In a recent decision in the case of SC SJ Holdings v. Pillsbury Winthrop Shaw Pittman (In re SC SJ Holdings), Civil Action No., 22-00689 (MN), the U.S. District Court for the District of Delaware (the court) affirmed a May 12, 2012, decision of the U.S. Bankruptcy Court for the District of Delaware (the Bankruptcy Court) denying the debtors’ motion for relief from certain releases contained in their confirmed plan (the plan). In particular, the debtors sought relief from the releases contained in their plan so that they could assert a malpractice claim against their former counsel. The Bankruptcy Court denied the debtors’ motion on the basis that such relief violated Sections 1127 and 1144 of the Bankruptcy Code.
As noted by the court, the debtors, prior to the commencement of their bankruptcy cases, operated a Fairmount Hotel in San Jose, California. Due to the COVID-19 pandemic, the debtors were experiencing financial difficulties and sought relief from Fairmount (the hotel operator), pursuant to a certain hotel management agreement, to pursue financing from other hotel operators. Fairmount refused and the debtors retained the law firm of Pillsbury Winthrop Shaw Pittman (Pillsbury). As set forth in the opinion, the debtors sought to retain Pillsbury to “provide advice on ‘considering and developing Chapter 11 options.’”
During the course of their bankruptcy cases, the debtors prepared numerous drafts of a plan. Each draft contained “substantively identical release, exculpatory, and injunctive provisions.” In particular, the release provisions not only provided for releases to the debtors but also their “attorneys … and other professionals.” The exculpation provisions in the draft plans contained similar language and expressly included the debtors’ professionals. These release, exculpation and injunctive provisions were included in the final version of the plan, disclosure statement and plan solicitation materials. In addition, the debtors’ principal testified under oath at the confirmation hearing both in support of the plan and in support of these release, exculpation and injunctive provisions, and “affirmed that [these provisions] were in the debtors’ best interest and integral to the [debtors’] successful reorganization.” The Bankruptcy Court confirmed the plan and found that these release provisions were “integral to the plan, supported by valuable consideration, and necessary for the debtors’ successful reorganization.”
Fairmount, during the course of the debtors’ bankruptcy cases, filed a number of claims against the debtors totaling $36 million. Fairmount also commenced an arbitration proceeding against the Debtors asserting breach of the covenant of good faith and fair dealing. Following confirmation of the debtors’ plan, the arbitration occurred. The day after the plan went effective, an arbitration award was entered in Fairmount’s favor in the amount of $13 million. Following entry of the arbitration award, the debtors sought to pursue malpractice claims against Pillsbury, leading the debtors to eventually file a motion with the Bankruptcy Court seeking “relief” from the plan’s release, exculpation and injunction provisions. In their motion, the debtors asserted that: they were unaware of Pillsbury’s alleged malpractice and Pillsbury committed malpractice when they allegedly failed to advise the debtors regarding the “import of the Plan’s release provisions.” Pillsbury objected to the motion contending that it was improper, untimely and “entirely without merit.”
On May 4, 2012, the Bankruptcy Court held a hearing to consider the debtors’ motion. Finding that the debtors filed their motion more than 180 days following confirmation of the plan, the Bankruptcy Court denied the motion. In particular, the Bankruptcy Court found that the Debtors’ motion was untimely as: it was filed following the substantial consummation of the plan in derogation of Section 1127 of the Bankruptcy Code; and it was filed more than 180 days following confirmation in derogation of Section 1144 of the Bankruptcy Code. The Bankruptcy Court also denied the debtors’ efforts to use FRCP 60 (as made applicable by Rule 9024 of the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules)) as a means to circumvent these strict timeframes.
Upon appeal, the court affirmed. In particular, the court, like the Bankruptcy Court, found that Section 1127 is “the exclusive means by which to modify a plan.” Further, the court noted that Section 1127 “is an absolute bar to modification [of a plan] after substantial consummation [thereof].” As the debtors did not file their motion until well after the plan was substantially consummated, the court ruled that the debtors’ motion was untimely. Holding that Section 1127(b) limits all modifications to substantially consummated plans, “regardless of the magnitude of the change,” the court also rejected the debtors’ contention that the removal of the plan’s release provisions (at least as to Pillsbury) was not a modification of the plan and did not “take debtors’ requested relief outside the scope of Section 1127(b).” The court also found that there were no “exceptions” to Section 1127(b). In so doing, the court rejected the debtors’ attempts to use Bankruptcy Rule 9024 to circumvent the strict deadline imposed by Section 1127(b). As noted by the court, “a rule of procedure cannot ‘negate the substantive impact of a restriction contained’ in a provision of the Bankruptcy Code or ‘validly provide’ a movant ‘with a substantive remedy that would be foreclosed by’ such a statutory provision.” (quoting In re Fesq, 153 F.3d 113, 116-17 (3d Cir. 1998)).
In addition to rejecting the debtors’ arguments concerning Section 1127 of the Bankruptcy Code, the court also found that Section 1144 of the Bankruptcy Code barred the relief sought by the debtors. Finding that the debtors were seeking to “modify” the plan (so as to avoid the release, exculpatory and injunctive provisions contained therein) or “revoke” the plan so as to render these provisions null and void, the court (as the Bankruptcy Court) found that the Debtors’ motion was untimely pursuant to Section 1144 of the Bankruptcy Code. As noted by the Court, Section 1144 of the Bankruptcy Code requires a motion to either modify or revoke a plan must be made within 180 days following confirmation of such plan. Further, in the case of revocation, the motion not only has to be filed within this 180-day period, the party seeking revocation must also show fraud. As the debtors failed to do either, the court denied the motion.
Finally, the court also rejected the debtors’ attempts to use Bankruptcy Rule 9024 to circumvent the strict requirements of Section 1144 essentially for the same reasons that the court articulated why Bankruptcy Rule 9024 could not circumvent Section 1127.
This opinion provides a stark reminder that the statutory protections afforded to confirmed plans (and, in particular, the release, exculpatory and injunction provisions contained therein) will be given great deference by a reviewing court and that the deadlines to seek relief from those provisions will be strictly enforced.
Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.
