Terms of Confirmed Chapter 11 Plan Prohibit Malpractice Claim Agains...

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The Third Circuit Court of Appeals issues a reminder to debtors’ counsel that they can protect themselves with beneficial (boilerplate) terms in a Chapter 11 Plan. In In re SC SJ Holdings, LLC, 2024 WL 1328233 (3rd. Cir. March 28, 2024), the Debtor was the owner of a hotel that was operated by Accor Management US, Inc. pursuant to a Hotel Management Agreement (“HMA”). After COVID related problems servicing its debt, Debtor consulted Law Firm for advice. Law Firm advised Debtor it should file a Chapter 11 petition and terminate the HMA with Accor, and it could emerge from the case in 100 days. Instead, the case lasted eight months and Debtor had to pay Accor more than $20 million in breach damages for rejecting the HMA. Debtor subsequently requested relief from certain terms of the confirmed Plan in order to pursue a malpractice claim against the Law Firm for the faulty advice.

The Plan contained provisions “for mutual releases among numerous parties as to any claims arising out of or related to the bankruptcy proceedings or to Debtors. Those release provisions cover Debtors’ ‘Related Persons,’ defined to include their ‘attorneys … and other professionals.‘”

More than six months after confirmation and three months after the Plan had been substantially consummated, Debtor filed its motion to modify the plan. The District Court held that the Debtor had not complied with §1127, which provides that a debtor may modify a plan at any time after confirmation and before substantial consummation, and §1144, which provides that a party may seek revocation of a confirmation order within six months after entry of the order “if an only if such order was procured by fraud.” Debtor could not satisfy the express requirements of either of the Code sections, the District Court found. The Third Circuit affirmed.

The lesson to Bankruptcy lawyers – review your boilerplate plan language and amend as appropriate.

Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Bankruptcy cases for over 30 years.  You can contact Scott at 404-815-0164 or [email protected].  For more information, click here.