United States v. Bullion Hollow Enterprises, Inc. (In Re Bullion Hollow Enterprises, Inc.)

Citations: 185 B.R. 726; 34 Collier Bankr. Cas. 2d 446; 76 A.F.T.R.2d (RIA) 6275; 1995 U.S. Dist. LEXIS 11784Docket: Bankruptcy 7-92-02845-HPB-11, 94-0259-B

Court: District Court, W.D. Virginia; August 3, 1995; Federal District Court

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The case involves an appeal by the United States against Bullion Hollow Enterprises, Inc. regarding the confirmation of a modified plan under Chapter 11 of the Bankruptcy Code. The United States argues that the Bankruptcy Court erred in confirming the modified plan because it had been "substantially consummated," precluding any modifications under 11 U.S.C. § 1127(b). The Court finds that the confirmed plan had indeed been substantially consummated, and no circumstances justified an exception, thus Bullion Hollow should not have been permitted to modify the plan.

Bullion Hollow, a mining operation owned by Randy Moore, filed for bankruptcy on December 17, 1992. The IRS filed a proof of claim for pre-petition employment taxes totaling $556,819.08, categorized into secured, priority, and unsecured claims. After negotiations, a reorganization plan was confirmed on May 9, 1994. However, following financial difficulties attributed to new federal mining regulations, Bullion Hollow sought to modify the confirmed plan. Initial modification attempts were denied due to non-compliance with disclosure provisions. A subsequent modified plan was confirmed on October 4, 1994, which the United States now challenges.

The Court reviews the Bankruptcy Court's findings for clear error and legal determinations de novo. It aligns with 11 U.S.C. § 1101(2) in defining "substantial consummation" and confirms that the modified plan should be upheld as the original plan had reached that status before modification attempts were made.

The proponent of a modification must prove that the plan has not been substantially consummated, as established in relevant bankruptcy cases. All criteria outlined in the three subsections must be satisfied to determine substantial consummation. The key contention in this case revolves around whether creditor payments are governed by subsection (A) or (C) of the substantial consummation definition. The debtor argues that these payments represent property transfers under subsection (A), necessitating that "all or substantially all" payments to creditors be completed for substantial consummation. Conversely, the IRS asserts that these payments fall under subsection (C), which only requires the initiation of distributions for substantial consummation to occur. 

The Fourth Circuit has not previously addressed this issue. The debtor cites In re Heatron, Inc., where the court ruled that a plan could not be substantially consummated unless a significant majority of creditor payments were made. However, subsequent cases have largely rejected the Heatron reasoning, asserting that payments to creditors are not considered property transfers under subsection (A) but rather under subsection (C), which merely requires that distributions have begun. This Court aligns with the majority view, emphasizing that the initiation of payments to creditors suffices for substantial consummation, as highlighted in the Hayball Trucking case, which argues for the necessity of interpreting statutory provisions to maintain their distinct meanings.

"Substantial consummation" is defined as completing or nearly completing the first aspect while merely beginning the second. Most courts have adopted the reasoning from the Hayball Trucking case, which this court supports. Consequently, payment to creditors qualifies under subsection (C) of 11 U.S.C. § 1101, meaning that only the commencement of payments to creditors is required for substantial consummation, provided other subsection criteria are satisfied. The court must verify whether payments to creditors have indeed begun under the current plan. There is no specified number of payments required to establish that distribution has commenced, as demonstrated in cases where minimal payments sufficed for substantial consummation. 

In this instance, Bullion Hollow acknowledges that some payments have been made to secured creditors, satisfying the criteria for substantial consummation. Bullion Hollow argues against this conclusion, suggesting a need to differentiate between payments to secured and unsecured creditors, claiming that since only secured creditors were paid, distribution has not commenced. However, the court finds no basis to differentiate between creditor classes; the essential factor is whether any payments to creditors have started. 

Bullion Hollow further contends that even if substantial consummation is established, modifications to the plan should be permitted due to unforeseen circumstances. For such modifications to be valid, the changed circumstances must have been unknown at the time of the prior plan's substantial consummation. Bullion Hollow cites new federal mining regulations as the cause for financial changes, noting these regulations were issued before the plan's confirmation. The timing indicates that the debtor had ample opportunity to seek modifications before the plan was confirmed, undermining their claim of unforeseen circumstances. Additionally, Bullion Hollow claims the plan was "essentially confirmed" during an earlier hearing, although the modifications were finalized later.

The argument presented is rejected for two primary reasons. First, the plan was not confirmed until May 9, 1994, which is two months after new regulations were issued, despite the assertion that it was "essentially confirmed" at a November 1993 hearing. Second, Bullion Hollow had the opportunity to request a modification before the plan was substantially consummated but did not do so until after substantial consummation had occurred. Consequently, the court concludes that the debtor's complaints do not justify modifying the plan post-consummation. The Court determines that the Bankruptcy Court incorrectly failed to recognize that the confirmed plan had been substantially consummated under 11 U.S.C. § 1101 and thus could not be modified. An order reflecting these findings will accompany the opinion. The ruling establishes that the Bankruptcy Court's decision is reversed, confirming that no extenuating circumstances exist to permit modification following substantial consummation of the plan.