Summary of a Recent
Judicial Development in
Bankruptcy

Creditor Not Allowed to Revoke Confirmation of Chapter 11 Plan

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Schwartz, No. 08-1183-EFM, 2009 WL 1421041 (D. Kan. May 20, 2009), the United States District Court for the District of Kansas held that a creditor was barred from seeking revocation of confirmation of a Chapter 11 debtor's plan because the creditor had failed to timely or properly invoke an adversary proceeding for revocation.

Background

The debtor failed to list ownership of a one-sixth remainder interest in real estate in his Chapter 11 bankruptcy schedules. Id. at *1. His plan was subsequently confirmed without mention of the remainder interest. Id. Frontier Farm Credit (FFC) discovered the omitted remainder interest a few months later after the life tenant passed away, and sought an order requiring the sale of the undivided one-sixth fee interest. Id. The debtor claimed to have had no knowledge of the remainder interest, and argued that he did not have an "actual interest" in the land, and that any interest that he currently held had been acquired more than 180 days after the filing date and was not included in the bankruptcy estate. Id. However, evidence revealed that he had been aware of the remainder interest and had also failed to disclose the receipt of funds from the sale of other property; he had failed to file a monthly report for the month when the transactions took place, and had not deposited the funds in the debtor-in-possession account. Id. at *2. By way of explanation, the debtor claimed that he did not include the remainder interest in his schedules because he did not think it was necessary since he did not have actual possession of the property; he also testified that he did not report the funds and kept them in a separate bank account because "he felt they had nothing to do with the bankruptcy." Id. at *3.

At the scheduling conference on FFC's motion, FFC indicated that it sought to revoke confirmation of the debtor's plan. Id. at *4. The bankruptcy court treated FFC's motion as a motion for the sale of assets and advised FFC that if it intended to seek some other remedy, it would have to amend its motion. Id. FFC did not amend its sale motion or file a complaint for revocation of confirmation, but following the evidentiary hearing it submitted a supplemental brief demanding revocation of confirmation or discharge for fraud. Id. The bankruptcy court denied the sale motion on the grounds that it lacked authority to order a sale after the plan had been confirmed, and held that FFC's request to revoke confirmation was neither timely nor properly invoked. Id. FFC then brought this adversary proceeding asserting an independent action for fraud and seeking monetary damages. Id. at *5. The bankruptcy court ruled in favor of the debtor, holding that FFC had not shown "that it relied on the nondisclosure of assets by the debtors to its detriment or that it suffered any damages because of the omission," and FFC appealed. Id.

Analysis and Holdings

The district court found that the bankruptcy court's analysis of fraud by silence was "more than sufficient in addressing the legal effects of the failure to disclose," and had properly declined to excuse FFC's failure to bring a properly and timely filed action for revocation of confirmation. Id. at *6. The court further found that a presumption of fraud was inapplicable because FFC's actual theory was fraud by silence rather than "constructive fraud." Id. at *7. The court also found no clear error in the bankruptcy court's determination that FFC had failed to prove that it suffered any real damages; the court had further determined that "even if the value of damages equaled FFC's share of the liquidated assets, that administrative fees would swallow the entire amount and there would be no real recovery." Id. Lastly, the court held that FFC's judicial estoppel argument was not appropriately put before the court for determination, and that the theory of judicial estoppel would not apply in this situation. Id. at *8-9. Therefore, the court affirmed the bankruptcy court's order denying relief to FFC. Id. at *9.

The case was decided on May 20, 2009.