The Unappealing Prospects For Debtors Whose Bankruptcy Plans Are Denied Confirmation

The United States Supreme Court decided a bankruptcy appeal on May 4th that holds that, even though creditors and others aggrieved by the confirmation of a bankruptcy plan can appeal the order confirming the plan as a matter of right, a debtor has no such right to appeal an order denying confirmation.  The basic logic employed by the Court is that an order confirming a plan moves the case forward and alters the rights of the parties, whereas an order denying confirmation does neither because the debtor can merely propose another, different plan.

The case is Bullard v. Blue Hills Bank,[1] an appeal from the Bankruptcy Court for the District of Massachusetts that made its way through the Bankruptcy Appellate Panel for the First Circuit and the First Circuit Court of Appeals.  The unanimous decision was authored by Chief Justice John Roberts.

Facts of the Bullard Case.

Louis Bullard filed his chapter 13 petition almost five years ago in December of 2010.  Bullard’s chief asset was a multifamily house located in Randolph, Massachusetts, encumbered by a mortgage in the original principal amount of $387,000, reduced as of the date of the bankruptcy filing to about $346,000, in favor of Hyde Park Bank (now known as Blue Hills Bank).  The mortgage called for payments through June 1, 2035, for a remaining term of 25 years as of the petition date.  Bullard provided an appraisal of the house in the amount of $245,000 and Hyde Park Bank provided an appraisal in the amount of $285,000.  Over the course of more than a year, Bullard amended his chapter 13 plan three times.  The Third Amended Plan provided that the claim of Hyde Park Bank would be bifurcated into a secured claim in the amount of $245,000 and an unsecured claim in the amount of about $101,000.[2]  The Plan provided that the unsecured claim would be paid slightly over 5% during the five year term of the Plan and that the secured claim would receive the monthly installment payments called for in the promissory note that is secured by the mortgage until the principal amount is paid in full.  Because those monthly installment payments were in the amounts necessary to amortize a $387,000 principal balance over 30 years, making the same payments on the secured claim balance of only $245,000 would result in full repayment of the secured claim well before June 1, 2035, but well beyond the five year term of the chapter 13 Plan.

Ruling of the Bankruptcy Court.

The bankruptcy court denied confirmation of the Plan.[3]  The bankruptcy court reasoned that chapter 13 provides for two possible treatments of secured claims.  First, the debtor may pay the secured and unsecured claims through the chapter 13 plan, with a maximum term of five years, with the unsecured claim receiving a typically modest distribution and the secured claim receiving full payment within the five year term.  In this case, the requirement that Bullard pay $245,000 plus interest over five years effectively eliminated this treatment as an economic matter (although some such plans merely state that the loan will be refinanced or the property sold at the end of the term of the plan – a provision which introduces so much uncertainty that many courts would have trouble finding that such a plan is feasible).

The second option is the treatment most often used for mortgages secured by the principal residence of the debtor – cure the pre-petition arrearage by payment in full over the term of the plan and continue making the payments called for by the mortgage, even long after the term of the plan, which mortgage is otherwise unmodified by the plan.

In the view of the Bankruptcy Court, the two choices available to Bullard were to modify the mortgage but complete all payments within no more than five years, or continue making payments over the remaining term of the mortgage (23 years as of the date of the decision in the Bullard case) but pay both the pre-petition arrearage and the principal balance of the mortgage in full.

Bullard’s chapter 13 Plan took the benefits of both approaches and rejected the burdens of both approaches.  His plan modified the mortgage by paying only 5% on the $101,000 unsecured portion of the claim, yet provided that the secured claim could be repaid over a period of years far exceeding the five year limitation of a chapter 13 plan.

After a lengthy and thorough analysis of this “hybrid plan,” including discussion of other courts that had allowed such hybrid plans, the Bankruptcy Court concluded that “a plan that proposes to both modify the rights of the secured claim holder and thereafter maintain payments on the secured portion of the claim for a period that exceeds the term of the plan cannot be confirmed over the creditor’s objection.”[4]

The Debtor’s Options After Denial of Confirmation of His Plan. 

After the denial of confirmation of his Plan, in addition to the ever-present option of settling with Hyde Park Bank, Bullard had two basic choices:  (1) file a Fourth Amended Plan either modifying the mortgage but completing all payments within five years, or alternatively a plan paying the mortgage in full over the remaining 23 year term;  or (2) appeal.  Apparently, Bullard was not satisfied with the economic consequences of either possibility for a further amended plan, and he chose to appeal.

Appeal to the BAP.

The first level of appeal was to the Bankruptcy Appellate Panel (BAP) of the First Circuit.[5]  In 2012, the BAP found that Bullard had no ability to appeal the order denying confirmation of his Plan as a matter of right because the order was not “final” given Bullard’s option of filing another plan, but the BAP nonetheless decided to hear the appeal as an interlocutory appeal because it presented a controlling question of law as to which there is a substantial difference of opinion.[6]

On the merits, the BAP found that Massachusetts bankruptcy courts are split on the confirmability of hybrid plans but agreed with the result reached by the Bankruptcy Court:  “Bullard’s hybrid plan cannot be confirmed.  The plan cannot employ both §1322(b)(2) and (5) to reduce Hyde Park’s secured claim and, at the same time, pay that secured claim over a period beyond the plan’s term.”[7]

Appeal to the First Circuit.

By 2014, Bullard’s case was before the First Circuit Court of Appeals.[8]  The First Circuit started with the issue of whether an order denying confirmation of a plan is a final order that the debtor may appeal as a matter of right, and noted that the circuits were split on this issue.[9]   Ultimately, the First Circuit opted for a clean and easily applied standard of holding that an order denying confirmation is not a final order and therefore not appealable as a matter of right as long as the debtor was free to file an amended plan in the bankruptcy case.  Bullard argued that his option of filing a further amended plan was illusory because the only feasible plan was the plan he filed.  To this, the First Circuit replied that “Bullard’s options may be unappealing at this stage of the game, but he ignores the fact that Congress laid out other options for him – options that he did not pursue”[10] – such as seeking discretionary review of the order denying confirmation as an interlocutory, non-final order.

The First Circuit found that it lacked jurisdiction to hear Bullard’s appeal and therefore did not address the merits of whether his hybrid chapter 13 plan could be confirmed.

Decision of the U.S. Supreme Court.

Four and a half years after filing his chapter 13 case, and almost three years after the bankruptcy court denied confirmation of Bullard’s Third Amended Plan, the United States Supreme Court unanimously confirmed the ruling of the First Circuit.  Chief Justice Roberts wrote for the Court.

The Court did not debate the merits of the confirmability of a hybrid chapter 13 plan.  The opinion deals exclusively with the issue of whether Bullard could appeal the order denying confirmation of his plan as a matter of right.

Chief Justice Roberts laid out the position of Hyde Park Bank and Bullard.  Bullard pointed out that the appeal statute applicable to bankruptcy cases authorizes an appeal from “final judgments, order, and decrees . . . in cases and proceedings.”  28 U.S.C. §158(a).  Bullard argued that if a debtor proposes more than one plan, each plan is a separate “proceeding” from which separate appeals may be taken if the bankruptcy court denies confirmation.  Hyde Park Bank’s position was that an order denying confirmation is not final as long as the debtor has an opportunity to file another plan.

The Court quickly agreed with the position of Hyde Park Bank and the BAP and First Circuit.

We agree with the Bank:  The relevant proceeding is the process of attempting to arrive at an approved plan that would allow the bankruptcy to move forward.  This is so, first and foremost, because only plan confirmation – or case dismissal – alters the status quo and fixes the rights and obligations of the parties.[11]

The Court noted that dismissal of the case after denial of plan confirmation similarly results in significant consequences and effects upon the rights of the debtor and remedies of the creditors.  However, merely denying confirmation with leave to amend has no such significant consequences, in the view of the Court.  Such an order merely disposes of that particular plan but the prospects of the debtor to propose an alternative plan and complete the chapter 13 process remains intact.  Per Chief Justice Roberts:  “But that alone does not make the denial final any more than, say, a car buyer’s declining to pay the sticker price is viewed as a “final” purchasing decision by either the buyer or seller.”[12]

Justice Roberts addressed the multi-appeal regimen that Bullard advocated for, noting that if the bankruptcy court denied several plans, then each such denial could result in another round of appeals.  “As Bullard’s case shows, each climb up the appellate ladder and slide down the chute can take more than a year.  Avoiding such delays and inefficiencies is precisely the reason for a rule of finality.”[13]  Given that Bullard’s appellate path had taken almost three years, the statement of Chief Justice Roberts as to timing appears to be conservative.

In response to Bullard’s arguments that most chapter 13 debtors are not financially able to take appeals over minor issues, the Chief Justice makes reference to the issue of whether the Court’s ruling would apply to chapter 11 reorganization cases:

These concerns are heightened if the same rule applies in Chapter 11, as the parties assume.  Chapter 11 debtors, often business entities, are more likely to have the resources to appeal and may do so on narrow issues.[14]

In response to Bullard’s arguments that the ruling of the Court would leave debtors with only the options of accepting dismissal of the case after denial of plan confirmation or propose a plan that would meet the dictates of the bankruptcy court, if not the desires of the debtor, and appeal the confirmation of that plan, the Court stated that such options may be “unappealing” as the First Circuit noted.  Ultimately, however, if the issues involved in the denial of confirmation are significant enough, the Court pointed out that there are several procedural avenues to appeal an interlocutory, non-final, order.  And while interlocutory appeals “do not provide relief in every case, they serve as useful safety valves for promptly correcting serious errors and addressing important legal questions.”[15]

Impact on Corporate Reorganization Plans.

Although the Bullard case involves an order denying confirmation of a chapter 13 plan, there is little reason to think that a different rule would apply to an order denying confirmation of a chapter 11 plan of reorganization, as long as the chapter 11 debtor maintains the right to file an amended plan after denial of confirmation.  However, the Bullard opinion does not resolve that issue notwithstanding the reference to chapter 11 cases within the opinion, as noted above.  The Chief Justice was careful to note that the parties assumed at oral argument that the Court’s ruling would apply to chapter 11 cases.

[1] 575 U.S. ____ (2015), slip opinion available at  (hereinafter referred to as the “Slip Opinion”).

[2] Although Bankruptcy Code Section 1322(b)(2) essentially prohibits the bifurcation and cram-down of a mortgage secured by the debtor’s principal residence, the First Circuit Court of Appeals has held that this section “does not bar modification of a secured claim on a multi-unit property in which one of the units is the debtor’s principal residence and the security interest extends to the other income-producing units.”  Lomas Mortg., Inc. v. Louis, 82 F.3d 1, 7 (1st Cir.1996).

[3] In Re Bullard, 475 F.R. 304 (Bkrtcy. Ct. Mass. 2012).  The presiding bankruptcy judge was William C. Hillman.

[4] Id, at 314.

[5] In Re Bullard, 494 B.R. 92 (2013).

[6] Bullard slip opinion at 3.

[7] 494 B.R. at 101.

[8] In Re Bullard, 752 F. 3d 483 (2014).

[9] Id, at 486.

[10] Id, at 487.

[11] Slip Opinion at 5.

[12] Slip Opinion at 6.

[13] Slip Opinion at 7.

[14] Slip Opinion at 7.

[15] Slip Opinion at 11, 12.