment of an attorney in the case in the event of default.
In 2019, the City filed a lawsuit against the debtor in Oakland County Circuit Court, contending that the debtor had violated the mortgage’s terms. The City sought that a receiver be appointed as well as to foreclose the mortgage. It was decided that the Circuit Court dismissed the case and held it was only bankruptcy courts that had the authority to be able to hear the dispute (i.e. it was the only court with jurisdiction over the issue).
In a reasoned ruling that was based on a rational argument, it was the Michigan Court of Appeals reversed the decision, stating that even though the bankruptcy court held exclusive control over specific aspects of bankruptcy and might have had jurisdiction over the city’s suit , its authority over the city’s lawsuit was not solely. The circuit court was in concurrent authority with the bankruptcy court for the city’s suit, which means it was also able to hear the disagreement and, therefore, should not have dismissed the ruling.
Shefa Shefa The Shefa is a reminder of how an approved bankruptcy plan usually creates obligations for both debtors as well as creditors. If a debtor fails to adhere to the plan and a state court is involved, it often can apply the terms of the plan, specifically ones based on state law. This is good news for creditors who do not feel comfortable to litigate in bankruptcy court which might be unsettling to them.
Delaware Bankruptcy Court: No Implied Assumption of Executory Agreements in Bankruptcy
The power for a bankruptcy trustee, or Chapter 11 Debtor in Possession (“DIP”) in the capacity to take over the responsibility to assign and assume or to reject executory agreements and leases that are not expired is a crucial tool that is designed to facilitate the idea of a “fresh beginning” for debtors as well as to increase potential value for the estate of bankruptcy to everyone involved. However it is important to note that the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”) set out strict guidelines regarding the taking over, assignment and refusal of leases and contracts. In the case of U.S. Bankruptcy Court for the District of Delaware dealt with the consequences of failing meet these requirements in In re Dura Automotive. Sys., LLC, 628 B.R. 750 (Bankr. D. Del. 2021). It was confirmed by the court that U.S. Court of Appeals for the Third Circuit – along with most other courts that have ruled on the matter–has rejected the concept in the case of “implied assumption” of executory contracts in bankruptcy proceedings.
The bankruptcy courts generally will allow the assumption or refusal of a lease or contract provided that they have evidence to show that either option is a wise business decision. Check out Mission Prod. Holdings, Inc. v. Tempnology, LLC, 133, S. Ct. 1652 1658 (2019) (“The bankruptcy court generally will approve thedecision to accept or decline], in accordance with the deferential ‘business judgement rule. .”). When assumed, the majority of executory agreements can be transferred by the DIP or trustee to third parties within the conditions specified in the sections 365(c) as well as 365(f). In chapter 11 instances, with the exception of regards to specific types of agreements (such as nonresidential real estate leases, air lease agreements or commitments with a Federal depository institution regulatory agency) The trustee or DIP can decide to assume or decline at any point prior until the confirmation of the chapter 11 plan. Any nondebtor parties to a contract could attempt to force either the trustee DIP to accept or deny before confirmation. In this case, the bankruptcy court has to decide on the timeframe that is appropriate to take the decision. 11 U.S.C. SSSS 365(d)(2), (d)(4) as well as (o). In the event of a decision to accept or deny the trustee or DIP, the trustee is usually required to stay up to date on the majority of obligations due in the course of the post-petition contract. 11 U.S.C. SSSS 365(d)(3) (d)(3) and (d)(5).
Bankruptcy Rule 6006 lays out guidelines for assumptions, assumed, the assignment or rejection of executory agreements and leases that have not expired. Rule 6006(a) states that “[aprocedure to take over the, or to reject or assign an executory lease or unexpired contract that is not in a planned plan is controlled by [Bankruptcy] Rule 9014.” According to the Bankruptcy Rules 9014(a) either the trustee, or DIP is required to request relief via a motion to the bankruptcy court with adequate notice and the opportunity to have a hearing given to the counterparty to the contract.