What Can a Creditor do to Enforce a Confirmed Chapter 11 Plan after a Debtor’s Default?

If you have a client who is a creditor of a debtor faced with a Chapter 11 reorganization, you know that many difficult conversations with the client lie ahead. If the client is a secured creditor, you will have to explain that it will likely need to modify its present payment terms with the debtor to less favorable ones. If the client is an unsecured creditor—such as a vendor, supplier, or an unsecured lender—the client likely not only has to discard the notion of being paid in full, but also must accept the fact that it will be paid over time.

Ultimately, a lot of work is put in between you and the client to obtain a payment plan that is either satisfactory or the best that can reasonably be accomplished in light of the debtor’s rights in a Chapter 11 case. The benefit of the debtor receiving these generous repayment terms is the obligation to repay that debt as agreed pursuant to the confirmed Plan of Reorganization. However, when that client returns to you, advising you that the debtor has again defaulted and is not making the scheduled discounted payments according to the confirmed Plan of Reorganization, what are the client’s options?

In assisting your client, there are two questions that must be addressed: (1) Which documents control the right to enforce the plan terms? (2) In what court must the creditor file an action to enforce those rights? As is always the case, the client’s right to enforce the Plan depends on how the payment terms were memorialized in writing.

The payment terms may be included in the Plan of Reorganization or written modification of the Plan of Reorganization reflected in the Order Confirming the Plan. Alternatively, the terms may be memorialized by a separate agreement or promissory note between your client and the debtor. Usually, the approach in drafting the payment terms is driven by the complexity of the Chapter 11 case, the ability of the debtor to make meaningful payments, and the total amount of payments that will be made through the Plan.

The client will have to make a business decision in evaluating the cost/benefit of incurring attorney’s fees and costs to reduce the payment terms to writing. If the Plan repayment is small, the creditor may have decided to simply rely on the terms in the Plan of Reorganization and the Order Confirming the Plan. However, if the repayment is significant and the debtor is more sophisticated, the Plan of Reorganization may call for the drafting of separate documents. Oftentimes, a secured lender will obtain a new set of loan documents, which includes, among other things, the interest rate, collateral, and payment terms.

Once you have determined which of the above documents control, you must next decide where the creditor must (or can) go to enforce the terms. Can the creditor return to the Bankruptcy Court, reopen the case and enforce the terms, or must the creditor commence a new action in State or Federal Court? The question, of course, is one of jurisdiction. The bankruptcy jurisdiction of the district courts extends to all civil proceedings arising under Title 11 of the U.S. Code or arising in or related to cases under Title 11.¹

The two types of proceedings that fall within the bankruptcy court’s jurisdiction are termed core and non-core proceedings.²

The difference is important, as the court’s ability to enter final judgment depends on the type of proceeding.³

There remains a split of authority as to whether a debtor can return to the bankruptcy court to enforce the Plan in the absence of a retention of jurisdiction by the bankruptcy court in the Plan. According to a recent Middle District of Florida decision, if the Order Confirming Plan or new written agreement does not specifically provide for the venue for enforcement, then the creditor will need to begin with jurisdiction in the Bankruptcy Court.⁴ This is good news for the client because the judge will likely remember the background and facts of the case. As a result, the creditor has the benefit of a judge with knowledge of the relevant issues and the motivation of the respected parties.

Camille Iurillo is a partner attorney with Englander Fischer, where she practices complex bankruptcy litigation, business litigation and business law. She earned her J.D. from Stetson University College of Law. Ms. Iurillo has also been selected as a “Top Lawyer” by Tampa Bay Magazine and named as one of Florida’s Legal Elite by Florida Trend magazine.

Julia Kapusta is an associate attorney with Englander Fischer, where she practices appellate law and commercial litigation.  She earned her J.D. from the University of Florida.  Prior to joining Englander Fischer, she clerked on the Second District Court of Appeal for the Honorable John L. Badalamenti. 

1. See 28 U.S.C. § 1334(b); In re Kachkar, 769 Fed. Appx. 673, 679 (11th Cir. 2019) (explaining the different categories of civil proceedings that fall within the bankruptcy court’s jurisdiction).

2. See Wortley v. Bakst, 844 F.3d 1313, 1318 (11th Cir. 2017).

3. Id. 4. See Golf Club at Bridgewater, L.L.C. v. Whitney Bank, 2013 WL 1193182, at *4 (M.D. Fla. Mar. 22, 2013).