On August 30, 2021, the 3rd U.S. Court of Appeals became the first federal appeals court to confirm claims against a debtor after a Chapter 11 plan was confirmed, but before the entry date in force of the plan, are subject to discharge. This decision strongly reminds all creditors and counterparties of a bankrupt entity to remain vigilant until the âeffective dateâ of a Chapter 11 plan and to strictly adhere to any administrative claims deadline established in a case of bankruptcy.
This is particularly important in cases where there is a long gap between the âconfirmation dateâ and the âeffective dateâ, which often occurs when the debtor needs time to organize and consume its financing. planned by the plan or needs regulatory approval for some aspect of the plan. It is also imperative that the counterparties to the enforceable contracts be vigilant because the debtor generally reserves the right to modify the documents complementary to the plan indicating the assumption of responsibility or the rejection until the “effective date” and any failure to comply with the plan. performance during this gap period can give rise to “claims” that must be administered through bankruptcy court proceedings.
Ellis v. Westinghouse Electric Co., LLC involved an employee of Westinghouse Electric Company LLC who was terminated after Westinghouse’s Chapter 11 plan was confirmed, but before the plan’s effective date. The plan and the order confirming it provided for the extinction of all claims against the debtor that arose before the plan’s “effective date” and set an administrative complaint deadline which fell on the first business day which fell within 30 days. after the effective date of the Chapter 11 Plan. The employee believed he had been wrongfully dismissed but did not file a claim by the administrative claim deadline. The question before the court was whether the employee’s wrongful dismissal request is now dismissed in these circumstances.
In the present case, the wording of Article 1141 (d) (1) of the Bankruptcy Code, which provides in the relevant part, âUnless otherwise provided in this paragraph, the plan or the order confirming the plan, the confirmation of a plan – (A) releases the debtor any debt arising before the date of this confirmation … â11 USC Â§ 1141 (d) (1) (emphasis added). The United States District Court for the Western District of Pennsylvania, ruling in favor of the employee on the termination issue, suggested that the most plausible reading of this law is that â[e]Unless otherwise specified, the clause modifies the expression “any debt” but not the expression “before the date of this confirmation”.
Overturning the district court, the Court of Appeal read the “[e]xunless otherwise specified âto apply to the entirety of Article 1141 (d) (1), and therefore held that Article 1141 (d) (1) of the Bankruptcy Code establishes a default rule with regard to relates to release but allows a confirmation plan or order to override this rule. The Court of Appeal further found that Section 503 of the Bankruptcy Code works in tandem with Section 1141 (d) (1) by authorizing a bankruptcy court to set and enforce administrative claims deadlines on which claims must be filed or be released. .
The factual circumstances in Ellis were fairly straightforward – it was not disputed that the employee’s claim arose on the date of his termination, and there was sufficient evidence that the employee had received notice of the administrative claim deadline and could therefore have filed a complaint. But what if the scenario was more nuanced?
Imagine a counterparty to a contract assumed under a Chapter 11 plan, where the debtor is technically up to date with its monetary obligations as of the confirmation of the plan but, before the effective date, begins. to take actions that are not in accordance with its obligations under the agreement. What should the counterparty do if these actions do not cause them damage before the administrative claims deadline, but rather threaten to harm the counterparty in the future?
The lesson learned from Ellis is that the bankruptcy process cannot be bypassed, and the counterparty must assert your rights and seek redress in bankruptcy court. In addition, he must do so in a timely manner – even if he is not sure whether his claim is truly mature or cannot yet quantify his damages – as the administrative claims deadline will be strictly enforced.