Individual Chapter 11 Cases after BAPCPA: Can You Still Close the Case Early?

Practitioners, judges and scholars have debated the ins and outs of BAPCPA in countless seminars and scholarly efforts. One area that courts will inevitably address pertains to the changes associated with individual chapter 11 cases. The problems run the spectrum from merely technical changes to broad questions regarding the very constitutionality of an individual's chapter 11.¹ Somewhere along the continuum of problems and concerns is the issue of closing an individual's chapter 11 case.

This article provides a brief overview of the law applicable to closing individual chapter 11 cases prior to BAPCPA, followed by a review of several changes to individual chapter 11 cases under BAPCPA that will impact the closing of an individual's chapter 11 case. The Code provisions, the case law prior to BAPCPA and the Federal Rules of Bankruptcy Procedure with the new overlay of BAPCPA will present some issues regarding case closing that need to be addressed by courts and parties well before confirmation.

Closing Pre-BAPCPA

Prior to BAPCPA, an individual's chapter 11 case was closed pursuant to §350² and Rule 3022³ when the estate was fully administered. The Code and Rules do not define "fully administered." However, the committee note to Rule 3022⁴ provides a list of nonexclusive factors to guide a determination on whether an estate is fully administered. Rule 3022 is flexible and allows the court to determine on a case-by-case basis when an estate is fully administered.⁵ It is clear that within this discretion a case is fully administered for final-decree purposes even if all the enumerated factors are not present.⁶ The factors subsume the requirements of substantial consummation as defined in §1101(2),⁷ and as such, courts often look to see if a case has been substantially consummated as a de facto test for full administration.⁸ Regardless of the exact factors courts consider, the intent of Rule 3022 is to close chapter 11 cases "sooner rather than later" post-confirmation. As highlighted in the next section, several new provisions applicable to individual chapter 11 cases call into question whether closing individual chapter 11 cases "sooner rather than later" is intended post-BAPCPA.

BAPCPA Changes Impacting Case Closing⁹

Expanded Definition of Property of the Estate. New §1115 provides that the estate of an individual chapter 11 debtor includes all property described in §541 acquired after the commencement of the case and post-petition earnings up to the closing, dismissal or conversion of the case. This statutory addition mirrors the definition of property of the estate applicable in chapter 13¹⁰ cases and treats post-petition earnings of an individual debtor under chapter 11 or 13 the same. Prior to BAPCPA, an individual chapter 11 debtor's post-petition earnings were not property of the estate. However, even though post-petition earnings were not property of the estate, those earnings would be needed to fund a plan. The difficulty under the prior law was that if the case was converted, the post-petition earnings up to conversion were not part of the chapter 7 estate. BAPCPA has changed this result and affected both discharge and case closing.

Disposable Income Test. New §1129(a)(15), added by §321(c) of BAPCPA, provides that where an allowed unsecured claimholder objects to confirmation, the plan must provide one of the following. First, the plan should provide that the value of property distributed under the plan to that claimholder must be no less than the value of that unsecured claim. If this requirement is not met, individual chapter 11 debtors will be required to commit all disposable income over a five-year plan or a longer timeframe if the plan provides for a longer timeframe. The five-year limit essentially provides a presumption of a five-year plan when an unsecured creditor objects and is not paid in full in an individual's chapter 11 case.¹¹

Absolute Priority Rule. Prior to BAPCPA, individual chapter 11 debtors sometimes were unable to obtain confirmation of a plan because of the "absolute priority rule." A plan that did not provide for full payment to the unsecured creditors' class, unless the unsecured creditors' class accepted the plan or the unsecured creditors' class was not impaired, was not confirmable if the individual debtor was retaining his or her interest in his or her property.

Amended §1129(b)(2)(B)(ii) creates an exception to the absolute priority rule in individual cases. Under BAPCPA, a debtor may retain post-petition earnings and property of the estate as defined under new §1115 even when the unsecured creditors' class does not accept the plan and is not paid in full. This provision, along with the disposable-income test in new §1129(a)(15) discussed above, and new §1123(a)(8), which requires individual debtors to devote earnings and other future earnings, make the confirmation of a plan in an individual chapter 11 case closely mirror chapter 13.

Discharge. Under BAPCPA, individual chapter 11 debtors will not obtain a discharge at confirmation. New §1141(d)(5)(A) provides that an individual chapter 11 debtor generally cannot obtain a discharge until all plan payments have been made. Indeed, §1141(d)(5)(B) and (C) provide that an individual chapter 11 debtor can obtain a discharge prior to completion of plan payments in very limited circumstances. There must be a showing that the property actually distributed under the plan for each unsecured claim is at least as much that such claimholders would have received under a chapter 7 and modification of the plan is not practicable.

Modification of Plan. BAPCPA expands the parties who can file motions to modify a confirmed plan. New §1127(e) provides that the debtor, the trustee, the U.S. Trustee and unsecured claimholders can file motions to modify a plan to adjust the amount of payments to a class of claims in the plan, to extend or reduce time for such payments or to alter the distribution to a creditor due to any payment of that claim made other than under the plan.

Closing Post-BAPCPA

Reconciling these modified provisions with the pre-BAPCPA practice of closing individual chapter 11 cases "sooner rather than later" is problematic. For example, it seems inconsistent with the new definition of property of the estate and delayed discharge in individual chapter 11 cases to close cases prior to completion of plan payments.¹² Both the expanded definition of property of the estate and delayed discharge provide greater control and oversight of individual chapter 11 cases. Closing individual chapter 11 cases would eliminate oversight once the case is closed.

Both the expanded definition of property of the estate and delayed discharge provide greater control and oversight of individual chapter 11 cases.

Additionally, closing individual chapter 11 cases early is inconsistent with the ability to effectively file motions to modify a confirmed plan as permitted by new §1127(e). This ability to modify plans post-confirmation by a host of parties further indicates that closing cases prior to discharge presents problems. It seems that post-confirmation reporting and monitoring of the debtor and the estate would be required for parties other than the debtor to know that a modification was in order. Granted, a motion to re-open can be filed pursuant to §350,¹³ but without information about material changes in the debtor's post-confirmation financial condition and compliance with the plan, the ability to know when to bring such a motion is greatly impaired.

Beyond the conflict between the amended Code, prior case law and Rule 3022, it is important to recognize that requiring individual chapter 11 cases to remain open post-confirmation, which in most instances will be five years or longer, impacts debtors in several practical respects. First, debtors will be required to file quarterly reports and pay quarterly fees post-confirmation for years if the case stays open until all payments are made. Depending on the posture the BA/UST takes, this may be a highly contested issue.¹⁴

Second, the timing of closing has ramifications in the disclosure-statement phase and plan-formulation phase, since the disclosure statement and plan will need to take into account how long a case will remain open. If the case is going to remain open until discharge, the payment of post-confirmation quarterly fees will impact feasibility, and a provision will need to be included in all plans for the post-confirmation payment of quarterly fees. On the other hand, if a plan contemplates closing a case very soon after confirmation as was done before BAPCPA in individual chapter 11 cases, information will need to be included in the disclosure statement regarding the debtor re-opening the case pursuant to §350(a), filing a final report and showing that the plan and other statutory requirements have been satisfied so that the court can enter an order granting the debtor a discharge.

Conclusion

We are left with a conflict between the case law on quickly closing an individual's chapter 11 case, and the new and amended Code provisions seem inconsistent with closing these cases early after confirmation. Perhaps the Advisory Committee on Bankruptcy Rules will amend Rule 3022 or add additional committee comments to address these issues regarding the closing of an individual's chapter 11 case. Since Rule 3022 has not been modified by the Interim Rules, the bankruptcy courts will have to provide some guidance.

Footnotes

1 Numerous articles have been written addressing the problematic issues associated with an individual's chapter 11 case after BAPCPA. It does not appear that the issue presented in this article has been squarely addressed. For a broad overview of the other issues, see Keach, Robert J., "Dead Man Filing Redux: Is the New Individual Chapter Eleven Unconstitutional?," 13 Am. Bankr. Inst. L. Rev. 483 (Winter 2005); Williams, Jack F. and Todres, Jacob L., "Tax Consequences of Post-Petition Income as Property of the Estate in an Individual Debtor Chapter 11 Case and Tax Disclosure in Chapter 11," 13 Am. Bankr. Inst. L. Rev. 701 (Winter 2005); Warner, G. Ray, "Garnishment Restrictions and the Involuntary Chapter 11: Rethinking Kokoszka in a Means Test World," 13 Am. Bankr. Inst. L. Rev. 733 (Winter 2005).

2 Section 350(a) provides that "[a]fter an estate is fully administered and the court has discharged the trustee, the court shall close the case." 11 U.S.C. §350 (1984).

3 Federal Rule of Bankruptcy Procedure 3022 provides that "[a]fter an estate is fully administered in a chapter 11 reorganization case, the court, on its own motion or on motion of a party in interest, shall enter a final decree closing the case." Fed. R. Bankr. P. 3022 (1991).

4 The Advisory Committee Note on Rule 3022 provides: Entry of a final decree closing a chapter 11 case should not be delayed solely because the payments required by the plan have not been completed. Factors that the court should consider in determining whether the estate has been fully administered include (1) whether the order confirming the plan has become final, (2) whether deposits required by the plan have been distributed, (3) whether the property proposed by the plan to be transferred has been transferred, (4) whether the debtor or the successor of the debtor under the plan has assumed the business or the management of the property dealt with by the plan, (5) whether payments under the plan have commenced and (6) whether all motions, contested matters and adversary proceedings have been finally resolved.

5 In re Jay Bee Enters. Inc., 207 B.R. 536, 539 (Bankr. E.D. Ky. 1997).

6 In re Mold Makers Inc., 124 B.R. 766, 768-69 (Bankr. N.D. Ill. 1990).

7 In re Jordan Mfg. Co. Inc., 138 B.R. 30, 32-33 (Bankr. C.D. Ill. 1992).

8 It is important to recognize that even if a case has been substantially consummated, a court may still deny entering a final decree if other factors indicate that the case has not been fully administered. See, e.g., In re SLI Inc., 2005 WL 1668396 (Bankr. D. Del. 2005) (recognizing that it is not necessarily appropriate to close a case at substantial consummation).

9 It is worth noting, as Judge Eugene Wedoff has recognized, that these changes to individual chapter 11s make such cases much more similar to a case filed under chapter 13 of the Code. See Wedoff, Eugene R., Major Effects of the Consumer Provisions of the 2005 Bankruptcy Reform Legislation, July 11, 2005, at 28 (on file with the author) (Judge Wedoff recognized that "[i]In several different respects, chapter 11 is modified for cases brought by individuals so as to make the case much more like one under chapter 13." He points to four specific Code provisions amended by or added by BAPCPA to illustrate his assertion: §1115 (2005) (modifying property of the estate), §1123(a)(8) (funding of plans from an individual debtor's earnings), §1129(a)(5) (imposing a best-efforts test) and §1141(d)(5) (discharge in an individual's chapter 11 case delayed until completion of plan)); Burnett, Bart B., "Impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 upon Individual Chapter 11 Debtor Cases," ABI's 11th Annual Rocky Mountain Bankruptcy Conference, Jan. 26-28, 2006, at 1 (on file with author) ("the new Act will arguably bring a chapter 11 case for individuals more in line with that of a case under chapter 13").

10 11 U.S.C. §1306(a) (1978).

11 Ahern, Lawrence III and Brown, William Houston, 2005 Bankruptcy Reform Legislation with Analysis (2005).

12 It is also inconsistent with the closing procedure in chapter 13 cases, which has a similar definition of property of the estate and a delayed discharge as well. However, closing chapter 13 cases is governed by Rule 5009, not Rule 3022. It is also inconsistent with the ability to effectively file motions to modify of a confirmed plan as permitted by new §1127(e).

13 Section 350(b) provides that "[a] case may be reopened in the court in which such case was closed to administer assets, to accord relief to the debtor, or for other cause." 11 U.S.C. §350 (1984).

14 Beyond the fact that debtors will likely not want to file post-confirmation reports, the actual focus maybe the avoidance of paying quarterly fees.