- In re SCH Corp., No. 14-2888, 2015 WL 756552 (3d Cir. Feb. 24, 2015)
- The Third Circuit ruled that a purported settlement negotiated by the Responsible Officer with the plan funder, which added three years to a five-year plan (effectively making it an eight-year plan), was not a Rule 9019 settlement but a plan modification under §§1127/1129 of the Bankruptcy Code. (“Such a drastic step should not be taken under the guise of a plan interpretation, the exercise of equitable powers, or a Rule 9019 settlement.”)
- Procedural context:
- This case was heard on appeal from the United States District Court for the District of Delaware, (D.C. Civil No. 1–12–cv–01576), District Judge: Hon. Sue L. Robinson. The District Court below affirmed the order of the Bankruptcy Court granting the motion filed by Appellee, 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. The Third Circuit here determined that this purported settlement really constituted a plan modification governed by 11 U.S.C. § 1127. Accordingly, the court vacated the District Court's order and remanded 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, (SCH Corp. et al.) in the underlying bankruptcy proceeding were in the debt collection business as of the date of their bankruptcy filing in 2009. They had previously faced numerous class action lawsuits based on alleged violations of the Fair Debt Collections Practices Act (“FDCPA”). The plaintiffs in those class action proceedings, referred to as the CFI Claimants, constituted the largest group of unsecured creditors in the bankruptcy cases. In the bankruptcy proceedings, the Bankruptcy Court approved the sale of substantially all of Debtors’ assets to Levine Leichtman Capital Partners III, L.P. (“LLCP”) and the Debtors’ assets were subsequently transferred to National Corrective Group, Inc. (“NCG”), a subsidiary of LLCP. Under the amended plan of liquidation supported by the CFI Claimants and approved by the Bankruptcy Court in 2009, 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 (until 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. Subsequent to approval of this plan, the CFI Claimants commenced litigation against NCG (which was then operating the Debtors' debt collection business) and LLCP, alleging, inter alia, violations of the FDCPA. Though the history is somewhat convoluted, the proceedings against NCG/LLCP were dismissed, and NCG subsequently asserted its offset rights with respect to the annual Post–Sale Payments. Therefore, very little, if any, funds were distributed to unsecured creditors under the confirmed plan. The CFI claimants reacted by moving to dismiss the bankruptcy proceedings or to enforce the terms of the confirmed plan. The Responsible Officer filed a motion for approval of a settlement he reached with NCG to resolve the dispute which provided that, among other things, NCG agreed to make three additional annual payments of $100,000 in 2015, 2016, and 2017. These future payments were still subject to offsets for future litigation. The CFI Claimants unsuccessfully objected to approval of the Settlement under Rule 9019 and the Martin factors. They also argued that the settlement was an impermissible modification to the confirmed plan under section 1127(b). Both the District Court and the Bankruptcy Court dismissed the § 1127 argument without much consideration. On appeal to the Third Circuit, the Responsible Officer renewed its contentions accepted by the lower courts, arguing that the Settlement resolved a disputed issue not addressed by the confirmed plan, left the basic economic relationship with NCG unaltered, and benefited the estates in the form of three additional plan payments. As such, it was urged that no modification of the plan occurred. The court does not accept this position and states that, extending the original five-year plan for additional three years is actually a “drastic step”, and 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. The court also pointed out that the 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. The court then engaged in a brief summary of case law that it found generally weighed in support of its determination that the purported settlement at issue in this case really constituted a plan modification. Because the court found that the purported settlement actually constituted a plan modification, it remanded to the Bankruptcy Court to consider this purported settlement as a modification request pursuant to § 1127.
- This case was heard before Circuit Judges Cowen, Vanaskie, and Greenberg. The Opinion was authored by Judge Cowen. It was noted that this is not an opinion of the full court and pursuant to I.O.P. 5.7, does not constitute binding precedent.
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