A motion by a group of shareholders seeking to modify a bankruptcy plan because of alleged fraud was properly denied pursuant to Bankruptcy Code Section 1144, the U.S. Court of Appeals for the Fifth Circuit held in a Jan. 23 unpublished decision (Anti Lothian Bankruptcy Fraud Committee v. Lothian Oil Inc. (In re Lothian Oil Inc.), 5th Cir., No. 11-51082, 1/23/13).
Judge Edith H. Jones held that the shareholders lacked standing to modify the order and that their motion to revoke the bankruptcy plan had been untimely filed. She affirmed the rulings of the district court.
An unofficial group of shareholders called the Anti Lothian Bankruptcy Fraud Committee alleged that the properties at issue in the settlements were surrendered without adequate compensation and therefore the bankruptcy orders approving the settlements should be invalidated. A separate group known as the Ad Hoc Committee of Series A Preferred Convertible Shareholders filed a motion on June 10, 2008, to set aside the orders pursuant to Rule 9024 of the Federal Rules of Bankruptcy Procedure. The bankruptcy court approved the settlements, but carved out the Ad Hoc Committee's right to pursue its Rule 9024 motion. However, following the plan confirmation, most of the Ad Hoc Committee members settled their claims relating to the motion.
On appeal, the district court ruled in favor of the debtor on all motions. The district court upheld the two orders related to the Anti Lothian document, namely the bankruptcy court's order denying the Anti Lothian document's Rule 9024 motion to set aside the settlements and the order granting the debtor's motion to dismiss the Anti Lothian document. However, the district court construed the Anti Lothian document as a motion to revoke a fraudulent bankruptcy plan pursuant to Section 1144. Regardless, the district court found that it had been filed outside the requisite 180-day window. The Anti Lothian Committee then appealed to the U.S. Court of Appeals for the Fifth Circuit.
First of all, the court found that the appellants lacked standing because only the plan's proponents or the debtor may modify a confirmed plan pursuant to Section 1127 of the Bankruptcy Code. The appellants never sought permission from the court to bring a derivative action on the debtor's behalf and so the court found the appellants lacked the requisite standing to modify the plan.
The court also said that though the “newness” of the alleged newly discovered evidence was “doubtful,” even if there was new evidence concerning fraud, Section 1144 and Rule 9024 explicitly deal with fraud and still stipulate a 180-day window.
“It would make little sense to toll the limitations period of rules designed to deal with fraud because fraud was present,” the court said. “Once a bankruptcy plan is confirmed, [Section 1144] sets the length of time available to challenge it--even when fraud is involved.”
The court also found the argument relating to the carve out provision unavailing. The court said that the carve out provision related specifically to the Ad Hoc Committee's Rule 9024 motion and that the appellants have no reservation of rights related to that motion. The court found that the carve out provision did not “have in mind the scenario of piece-mealing redundant 9024 claims.”
Accordingly, the district court's rulings were affirmed.
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