Diamond Enterprises, Ltd. v. Michael Younessi (In re Michael Younessi), BAP No. CC-18-1337-FLKu (B.A.P. 9th Cir. July 10, 2019)
In Diamond Enterprises, Ltd. v. Michael Younessi (In re Michael Younessi), the Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) held that, where a bankruptcy court enters an order modifying a confirmed plan in a material way, the 180-day deadline under section 1144 of the Bankruptcy Code for a creditor to file an adversary proceeding to revoke the confirmed plan for fraud runs from the date of entry of the modified confirmation order, not the date of the original confirmation order. The BAP distinguished the Ninth Circuit’s Orange Tree decision, in which the Ninth Circuit held, on different facts, that the 180-day deadline runs from the date of entry of the original confirmation order.
Section 1144 of the Bankruptcy Code provides that an order confirming a chapter 11 plan of reorganization may be revoked “only 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 “only if such order was procured by fraud.” The United States Bankruptcy Court for the Central District of California (the “Bankruptcy Court”) entered an order (the “Confirmation Order”) confirming debtor Michael Younessi’s chapter 11 plan of reorganization (the “Plan”). The Bankruptcy Court subsequently entered an order granting creditor Diamond Enterprise Ltd., LP’s (“Diamond”) motion to modify the Plan.
Over 180 days after entry of the Confirmation Order, but less than 180 days after entry of the Reconsideration Order (as defined below), Diamond filed a complaint to revoke confirmation, contending that the Confirmation Order was procured by fraud. Younessi filed a motion to dismiss the complaint, arguing that it was barred by the 180-day deadline in section 1144. The Bankruptcy Court agreed with Younessi, and Diamond appealed. The BAP reversed the Bankruptcy Court and remanded the case, holding that, on the facts, the 180-day period ran from the date the Reconsideration Order was entered.
Debtor Younessi was close friends with Diamond’s manager, Bruce Houman, and solicited investments from Houman to develop commercial real estate. Houman, through Diamond, contributed over $2 million towards the purchase of real estate and interests in Younessi’s companies. Younessi and Houman obtained a line of credit secured against the investment properties. Younessi began to withdraw money for personal use without Houman’s knowledge or permission. Diamond then successfully sued Younessi in California state court on multiple theories of liability, including fraud and breach of fiduciary duty. Judgment was entered for Diamond for approximately $4 million plus attorneys’ fees.
Younessi filed a chapter 11 petition on December 27, 2016. Diamond filed an adversary complaint seeking a determination that the state court judgment was a non-dischargeable debt. Diamond also filed a proof of claim for approximately $7.2 million. The Plan classified Diamond’s debt separately from other debts and provided Diamond with three unpalatable options. The Plan provided that, if Diamond selected none of the options, the default treatment would be option A (payment of $22,000 to Diamond in full satisfaction of its claims and a deemed consent to discharge of liability). Diamond was the only creditor that voted to reject the Plan and was outvoted by the other creditors. Also, Diamond did not choose any of the proposed treatments. The Bankruptcy Court then entered the Confirmation Order.
Diamond then filed a motion for reconsideration of the Confirmation Order requesting that the Bankruptcy Court decline to confirm the Plan or modify the Confirmation Order stating that the Confirmation Order and Plan had no effect on Diamond’s pending nondischargeability action. The Bankruptcy Court entered an order granting the motion for reconsideration (the “Reconsideration Order”). The Reconsideration Order specifically modified the Confirmation Order to grant the relief requested in Diamond’s motion for reconsideration. 179 days after entry of the Reconsideration Order, Diamond filed a second adversary complaint seeking to revoke confirmation of the Plan for fraud under section 1144.
Younessi filed a motion to dismiss, arguing that the 180-day period ran from the date of the Confirmation Order, not the Reconsideration Order. 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) (“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, in opposition, argued that the Bankruptcy Court should adopt the reasoning in Berg v. TM Carlton House Partners, Ltd. (In re TM Carlton House Partners, Ltd.), 110 B.R. 185 (Bankr. E.D. Pa. 1990) (“TM Carlton House”), which held that the 180-day period began to run from the date of the order confirming the modified plan. The Bankruptcy Court agreed with Younessi and granted the motion to dismiss. Among other things, the Bankruptcy Court held that TM Carlton House was distinguishable because the modification order there was issued under section 1127(b) of the Bankruptcy Code, which permits a reorganized debtor to modify a plan after confirmation, but before substantial consummation of that plan.
On appeal, the BAP distinguished Orange Tree, holding that the facts of Younessi were closer to those of TM Carlton House than to Orange Tree. First, the Reconsideration Order materially modified the Plan’s treatment of both Diamond and other creditors by reinstating the prospect of a non-dischargeable $7 million debt, while Orange Tree involved mere “house-keeping matters” that did not require the creditor protections of section 1127(b). Secondly, the Bankruptcy Court recognized that the original Plan was non-confirmable, because it proposed to discharge the debt to Diamond without an adjudication of non-dischargeability in violation of section 1141(d)(2) of the Bankruptcy Code. Unlike Orange Tree, the Reconsideration Order did not confirm the same plan of reorganization as the Confirmation Order; rather; the Reconsideration Order refashioned the Plan in an important way. Moreover, even if the Bankruptcy Court should have required the Plan modifications to comply with section 1127, its failure to do so did not shorten the time to file an adversary complaint under section 1144.
Article courtesy of David Simonds (Hogan Lovells) and Edward McNeilly (Skagit Law Group).