What’s Next: Denial of Plan Confirmation and the Supreme Court’s Decision in Bullard v. Blue Hills Bank

Case Summary

The debtor, Louis Bullard, proposed a chapter 13 plan. Bullard’s mortgage lender objected to the plan’s treatment of its claim. The bankruptcy court sustained the bank’s objection and denied confirmation of the plan. Bullard appealed the denial of confirmation to the Bankruptcy Appellate Panel of the United States Court of Appeals for the First Circuit (BAP). See In re Bullard, 475 B.R. 304 (Bankr. D. Mass. 2012). The BAP held that the order denying confirmation of the plan was not a final appealable order under 28 U.S.C. § 158(a)(1), but exercised its discretion, under 28 U.S.C. § 158(a)(3), to hear the appeal from the interlocutory order because of the legal issues raised; and agreed with the bankruptcy court that Bullard’s proposed plan was nonconfirmable. See In re Bullard, 494 B.R. 92 (BAP 1^st Cir. 2013). Bullard again appealed, but the United States Court of Appeals for the First Circuit dismissed the appeal on the grounds of lack of jurisdiction under 28 U.S.C. § 158(d)(1), concluding that a bankruptcy court’s order denying confirmation is not final as long as the debtor remains free to propose another plan.

Historically, federal appellate courts have split on whether plan denial decisions can be appealed as a matter of right. The current bankruptcy appeals statute authorizes appeals as of right not only from final judgments but from “final judgments, orders, and decrees … in cases and proceedings.” 28 U.S.C. § 158(a)(1). The dispute before the Supreme Court in Bullard centered on the interpretation of an immediately appealable “proceeding”, in the context of the rejection of a proposed plan. Bullard, argued for a plan-by-plan approach (i.e., each time a bankruptcy court reviewed a proposed plan, it conducts a separate proceeding). The bank, however, argued that the relevant “proceeding” is the entire process of considering plans, which terminates only when a plan is confirmed or if the case is dismissed.

The unanimous Supreme Court, with Chief Justice John Roberts writing the opinion, concluded that the relevant “proceeding” is the plan confirmation (or dismissal of the case) because those actions alter the status quo and fix the rights and obligations of the parties. Denial of confirmation with leave to amend, on the other hand, changes little – the automatic stay remains in place and the parties’ rights and obligations remain unsettled. While the Supreme Court acknowledged that denying confirmation does rule out the specified treatment contained in a particular plan, that alone does not make denial final.

The Supreme Court emphasized the pragmatic importance of its holding. Strategic appeals and tactical delays frequently occur in bankruptcy cases. If every denial of plan confirmation were appealable, multiple appeals of a nonconfirmable plan could ensue, resulting in a debtor asserting unwieldy leverage over its creditors by keeping those parties hostage in the bankruptcy case. Alternatively, the Supreme Court suggested that by not allowing appeal of a plan denial, the debtor and creditors would be forced to go back to the drawing board and work together to craft a confirmable plan. Further, while denial of confirmation is not appealable as a matter of right, the Supreme Court observed that the appellate court  has the right to grant discretionary review of interlocutory orders, under 28 U.S.C. § 158(a)(3), 158(d)(2), and 1292, where there is a novel issue or important question of bankruptcy law at play.

Thoughts and Implications

While the Bullard case involved a chapter 13 plan, the Supreme Court’s reasoning may be equally applicable to denial of confirmation of a chapter 11 plan. In the chapter 11 context there are presently three (3) circuits that hold denial of confirmation of a plan is not a final appealable order. See In re Civic Partners Sioux City, 2015 WL 884075 (8th Cir. 2015); In re Lindsey, 726 F.3d 857 (6th Cir. 2013); In re Lievsay, 118 F.3d 661, 662–63 (9th Cir. 1997).^[1] On the other-hand, there is one (1) circuit that permits an appeal from denial of plan confirmation in the chapter 11 context. In re Armstrong World Indus., 432 F.3d 507, 511 (3d Cir. 2005).^[2] If the Supreme Court’s reasoning is applied to chapter 11 cases, it would resolve the conflicting rulings by the appellate courts resulting in the current split amongst the circuits on the appealability of orders denying confirmation of a chapter 11 plan.

If applicable, the impact of the Supreme Court’s ruling is that a plan proponent whose chapter 11 plan is denied confirmation is left with limited options. For example, a plan proponent may seek leave for an interlocutory appeal, however, if such leave is denied, the remaining options include (i) dismissal of the case, which is appealable but poses substantial risk to the debtor’s ability to restructure by stripping the debtor of the automatic stay and other benefits of the bankruptcy process, or (ii) negotiation and prosecution of a new plan. Conversely, however, confirmation of a plan remains appealable as a matter of right. A creditor that loses a confirmation battle retains the right to appeal immediately.

A proponent of a plan will need to proceed more cautiously and be cognizant that even though they may possess a good faith basis to seek the extension of the law through a plan process, they will also need to consider that denial of the plan will not result in an automatic appeal as a matter of right. As a result of this shift in power, plan proponents will likely pursue more conservative strategies in the plan confirmation process.