Summary of a Recent
Judicial Development in
Bankruptcy

Parties' Stipulation Not Required in Reorganization Plan

Patricia Farnese
National AgLaw Center Graduate Assistant

The United States Court of Appeals for the Ninth Circuit has affirmed a bankruptcy court's decision to confirm a debtor's bankruptcy reorganization plan over the objections of two creditors that the plan did not allow one of the creditors to foreclose on portions of the debtor's land. In re Allen, 300 F.3d 1055, 1057 (9th Cir. 2002). The parties had previously stipulated, with court approval, that such foreclosure proceedings could occur. See id. at 1057. The Ninth Circuit held that for the terms of the parties' stipulation to be required as part of the reorganization plan, the stipulation must clearly state that it was intended to be incorporated into the reorganization plan. See id.

The debtor, Robert E. Allen, was a kiwi farmer who had secured a number of operating loans for his farming operation. See id. Allen obtained two of these loans from the Atalanta Corporation ("Atalanta") and the Anatom Investment Corporation ("Anatom"). Id. Both Atalanta and Anatom held liens on real property owned by Allen as security for their loans. See id.

After defaulting on his loan with Atalanta, Allen filed a Chapter 11 bankruptcy petition. See id. Atalanta and Anatom subsequently entered into a stipulation with Allen that allowed the automatic stay to be lifted and for foreclosure proceedings to begin on some of Allen's property. Id. The stipulation also provided that Allen would harvest his current crop and allow Atalanta to market it. See id. The proceeds would then be turned over to Atalanta to be distributed pursuant to the terms set forth in the parties' stipulation. See id. The bankruptcy court approved the parties' stipulation and issued an order to that effect. See id.

Notwithstanding the parties' stipulation and the court's approval of that stipulation, Allen submitted a reorganization plan to the court that did not incorporate the terms of the parties' stipulation and "did not permit Atalanta to complete the foreclosure proceedings it had begun on Allen's property." Id. On April 26, 1999, over Anatom's and Atalanta's objections, the bankruptcy court confirmed Allen's reorganization plan. See id.

Atalanta and Anatom appealed the bankruptcy court's decision to the district court. See id. The district court remanded the matter "to the bankruptcy court to set forth specific findings as to the interest rate set for the Atalanta and Anatom loans," but otherwise affirmed the bankruptcy court's decision. See id. Atalanta and Anatom appealed the district court's decision to the Ninth Circuit. See id.

Atalanta and Anatom argued that the bankruptcy court "erred in confirming a reorganization plan that did not incorporate the terms" of the parties' stipulation or the court's order approving the stipulation "without first finding 'special circumstances' to justify doing so." Id. They argued that the Ninth Circuit's earlier decision in In re Lenox, 902 F.2d 737 (9th Cir.1990), a case very similar to the matter at hand, supported this argument. See id.

In Lenox, "the parties entered into a pre-confirmation stipulation under which the creditors would postpone seeking relief from the § 362 automatic stay and the debtors would make scheduled payments on a loan." Id. (Lenox, 902 F.3d at 739). The parties' stipulation also stated that its terms bound the debtors in any plan of reorganization. See id. The bankruptcy court approved the parties' stipulation and entered an order to that effect. See id.

The debtors in Lenox submitted a reorganization plan that did not incorporate the terms of the stipulation agreement. See id. The bankruptcy court approved the plan, and the bankruptcy appellate panel affirmed the confirmation. See id. The creditors appealed the bankruptcy appellate decision to the Ninth Circuit. See id. The Ninth Circuit "reversed the BAP's decision regarding the exclusion of the stipulation." Id. It stated that "[t]o modify or reverse a prior order . . . the bankruptcy court must find that 'special circumstances' exist (such as preventing forfeiture of the family farm) and 'must take the maximum steps reasonably practical to put the other party to the stipulation in a position close to what the stipulation gave it.'" Id. at 1058-59 (quoting Lenox, 902 F.3d at 740).

In the present case, the court identified the issue before it as "[coming] down to whether the rule of [Lenox] applies to a case, such as this one, in which a pre-confirmation order modifying the automatic stay does not state--as it did in [Lenox]-- that the terms of the order will bind either the debtor or the bankruptcy court in a plan of reorganization." Id. at 1059. Because Allen, Anatom, and Atalanta did not include such a clause in their stipulation, the court answered this question in the negative. See id.

The court explained that a stipulation is merely temporary and "thus operates only until the confirmation of the reorganization plan--unless, of course, as in [Lenox], the order itself provides that it will outlast the reorganization." Id. Moreover, the court ruled that to give a stipulation the effect requested by Anatom and Atalanta could be unfair to other creditors and interested parties who may have wanted to object to terms of the stipulation if they had known it would affect the reorganization plan. See id. at 1060. The court concluded that

[r]equiring that the parties to a stipulation modifying the automatic stay expressly state within the stipulation that it will bind the parties and the court in any future reorganization plan ensures that other creditors and interested parties, as well as the bankruptcy court, will have notice of the intended effect before the bankruptcy court issues an order approving it.

Id.

In conclusion, the Ninth Circuit affirmed the bankruptcy court's decision to confirm the reorganization plan without a finding of "special circumstances" because neither the stipulation nor the court order approving the stipulation clearly stated that "it would bind either the parties or the court in any subsequent reorganization plan." Id.

The case was decided on August 16, 2002; this summary was posted February, 2003