In re: Michael Younessi

FILED
JUL 10 2019
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
ORDERED PUBLISHED
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-18-1337-FLKu
MICHAEL YOUNESSI, Bk. No. 8:16-bk-15208-MW
Debtor. Adv. Pro. 8:18-ap-01150-MW
DIAMOND ENTERPRISES, LTD., LP,
Appellant,
v. OPINION
MICHAEL YOUNESSI,
Appellee.
Argued and Submitted on June 20, 2019
at Pasadena, California
Filed – July 10, 2019
Appeal from the United States Bankruptcy Court
for the Central District of California
Honorable Mark S. Wallace, Bankruptcy Judge, Presiding
Appearances: M. Douglas Flahaut of Arent Fox LLP argued for
appellant Diamond Enterprises, Ltd., LP; Michael Jones of
M Jones & Associates, PC argued for appellee Michael
Younessi.
Before: FARIS, LAFFERTY, and KURTZ, Bankruptcy Judges.
FARIS, Bankruptcy Judge:
INTRODUCTION
The bankruptcy court confirmed debtor Michael Younessi’s chapter
111 plan, then granted (in part) creditor Diamond Enterprises, Ltd., LP’s
(“Diamond”) motion to modify the confirmation order. Over 180 days after
the original confirmation order, but less than 180 days after the
modification, Diamond filed a complaint to revoke confirmation,
contending that the original confirmation order was procured by fraud.
Mr. Younessi filed a motion to dismiss the complaint, arguing that it was
barred by the 180-day deadline in § 1144. The bankruptcy court agreed
with Mr. Younessi, and Diamond appealed.
The narrow question on appeal is whether the modification order
reset the 180-day deadline for Diamond to seek revocation of the plan
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are the Federal Rules of Civil
Procedure.
2
confirmation. We agree with Diamond that, on the facts of this case, the
180-day period ran from the order modifying the plan confirmation order.
Accordingly, we REVERSE and REMAND.
FACTUAL BACKGROUND2
A. Prepetition events
Mr. Younessi was close friends with Dr. Bruce Houman, Diamond’s
manager, and solicited investments from Dr. Houman to develop
commercial real estate. Dr. Houman, through Diamond, contributed over
$2 million toward the purchase of real estate and interests in
Mr. Younessi’s companies.
Mr. Younessi and Dr. Houman obtained a $1.2 million line of credit
secured against the investment properties. Almost immediately,
Mr. Younessi began unilaterally withdrawing money for personal use
without Dr. Houman’s knowledge or permission.
In July 2009, Diamond sued Mr. Younessi and his company in
California superior court for fraud, breach of fiduciary duty, securities
violations, and other claims. Following a trial, the state court ruled against
Mr. Younessi and in favor of Diamond. The court found that Mr. Younessi
made material misrepresentations to Dr. Houman regarding his and his
2
We exercise our discretion to review the bankruptcy court’s docket, as
appropriate. See Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 725 n.2
(9th Cir. BAP 2008).
3
companies’ finances and net worth and the nature and value of some of the
companies and real properties. It entered judgment totaling $3,979,242.68
plus attorneys’ fees. The court of appeal affirmed.
B. Mr. Younessi’s chapter 11 case and confirmed plan
Mr. Younessi filed his chapter 11 petition on December 27, 2016.
Diamond filed an adversary complaint seeking a determination that
the state court judgment was nondischargeable under §§ 523(a)(2), (4), (6),
and (19). Diamond also filed a proof of claim for $7,220,122.60 based on the
state court judgment debt.
Mr. Younessi filed his proposed chapter 11 plan and disclosure
statement on July 30, 2017. He filed a first amended plan (the “Plan”) and
first amended disclosure statement on September 1, 2017. The bankruptcy
court approved the amended disclosure statement.
The Plan classified Diamond as a Class 7 Creditor, acknowledging
that the judgment debt was “potentially non-dischargeable.” The Plan
proposed three options for treatment of Diamond’s claim. Treatment A
provided that Diamond would receive a single payment of $22,000 in full
satisfaction of its claims, that Diamond would “consent” to the discharge of
Mr. Younessi’s liability to it and Dr. Houman, and that “Houman will
provide a statement to Debtor that Houman no longer believes the actions
of Debtor forming the basis of Diamond’s claim were improper, and
Diamond’s claim ultimately arose because of a business deal that went bad
4
without malfeasance of any of the parties.” Treatment B required
Mr. Younessi to “pay Diamond 5% of his annual earnings between
$250,000 and $350,000, and 10% of his annual earnings in excess of
$350,000.00 until Claim 7 is paid in full, the debt is discharged, or the
Debtor’s obligations to continue with these payments is otherwise
terminated.” Treatment C provided that Mr. Younessi would pay Diamond
a lump-sum distribution of $80,000 in exchange for Diamond conveying
certain property interests to Mr. Younessi. If Diamond selected none of the
options, “Class 7 Treatment A will be the default treatment for Class 7.”
Diamond was the only voting creditor to cast a ballot rejecting the
Plan. It did not choose any of the proposed treatments.
Diamond also objected to the Plan. It argued that the Plan did not
satisfy the statutory requirements for plan confirmation and sought to
compel Diamond to make false and misleading statements regarding the
state court action. It contended that Mr. Younessi did not disclose all
material information, assets, and risks in the Plan, including prior
bankruptcy proceedings, related bankruptcy proceedings, and interests in
various companies.
The bankruptcy court entered an order confirming the Plan
(“Confirmation Order”) on December 21, 2017. It stated that “nothing in
the Chapter 11 Plan shall have any effect on Diamond’s pending
non-dischargeability action against Debtor except to the extent that
5
Diamond is determined to have actually or constructively consented to
such effect or as otherwise provided by law, and except to the extent, if
any, that Diamond’s ineligibility to vote on the Chapter 11 Plan has a
bearing on these matters.”3
In its findings of fact and conclusions of law, the court found that the
Plan complied with the applicable provisions of the Bankruptcy Code. The
court found that Diamond selected Treatment A by not picking either
Treatment B or C. It stated that “Diamond elected this treatment by its own
decision, and as such Diamond effectively waived its objections by
agreeing to that treatment by consent.”
C. Motion for reconsideration
Diamond filed a motion for reconsideration of the Confirmation
Order under Rules 9023 and 9024. It requested that the bankruptcy court
either decline to confirm the Plan or modify the Confirmation Order to
make clear that the Confirmation Order and Plan shall not “have any effect
on Diamond’s pending Nondischargeability Action against the Debtor and,
in the event Diamond prevails in that action, such nondischargeable
judgment in favor of Diamond (if any) will not be adversely affected or
discharged pursuant to the [Plan] . . . .” It argued that it did not consent to
3
The bankruptcy court noted that Diamond had cast a ballot rejecting the Plan,
but, because Mr. Younessi had objected to Diamond’s proof of claim, “Diamond did not
have an allowed claim at the time the ballot was cast, and was therefore not permitted
to vote.”
6
plan confirmation or its treatment under the Plan, and that the Plan did not
satisfy the requirements for confirmation.
Mr. Younessi opposed the motion for reconsideration. He argued that
Diamond waived its objections by not raising them until after the deadline
for objections had passed. He argued that Diamond had consented to its
treatment under the Plan by failing to select a treatment option.
On January 29, 2018, the bankruptcy court entered an order granting
the motion for reconsideration (“Reconsideration Order”). It recognized
that Diamond did not elect Treatment A and stated that “nothing within
the four corners of the Plan states that such [default] placement is within
Diamond Enterprises’s actual or even deemed consent.” It concluded that,
“[i]n view of the absence of consent, the cramdown and best interests of
creditors tests are not satisfied . . . , making the Plan unconfirmable.” But
rather than vacate the Confirmation Order, the court decided to grant the
alternative relief requested in the motion for reconsideration and modify
the Confirmation Order. The bankruptcy court ordered:
The Confirmation Order is specifically modified to make
clear that nothing in the Confirmation Order or the Amended
Plan shall require an affirmative statement from Houman or
have any effect on Diamond’s pending Nondischargeability
Action against the Debtor and, in the event Diamond prevails
in that action, such nondischargeable judgment in favor of
Diamond (if any) will not be materially and adversely affected
or discharged pursuant to the Amended Plan and will be fully
enforceable against the Debtor to the extent provided by law
notwithstanding the express provisions of the Amended Plan.
7
(Emphases added.) No one appealed from the order confirming the plan or
the Reconsideration Order, and the time to do so has long since expired.
D. The second adversary complaint and the motion to dismiss
On July 27, 2018, 179 days after the court entered the Reconsideration
Order, Diamond filed a second adversary complaint seeking to revoke
confirmation of the Plan. Diamond alleged that Mr. Younessi failed to
report prebankruptcy income, engaged in schemes to defraud creditors by
granting title to his properties to other entities on the eve of foreclosure,
failed to disclose ownership interests in various companies, and failed to
disclose ownership interests in community property and internet domain
names. The first cause of action sought revocation of the Plan under § 1144.
The second cause of action sought unspecified damages arising from
Mr. Younessi’s alleged fraud.
Mr. Younessi filed a motion to dismiss (“Motion to Dismiss”) the
adversary complaint under Civil Rule 12(b)(6). His argument was
straightforward: that Diamond failed to file the adversary complaint within
the 180-day deadline under § 1144. Mr. Younessi contended that the
complaint was filed 218 days after the Confirmation Order and 179 days
after the Reconsideration Order. He argued that the 180-day period ran
from “the date of the entry of the order of confirmation[,]” which
implicated the Confirmation Order, not the Reconsideration Order.
8
Mr. Younessi relied solely on the Ninth Circuit’s decision in Dale C.
Eckert Corp. v. Orange Tree Associates, Ltd. (In re Orange Tree Associates, Ltd.),
961 F.2d 1445 (9th Cir. 1992) (hereinafter “Orange Tree”), which held that an
adversary proceeding filed more than 180 days after the original
confirmation order, but less than 180 days after the modification of the
confirmation order, was untimely.
Diamond opposed the motion to dismiss, arguing that the “major
substantive changes and modifications to the plan” mandated that the 180-
day period began running from entry of the Reconsideration Order, not the
Confirmation Order. It acknowledged the Ninth Circuit’s holding in Orange
Tree, but distinguished that case by arguing that Orange Tree “‘involved
only housekeeping matters’ that did not materially affect the rights of the
protesting creditor[,]” while the Reconsideration Order “was entered to
substantively alter the plan to, among other things, carve out Diamond’s
nondischargeability action so that the plan would not expressly violate 11
U.S.C. § 1141’s requirement that a plan not discharge nondischargeable
debt.”
Rather, it urged the court to adopt the reasoning in Collier on
Bankruptcy and Berg v. TM Carlton House Partners, Ltd. (In re TM Carlton
House Partners, Ltd.), 110 B.R. 185 (Bankr. E.D. Pa. 1990) (hereinafter “TM
Carlton House”): “An order confirming a modified plan is the effective
order of confirmation for the plan and the 180-day period would begin to
9
run anew.” 8 Collier on Bankruptcy ¶ 1144.04[1] (Richard Levin & Henry J.
Sommer eds., 16th ed. 2019).
Diamond also argued that the 180-day deadline applied only to its
first cause of action for revocation of discharge, not the second cause of
action for fraud damages.
The bankruptcy court entered an order (the “Dismissal Order”)
granting the motion in part. The bankruptcy court concluded:
Orange Tree clearly applies here and compels the
conclusion that the 180-day period began running in the case
on December 21, 2017 – the date of the entry of the Plan
Confirmation Order. The Reconsideration Order did not result
from any modification of the Plan under Bankruptcy Code
section 1127 and there certainly was no compliance with the
requirements of section 1127(b). Accordingly, the potential
exception that may apply when a confirmed plan is modified
under section 1127 plays no role here.
The rationale for having the 180-day period run from the
date of entry of a modification order as opposed to the original
confirmation order is even weaker here than it was in Orange
Tree because the Reconsideration Order enlarged rather than
diminished Diamond’s rights. And, even if it had diminished
them, Diamond’s remedy would have been under Bankruptcy
Rule 9024.
It held that TM Carlton House is distinguishable because the modification
order there was issued under § 1127(b).
The court dismissed the first cause of action to revoke the
10
confirmation as barred by the 180-day statute of limitations under § 1144.
However, it held that the second cause of action for fraud “remains
intact[.]”
Diamond timely filed a notice of appeal and motion for leave to
appeal the interlocutory Dismissal Order. The BAP motions panel granted
leave to appeal.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334and 157(b)(2)(I) and (L). We have jurisdiction under 28 U.S.C. § 158(a)(3).
ISSUE
Whether the Reconsideration Order reset the 180-day deadline for
Diamond to file its adversary proceeding seeking revocation of
Mr. Younessi’s chapter 11 plan confirmation under § 1144.
STANDARD OF REVIEW
We review the bankruptcy court’s legal conclusions de novo,
including its interpretation of the Bankruptcy Code. Francis v. Wallace (In re
Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014) (citation omitted). Similarly,
“[w]e review de novo the [trial] court’s grant of a motion to dismiss under
[Civil] Rule 12(b)(6), accepting all factual allegations in the complaint as
true and construing them in the light most favorable to the nonmoving
party.” Narayanan v. British Airways, 747 F.3d 1125, 1127 (9th Cir. 2014)
(citation omitted).
11
“De novo review requires that we consider a matter anew, as if no
decision had been made previously.” In re Francis, 505 B.R. at 917 (citations
omitted).
DISCUSSION
Section 1129 controls the confirmation of chapter 11 plans of
reorganization. Following confirmation of a chapter 11 plan, the court may
revoke the confirmation order for fraud under § 1144. Section 1144
provides the only avenue for revocation of a confirmed plan. In re Valley
Health Sys., No. 6:07-bk-18293-PC, 2011 WL 7637256, at *6 (Bankr. C.D. Cal.
Nov. 8, 2011), aff’d sub nom. Lopez v. Post-Effective Date Committee of
Creditors (In re Valley Health Sys.), BAP No. CC-11-1657-MkDKi, 2012 WL
3205173 (9th Cir. BAP Aug. 3, 2012).
Section 1144 provides, in relevant part:
On request of a party in interest at any time before 180 days
after the date of the entry of the order of confirmation, and after
notice and a hearing, the court may revoke such order if and
only if such order was procured by fraud.
§ 1144. “In practical effect there is a 180-day statute of limitations that
balances bankruptcy’s strong policy of finality against the need to unravel
frauds. After 180 days, one’s options become more limited.” Official Comm.
of Unsecured Creditors v. Michelson (In re Michelson), 141 B.R. 715, 723 (Bankr.
E.D. Cal. 1992); see Huntington Banks of Mich. v. Felcor/Lax Holdings LP, 9 F.
12App’x 669, 670 (9th Cir. 2001) (“Section 1144’s six-month time limit to file
actions seeking revocation of a Plan is absolute, and no motion for
revocation may be filed once the period has expired, regardless of the
circumstances.” (citing Farley v. Coffee Cupboard, Inc. (In re Coffee Cupboard,
Inc.), 119 B.R. 14, 19 (E.D.N.Y. 1990))); Rule 9024 (“[A] complaint to revoke
an order confirming a plan may be filed only within the time allowed by
§ 1144, § 1230, or § 1330.”).
The Ninth Circuit construed § 1144 in Orange Tree. In that case, the
creditor, Eckert,4 held a disputed, secured claim of $765,763. Orange Tree
proposed a chapter 11 plan that would generate approximately $8,000 for
Eckert. Eckert voted to accept the plan, and the bankruptcy court
confirmed Orange Tree’s chapter 11 plan of reorganization. 961 F.2d at
1446.
Three months later, the bankruptcy court entered a modified
confirmation order in Orange Tree’s bankruptcy case to clarify ambiguities
in the original confirmation order. Id. at 1447. The court of appeals noted
that the modified plan “(1) set a new ‘effective date’ for the plan,
(2) explicitly discharged all liens other than that of [a bank], (3) set a new
period for filing claims based on the rejection of executory contracts and
4
Coincidentally, Eckert had also filed for bankruptcy protection, so most of the
actions which our discussion attributes to Eckert were actually done by Eckert’s
bankruptcy trustee for the benefit of Eckert’s bankruptcy estate. To keep things simple,
we will refer to the creditor as “Eckert.”
13
(4) allowed the reorganized debtor to make payments for professional
services in the ordinary course of business.” Id. at 1449.
Less than 180 days after entry of the modified confirmation order, but
more than 180 days after entry of the original confirmation order, Eckert
filed a complaint seeking to revoke the confirmation order on the basis of
fraud. The bankruptcy court dismissed the complaint as untimely. The BAP
affirmed, and Eckert again appealed. Id. at 1446-47.
The Ninth Circuit stated that, if the original confirmation order was
the operative order, then Eckert’s complaint was untimely. If the modified
order controlled, then the complaint was timely. It held that the 180-day
period under § 1144 ran from the original order. Id. at 1447.
The court first examined the policy reasons behind choosing the
earlier date:
Congress has determined that a 180-day limitations
period strikes the appropriate balance between the strong need
for finality in reorganization plans and the interest in affording
parties in interest a reasonable opportunity to discover and
assert fraud. In recognition of the strength of the interest in
finality of reorganization plans, courts have held uniformly that
strict compliance with section 1144 is a prerequisite to relief.
Expiration of the limitations period bars a motion to set aside
the confirmation of a reorganization plan even if the fraud is
not discovered until the period has passed.
Id. (citations omitted). It noted that a “compelling reason for finality of
14
reorganization plans” was that chapter 11 “plans are not easily devised,
and once accomplished a short time for challenging such plan is necessary
to keep alive the potential life of that business. Uncertainty of continued
operations, injected by a Sword of Damocles in the form of fraud
allegations which can be filed at any time in the future, would render
meaningless the whole purpose of a Chapter XI proceeding.” Id. at 1448
(quoting In re Newport Harbor Assocs., 589 F.2d 20, 23 n.6 (1st Cir. 1978)).
Based on these policy considerations, the court held that the “parties
in interest were on notice they had a limited time to seek revocation on the
ground of fraud.” Id. at 1448. It noted that, “[s]ince the second confirmation
order was unrelated to the alleged fraud, entry of that order provided no
excuse for extending the limitations period for challenging the initial
order.” Id.
The court further stated that § 1144 “contemplates the entry of only
one such order, unless the order is revoked for fraud or the plan is
modified after confirmation pursuant to the procedures set forth in section
1127(b). As we have noted, entry of the [modification] order was not
preceded by compliance with the conditions imposed by section 1127(b)5
for modification of a confirmed plan.” Id. (citations omitted).
5
Section 1127(b) provides that “[s]uch plan as modified under this subsection
becomes the plan only if circumstances warrant such modification and the court, after
notice and a hearing, confirms such plan as modified, under section 1129 of this title.”
15
The court rejected Eckert’s argument that extension of the 180-day
period was warranted because the modified order materially affected its
rights. It held that none of the changes in the modification order affected
Eckert’s rights; other than explicitly discharging certain liens (which did
not affect Eckert), the changes “were consistent with the plan as originally
confirmed and involved only housekeeping matters.” Id. at 1449.
In any event, the court held that, even if the modified order had
materially affected Eckert’s rights, “Eckert’s remedy was not to seek
revocation of the reorganization plan for fraud, but to ask the bankruptcy
court to reconsider the [modification] order.” Id. at 1448. It held that even
the three “housekeeping matters” “could and should have been made not
by what purported to be a modified order of confirmation, but rather by an
order entered pursuant to the provision of the reorganization plan
authorizing the . . . bankruptcy court ‘to carry out the provisions, purposes
and intent of the Plan’ through the ‘[e]ntry of orders in aid of
implementation of the Plan.’” Id. at 1449.
In this case, Diamond contends that the bankruptcy court erred in
rejecting TM Carlton House, a 1990 case from the bankruptcy court for the
Eastern District of Pennsylvania. In TM Carlton House, the bankruptcy court
held that the later order confirming a modified plan was the operative
confirmation order because the modifications complied with § 1127(b). 110
B.R. at 188. The proposed modifications were “in several respects deemed
16
sufficiently technical to not require the preparation of an Amended
Disclosure Statement.” Id. at 187. The bankruptcy court held that the later
order “followed notice and a hearing . . . . Consequently, the Plan
confirmed by the [later order] became the Debtor’s Plan of
Reorganization.” Id. at 188 (emphasis in original).
In Orange Tree, the Ninth Circuit distinguished TM Carlton House. It
stated:
In Carlton House, a confirmed reorganization plan was modified
pursuant to 11 U.S.C. § 1127(b). The court held that by the
terms of section 1127(b) the modified plan “becomes” the
debtor’s reorganization plan and therefore the 180-day period
for challenges to the plan runs from the date of modification,
rather than the date of initial confirmation. 110 B.R. at 188-89.
This case did not involve the modification of a confirmed plan
pursuant to section 1127(b) after all the protective measures
required by that section had been taken, but the entry, without
a hearing or a vote, of a superseding order purporting to
confirm the same plan.
961 F.2d at 1448 n.8.
The facts of this case are closer to TM Carlton House than to Orange
Tree. The Reconsideration Order changed the Plan in significant ways.
Those changes affected all creditors and were not “housekeeping matters”
by any stretch of the imagination.
As it was proposed to creditors, the Plan provided only three possible
treatments for Diamond’s claim. But the Reconsideration Order effectively
17
created a fourth treatment (Treatment D?) that was not in the Plan, not
described in the accompanying disclosure statement, and not formally
presented to the other creditors for objections or for acceptance or rejection.
The new treatment had a material effect, not just on Diamond, but
also on the other creditors. Under each of the three treatments specified in
the Plan, the amount that Mr. Younessi had to pay to Diamond was
controlled: Treatments A and C each provided for the payment of fixed
dollar amounts; and Treatment B provided for payment of stated
percentages of Mr. Younessi’s annual income. These limits improved the
chances that Mr. Younessi would be able to carry out the Plan and pay
other unsecured creditors as the Plan required.6 (They also support the
finding of a required element of plan confirmation: that “[c]onfirmation of
the plan is not likely to be followed by the liquidation, or the need for
further financial reorganization, of the debtor . . . .” § 1129(a)(11).) But the
Reconsideration Order’s new fourth treatment destroyed this expectation.
Mr. Younessi faces the prospect of a nondischargeable debt for over $7
million. His risk is serious, given that the state court had already found that
he made misrepresentations to Diamond. Under the Reconsideration
Order, he has no way to prevent Diamond from enforcing that debt by
6
The Plan requires Mr. Younessi to make quarterly payments to general
unsecured creditors over a five-year period. Secured claims were satisfied by the
surrender of collateral.
18
garnishing his income and seizing other assets, which could in turn make it
impossible for him to carry out his plan and make distributions to his other
creditors.
There is another important distinction between this case and Orange
Tree: as the bankruptcy judge acknowledged with admirable candor, the
Plan was “non-confirmable.” Under Treatment A, which the bankruptcy
court initially held was binding on Diamond, Diamond’s claim would be
discharged without an adjudication of Diamond’s claims of
nondischargeability. This was impermissible unless Diamond consented to
it.7 Mr. Younessi argued that Diamond had consented to Treatment A
because it failed to choose among Treatments A, B, and C. But Diamond
had vigorously objected to confirmation of the entire plan. To say that
Diamond opposed confirmation of the whole Plan, but voluntarily
consented to one provision of that Plan, is sophistry.
The bankruptcy court realized this when it entered the
Reconsideration Order. In doing so, the bankruptcy court was carrying out
its duty to deny confirmation of a plan that violates the Bankruptcy Code.
United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 277 (2010) (holding
that the bankruptcy court should “confirm a plan only if the court finds,
7
Section 1141(d)(2) provides that “[a] discharge under this chapter does not
discharge a debtor who is an individual from any debt excepted from discharge under
section 523 of this title.” We assume (without deciding) that a creditor in Diamond’s
position could waive this protection by consenting to it.
19
inter alia, that the plan complies with the ‘applicable provisions’ of the
Code. . . . [T]he Code makes plain that bankruptcy courts have the
authority — indeed, the obligation — to direct a debtor to conform his plan
to the requirements of” the Bankruptcy Code).
In short, the Reconsideration Order’s changes to the Plan were not
mere clarifications or housekeeping matters, but rather were of great
significance to all concerned. Unlike Orange Tree, the Reconsideration
Order did not confirm the same Plan as the Confirmation Order; in reality,
it refashioned the Plan in an important way.
Mr. Younessi argues that the 180-day period always runs from the
entry of the initial confirmation order, regardless of any subsequent plan
modification. This misreads Orange Tree. The Ninth Circuit emphasized in
that case that the changes to the plan were mere clarifications and
housekeeping matters. The court went so far as to criticize the bankruptcy
court for modifying the confirmation order at all: instead, the court said
that the bankruptcy court should have entered an order implementing the
plan. Orange Tree, 961 F.2d at 1449. Orange Tree does not stand for the
proposition that the 180-day period is unaffected by even a substantive
modification of the plan.
Mr. Younessi argues that the Reconsideration Order did not modify
the Plan, but rather only modified the Confirmation Order. This argument
ignores the fact that the Confirmation Order expressly provides (in two
20
separate provisions) that its terms control over any inconsistent provisions
of the Plan. In other words, the change to the Confirmation Order that
created an inconsistency with the Plan – the creation of the new treatment
for Diamond’s claim – also automatically changed the Plan.
Mr. Younessi also argues that the bankruptcy court did not invoke
§ 1127. But this argument disregards the facts that the changes to the
Confirmation Order did change the Plan; that § 1127 is the only statutory
basis to amend a plan; and that any plan modification must therefore
comply with § 1127. Section 1127 applied here because the Reconsideration
Order changed the Plan in ways that affected all unsecured creditors.8 Even
assuming for the sake of argument that the court should have invoked the
protective provisions of § 1127,9 its failure to do so could not logically
8
In Orange Tree, the Ninth Circuit implied that the modified order was not
entered pursuant to § 1127(b) (which distinguished it from TM Carlton House). 961 F.2d
at 1448 n.8. However, that statement cannot be read in isolation. The Ninth Circuit
observed that changes to Orange Tree’s plan were largely “housekeeping matters” and
“clarifications” that did not affect other creditors or implicate the need for the
protections of §§ 1127 and 1129. In contrast, the changes to Mr. Younessi’s Plan were not
mere housekeeping matters or clarifications.
9
As the bankruptcy court observed, Diamond gave notice of its motion for
reconsideration to all creditors. No creditor objected to the motion or appeared at the
hearing, so they waived any argument that § 1127 was not satisfied. Further, even if the
bankruptcy court erred in failing to apply the protective provisions of § 1127, the Plan
remains binding. Neither Diamond nor anyone else appealed from the Reconsideration
Order, and the time for doing so has expired. At oral argument, Diamond’s counsel
confirmed that it deliberately chose not to appeal. Therefore, the Plan, as modified by
(continued...)
21
shorten the time to file a complaint under § 1144; to hold otherwise would
imply that one deprivation of rights justifies (or even requires) a reduction
of the time during which creditors can assert other rights.
Accordingly, under Orange Tree, the Reconsideration Order restarted
the 180-day period under § 1144, and Diamond’s complaint was timely.
CONCLUSION
Because the adversary complaint was timely, the bankruptcy court
erred in granting Mr. Younessi’s Motion to Dismiss. We REVERSE and
REMAND.
9
(...continued)
the Confirmation Order and the Reconsideration Order, is res judicata. See Espinosa, 559
U.S. at 275 (“the Bankruptcy Court’s failure to find undue hardship before confirming
[debtor’s] plan was a legal error. . . . But the order remains enforceable and binding on
[creditor] because [creditor] had notice of the error and failed to object or timely
appeal”).
22