COWEN, Circuit Judge.
For the second time, this Court must address an appeal filed by the "CFI Claimants" with respect to post-confirmation bankruptcy proceedings arising out of the Chapter 11 bankruptcy of SCH Corp., American Corrective Counseling Services, Inc., and ACCS Corp. ("Debtors"). The District Court affirmed the order of the Bankruptcy Court granting the motion filed by Appellee Carl Singley, the Debtors' disbursing agent, litigation designee, and responsible officer ("Responsible Officer"), to approve the settlement he reached with the plan funder, National Corrective Group, Inc. ("NCG"), pursuant to Federal Rule of Bankruptcy Procedure 9019. We determine that this purported settlement really constituted a plan modification governed by 11 U.S.C. § 1127. Accordingly, we will vacate the District Court's order and remand with instructions for the District Court to vacate the Bankruptcy Court's order and to direct the Bankruptcy Court to consider the purported settlement as a request for a plan modification pursuant to § 1127.
The Debtors were in the debt collection business when they filed for Chapter 11 bankruptcy in the District of Delaware in January 2009. Previously, class action proceedings were filed against the Debtors in California, Florida, Indiana, and Pennsylvania, alleging, inter alia, violations of the Fair Debt Collection Practices Act ("FDCPA"). The plaintiffs in the class action cases filed in the Northern District of California, the Middle District of Florida, and the Northern District of Indiana shared a common legal team ("CFI Counsel"). These "CFI Claimants" constituted the largest group of unsecured creditors in the bankruptcy cases.
On February 10, 2009, the Bankruptcy Court approved the Debtors' motion to conduct an auction for the sale of their operating assets. The Debtors then filed a motion to approve the sale of substantially all of their assets to Levine Leichtman Capital Partners III, L.P. ("LLCP"), an investment firm and the Debtors' largest secured creditor. The CFI Claimants objected and moved to dismiss the bankruptcy cases. On March 31, 2009, the Bankruptcy Court denied the CFI Claimants' motion to dismiss and authorized the transfer of the Debtors' assets to NCG. NCG is a subsidiary of LLCP. The sale was consummated on April 11, 2009.
After the CFI Claimants rejected the initial proposed plan of liquidation because it included third-party releases that would have barred claims against LLCP and NCG, LLCP filed a proposed amended plan. With some changes, this revised plan was actively supported by the CFI Claimants. The plan was confirmed by the Bankruptcy Court in a November 2, 2009 order. LLCP served as the plan proponent and sponsor, while NCG functioned as the plan funder. NCG agreed to pay up to $200,000 per year for five years—with the first payment to be made in April 2010 and the final payment due in April 2014. However, these payments were subject to offsets for unpaid professional fees and up to $500,000 for "Post-Sale Losses" incurred by LLCP or NCG in defending against future consumer lawsuits. The Bankruptcy Court approved Singley's appointment as the Responsible Officer. It also expressly retained jurisdiction to administer and interpret the plan's provisions, modify any provisions of the plan to the extent permitted by the Bankruptcy Code, and enter such orders as may be necessary or appropriate in furtherance of the successful implementation of the plan.
CFI Counsel filed a lawsuit in the Northern District of California against NCG (which was now operating the Debtors' debt collection business) and LLCP, alleging, inter alia, violations of the FDCPA. CFI Counsel also assisted in a class action lawsuit filed in the Middle District of Pennsylvania against NCG and LLCP. "To their dismay, based on their dual representation of the CFI Claimants and the plaintiffs in the new California litigation, NCG moved to disqualify CFI Counsel in both the pre- and post-bankruptcy litigation in that State. The motions in both cases were granted."
NCG asserted its offset rights with respect to the annual Post-Sale Payments, and, therefore, very little, if any, funds have been distributed to unsecured creditors under the confirmed plan. In particular, it claimed offsets for litigation expenses reimbursed by insurance. The CFI Claimants moved to dismiss the bankruptcy cases for lack of good faith or, in the alternative, to enforce the terms of the confirmed plan. The Responsible Officer filed a motion to approve a settlement he reached with NCG to resolve the funding dispute. Under this proposed settlement, NCG's payment obligation for the period ending in April 2014 was fixed at $233,631. NCG also agreed to make three additional annual payments of up to $100,000 in 2015, 2016, and 2017. Although NCG waived its rights to take offsets for any expenses that may or have been reimbursed through insurance coverage or to apply historic offset rights (i.e., those arising before the effective date of the settlement) against the future payments, these future payments were still subject to offsets for future litigation expenses "provided, however, that such Post-Sale Losses shall not reduce the annual payment on the sixth, seventh and eighth anniversaries beyond a $25,000 `floor.'" (A212 (emphasis omitted).) In addition, the Responsible Officer, LLCP, and the Responsible Officer's own counsel agreed to certain monetary concessions.
The CFI Claimants objected to the proposed settlement on a number of grounds. According to them, "[t]he proposed three-year extension of the Plan is, in effect, a proposed, post-confirmation request to modify the Plan" that "would be governed by 11 U.S.C. § 1127(b), and, by incorporation, 11 U.S.C. § 1129." (A77.) Noting that the Bankruptcy Court must review a proposed settlement under the four-factor standard established by this Court in
The Bankruptcy Court conducted an evidentiary hearing on the CFI Claimants' motion to dismiss as well as the Responsible Officer's motion to approve the settlement. In an October 12, 2012 order, the Bankruptcy Court granted the Responsible Officer's motion, approved and authorized the parties to execute and implement the settlement, and retained jurisdiction to interpret and enforce the settlement. It also entered a separate order denying the CFI Claimants' motion to dismiss. In an oral decision delivered by telephone on September 14, 2012, the Bankruptcy Court considered the settlement under the
The CFI Claimants appealed to the District Court from the denial of their motion to dismiss. The District Court dismissed the appeal as equitably moot in a July 8, 2013 order. On June 17, 2014, we vacated the District Court's dismissal order and remanded for further proceedings "[b]ecause the District Court dismissed the appeal despite a finding that reversing the plan of liquidation would not result in any inequity, and because our opinion [addressing the equitable mootness doctrine] in
The CFI Claimants likewise appealed to the District Court from the Bankruptcy Court's order granting the Responsible Officer's motion to approve the settlement. On April 2, 2014, the District Court dismissed their appeal and affirmed the order of the Bankruptcy Court. According to the District Court, the Bankruptcy Court properly applied the
Under § 1127(b), the plan proponent or reorganized debtor may at any time modify a confirmed plan "before substantial consummation of such plan."
The Bankruptcy Court abused its discretion by failing to consider the purported settlement as a modification of a confirmed plan governed by § 1127. According to the Responsible Officer and the District Court, the proposed settlement simply resolved a dispute concerning the interpretation of the plan confirmed by the Bankruptcy Court, which was silent on the specific issue of whether insurance coverage would negate NCG's offset rights. The CFI Claimants acknowledge that, if the settlement merely provided for compromised payments within the five-year time period specified in the confirmed plan, such an agreement would not rise to the level of an impermissible plan modification. However, the Responsible Officer and NCG actually negotiated what the Responsible Officer calls an "extension of the plan funding period." (Appellee's Brief at 41.) In short, the confirmed plan required NCG to make five annual payments, subject to offsets for litigation expenses, by April 2014, while the purported settlement approved by the Bankruptcy Court provided for three additional payments subject to the same basic offset mechanism in 2015, 2016, and 2017. According to the Responsible Officer, this arrangement did not modify any terms of the confirmed plan because it left unchanged the basic nature of the economic relationship with NCG and allegedly provided the estate the benefit of up to $300,000 that would have been otherwise offset by NCG under the confirmed plan. However, a plan modification that allegedly provides greater economic benefits for the estate and its creditors remains a plan modification governed by § 1127— not a settlement to be reviewed under Rule 9109. According to the CFI Claimants, this three-year extension of the plan funding period actually had the practical effect of preventing CFI Counsel from litigating class action consumer claims against LLCP and NCG for an additional three years. Given the circumstances, we believe that the extension of (what the Bankruptcy Court at the evidentiary hearing called) "the life of the economic relationships that we have" (A515) rises to the level of a plan modification subject to § 1127. In other words, turning a five-year plan into an eight-year plan constitutes a modification of the plan itself.
Furthermore, the case law generally weighs in support of our determination that the purported settlement at issue in this case really constituted a plan modification.
The Responsible Officer turns for support to an unpublished ruling by the Ninth Circuit as well as an Eastern District of Pennsylvania decision. Both opinions are distinguishable, and, in any event, they are not binding on this Court (or, for that matter, the Ninth Circuit). In
Because the purported settlement constituted a plan modification, we will remand this matter to the Bankruptcy Court to consider this purported settlement as a modification request pursuant to § 1127. The CFI Claimants question whether, "in the third year of a five-year plan, with the plan funder (NCG) taking the position with Appellee that it had fully complied with its payment obligations under the plan, that Appellee would argue that the plan had not been `substantially consummated.'" (Appellants' Brief at 38 (footnote omitted).) They further observe that the Responsible Officer asked the District Court to dismiss the CFI Claimants' appeal from the order denying the motion to dismiss the bankruptcy cases on the grounds that the plan had been consummated (and that the District Court did dismiss the appeal as equitably moot). In addition to noting that the substantial consummation determination would be made "as of the time of the modification (i.e., the Settlement)," the Responsible Officer suggests in passing that this Court "can determine that the requirements of Section 1127 of the Bankruptcy Code were satisfied through the hearing before the Bankruptcy Court on the Settlement." (Appellee's Brief at 40 n.13 (citing
We will vacate the District Court's order and remand with instructions for the District Court to vacate the Bankruptcy Court's order and to direct the Bankruptcy Court to consider the purported settlement as a request for a plan modification pursuant to § 1127.
Evidently suggesting that this case is now moot, the Responsible Officer claims that "the `CFI' acronym is no longer applicable" and that it is unclear what will happen to any funds that may be distributable to those purported CFI Claimants. (Appellee's Brief at 16.) He notes that a final report was filed in the bankruptcy cases and that, on October 16, 2013, a final decree and order was entered administratively closing these cases. According to the Responsible Officer, the California pre-bankruptcy proceeding was dismissed with prejudice (and the class itself was de-certified), the Florida case was settled prior to class certification, and "the lone remaining class members are those in the class certified in [Indiana], which is currently dismissed pending re-opening." (