Whether to Grant an Individual Chapter 11 Debtor an "early" Discharge

• Publication year: 2015

Whether to Grant an Individual Chapter 11 Debtor an "Early" Discharge

Alan M. Ahart

Mark S. Wallace

WHETHER TO GRANT AN INDIVIDUAL CHAPTER 11 DEBTOR AN "EARLY" DISCHARGE

Alan M. Ahart^* Mark S. Wallace^**

Abstract

This Article provides a framework for determining whether to grant an "early" discharge to an individual chapter 11 debtor. An early discharge permits such a debtor to receive a discharge before making all payments under the confirmed plan. Part I begins with a review of the legislative history of § 1141(d)(5) of the Bankruptcy Code, which sets forth the requirements for an early discharge. Part II then analyzes discharge at confirmation of the plan, including the circumstances that do, or do not, warrant issuing such an early discharge, and what information ought to be included in the disclosure statement, plan, and notice of confirmation hearing. Part III examines discharge after confirmation before completion of plan payments as well as the alternatives of case dismissal or conversion to another chapter. The Article concludes that an individual chapter 11 debtor may obtain a discharge: (1) upon confirmation of a reorganization plan where the debtor has paid specified amounts to unsecured creditors before confirmation, or where necessary to keep important customers or to obtain financing to pay unsecured creditors under the confirmed plan; or (2) after plan confirmation but before plan payments are finished if the unsecured creditors have received the required distribution and the debtor no longer has sufficient income to both meet living expenses and to make the payments required under the confirmed plan.

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Introduction

An individual debtor may file for relief under chapter 11 of the Bankruptcy Code (the "Code").¹ Such a debtor generally may receive a discharge of her dischargeable debts if: (1) a plan is confirmed; (2) neither the plan nor the confirmation order provides otherwise; and (3) the debtor does not waive discharge.² As under chapter 13,³ the discharge of an individual chapter 11 debtor will ordinarily be postponed until completion of plan payments⁴ —typically years after plan confirmation. However, an individual chapter 11 debtor may seek a discharge before making all of the payments under the confirmed plan.⁵ This is an "early" discharge and may occur either at plan confirmation or some time thereafter. The requirements for such an early discharge are set forth in § 1141(d)(5) of the Code, which was added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA").⁶

The object of this Article is to provide a framework for deciding whether to grant an early discharge to an individual chapter 11 debtor. Part I describes the legislative history of § 1141(d)(5) of the Code. Part II analyzes discharge at confirmation of the plan, including the circumstances that do, or do not, warrant issuing such an early discharge, and what information ought to be included in the disclosure statement, plan, and notice of confirmation hearing.

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Part III examines discharge after confirmation before completion of plan payments as well as the alternatives of case dismissal or conversion to another chapter. Part IV concludes that an individual chapter 11 debtor may obtain a discharge: (1) upon confirmation of a reorganization plan where the debtor has paid specified amounts to unsecured creditors before confirmation, or where necessary to keep important customers or to obtain financing to pay unsecured creditors under the confirmed plan; or (2) after plan confirmation but before plan payments are finished if the unsecured creditors have received the required distribution and the debtor no longer has sufficient income to both meet living expenses and to make the payments required under the confirmed plan.

I. The Legislative History of Code Section 1141(D)(5)

Before BAPCPA was enacted there was no separate provision stating the conditions for granting a discharge to an individual chapter 11 debtor. Also, discharge was entirely a function of confirming a plan: plan confirmation equated with discharge unless the plan or the confirmation order provided otherwise.⁷ The first bill that would have provided new conditions for discharging an individual chapter 11 debtor was a House bill amended by the United States Senate in 2000.⁸ Section 321(d) of this bill would have severed the notion of discharge from confirmation of a plan.⁹ It also said that, except as otherwise ordered by the court for cause shown, discharge was not effective until plan payments were completed and that after confirmation the court could grant a discharge to an individual debtor that had not completed plan payments only if unsecured creditors had already received as much as what they would have received if the debtor's property had been liquidated in a chapter 7 case and modification of the confirmed plan was not practicable (hereinafter together "the two requirements").¹⁰ But this bill was never enacted into law.

In 2002, another measure was introduced that included slightly different language.¹¹ This bill indicated that confirmation of the plan would not discharge any debt provided for in the plan unless the court ordered otherwise and prohibited the court from granting a discharge after confirmation unless

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the two requirements above were satisfied.¹² This measure also did not pass Congress.

During the following year, yet another bill was introduced dealing with discharge of an individual chapter 11 debtor.¹³ This bill, as amended, provided the bankruptcy court with the authority to grant a discharge after confirmation where the two requirements were satisfied.¹⁴ This same language was included in § 321(d) of BAPCPA that added § 1141(d) in 2005.¹⁵ After BAPCPA, § 1141(d)(5) provides as follows. First, confirmation of the plan is no longer the key to obtaining a discharge for an individual debtor;¹⁶ a discharge may be issued at confirmation only if the court orders a discharge for cause after notice and hearing.¹⁷ Second, if an individual debtor seeks a discharge after confirmation but before plan payments are completed, the debtor must at least satisfy the two requirements of § 1141(d)(5)(B). Third, inasmuch as § 1141(d)(5)(C) and (6) both say that the court may grant a discharge if certain conditions are met, the court has discretion whether to grant an early discharge.¹⁸

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II. DISCHARGE AT CONFIRMATION

A. Establishing Cause to Grant a Discharge at Confirmation

This Part II will define "cause" and argue that several opinions have not utilized this definition in their determinations of cause, or have mistakenly applied the requirements for an early discharge at confirmation to cases arising postconfirmation. It will demonstrate that there is probably no federal income tax reason to discharge a debtor at confirmation, and will provide examples of cause to issue a discharge upon confirmation of the chapter 11 plan. Lastly, Part II will recommend language to be included in the disclosure statement, plan, and notice of confirmation hearing if the debtor seeks a discharge when the plan is to be confirmed.

1. "Cause" Defined

To grant an individual debtor a discharge at confirmation the court must find "cause."¹⁹ According to leading dictionaries²⁰ covering the year 2000 when the distinct conditions for discharging an individual chapter 11 debtor were first introduced in Congress,²¹ "cause" as it is used in § 1141(d)(5)(A) should be defined as "a reason for action or condition . . . ,"²² "a reason, motive, or ground for some action . . . ; esp[ecially], sufficient reason,"²³ or "the reason or motive for some human action."²⁴ In other words, to issue a discharge at confirmation the court should find a reason to do so. Unfortunately, virtually all of the courts that have discussed early discharge at confirmation have not utilized this definition.

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2. "Cause" Is Not a Function of the Probability that the Unsecured Creditors Will Be Paid as Provided in the Confirmed Plan

Some of the published opinions have analyzed cause in terms of the likelihood that unsecured creditors will receive the amounts promised them in the plan. One opinion said the following factors were persuasive in determining cause: (1) the likelihood the debtors will make all of their plan payments and (2) the assurance, in the form of collateral, that creditors will receive the amount they have been promised even if the plan payments are not made.²⁵ This is the only reported decision that has granted a discharge at confirmation. The reliability of the debtor's income as a construction law attorney together with the equity in property securing a junior deed of trust in favor of the class of unsecured creditors gave the court the confidence to allow a discharge upon confirmation of the plan.²⁶

A different opinion denied the request for an early discharge because the debtor failed to convince the court that he would make all future payments with a high degree of certainty.²⁷ Similarly, another opinion said that in general cause must be determined based on the totality of circumstances, but "that at minimum, a debtor must show the ability to make plan payments with a 'high degree of certainty.'"²⁸ However, none of these opinions actually address the definition of cause stated above. Cause should not be a function of the probability that the debtor will be able to make plan payments after confirmation, as the court must already find that the plan is feasible before confirming the plan.²⁹ Moreover, ordinarily the debtor should be required to actually begin making payments after plan confirmation before receiving a discharge. The court must instead find a reason to enter a discharge upon confirmation.

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3. "Cause" Is Not Determined by Substantial Consummation of a Confirmed Plan

Other courts have refused to find cause because substantial consummation was not shown. One opinion stated that "[c]ause must be...