Boylan International, Ltd. d/b/a Boylan Studios

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
BOYLAN INTERNATIONAL, LTD.,
d/b/a BOYLAN STUDIOS,
Debtor.
Chapter 11
Case No. 07-11372 (MG)
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND
DENYING IN PART THE LIQUIDATING TRUSTEE’S MOTION TO MODIFY A
CONFIRMED CHAPTER 11 LIQUIDATION PLAN
A P P E A R A N C E S:
PATTON BOGGS LLP
Attorneys for Alma Garnett as the Liquidating Trustee
1185 Avenue of the Americas, 30th Floor
New York, New York 10036
By: 	Anthony T. Nguyen, Esq.
TRACY HOPE DAVIS
United States Trustee for Region 2
22 Whitehall Street, 21st Floor
New York, New York 10004
By: 	Greg M. Zipes, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Alma Garnett (“Garnett”) as the Liquidating Trustee for Boylan International Ltd. (the
“Debtor”) moves for an order permitting the modification of the Debtor’s confirmed chapter 11
liquidation plan (the “Motion”). (ECF Doc. # 164.) Garnett seeks to modify the Combined
Disclosure Statement and Plan of Liquidation (the “Plan”) (ECF Doc. # 106), which was
confirmed on May 30, 2009, by extending the life of the Boylan Liquidating Trust (the “Trust”).
No objections were filed to the Motion. However, the Office of the United States Trustee
(the “UST”) moved for an order converting the Debtor’s chapter 11 case to one under chapter 7
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or, in the alternative, dismissing the chapter 11 case (the “UST Motion”). (ECF Doc. # 161.)
The UST argued, inter alia, that conversion or dismissal was appropriate because the Debtor
could not effectuate substantial consummation of a confirmed plan. (UST Motion, at 4.) The
UST Motion was subsequently withdrawn shortly after the filing of the Motion. (ECF Doc. #
165.) For the reasons explained below, the Motion is granted, except that the extension of the
Trust is limited to two years.
BACKGROUND
By its terms, the Trust expires on June 9, 2011. (Motion ¶ 14.) Garnett seeks to extend
the life of the Trust for two years with the option of an additional two year extension upon notice
to the Court. Garnett asserts the extension is necessary so that the Trust can continue to
prosecute the estate’s “primary asset”—a malpractice claim against the Debtor’s former counsel
(“the Malpractice Claim”). (Id. ¶ 3.)
Prior to the bankruptcy, the Debtor operated approximately 15,000 square feet of prime
studio space (the “Premises”) located at 601 West 26 th Street in New York City. The Debtor
rented the Premises to clients who were interested in obtaining a location for photography,
filming and various events. The Debtor’s business ceased operating after it lost its lease of the
Premises and its principal suffered health problems.
On the effective date of the Plan, the Trust was created and Garnett was appointed
Trustee. (Id. ¶ 9.) All property of the estate vested in the Trust, including the Malpractice
Claim. (Id. ¶ 10.) The Plan contemplated Garnett’s prosecution of the Malpractice Claim to
bring additional funds into the estate for distribution to creditors.1 (Id. ¶ 10.)
1 	The estimated value of the Malpractice Claim is not mentioned in the Disclosure Statement or Plan. The
amended complaint demands millions of dollars in damages. There are four causes of action, three for legal
malpractice and one for breach of fiduciary duty. The three malpractice causes of action seek $2,256,000 in
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The action was originally commenced on October 20, 2008 in the Supreme Court of New
York, New York County. (Declaration of Alma Garnett (the “Garnett Declaration”) ¶ 5, attached
to the Motion as Exhibit A.) As chronicled in the Garnett Declaration, there were unforeseen
delays in the case due to multiple adverse state trial court decisions that were ultimately reversed
on appeal on March 3, 2011.2 Garnett submits that the litigation is now proceeding in due
course. (Id. ¶ 17.)
The Liquidation Trust Agreement, which was incorporated in the Plan, had an initial term
of one year from the Plan’s effective date. The Liquidating Trust Agreement also provided for
an optional two-year extension of the Trust term upon filing notice with the Court. (Motion ¶
13.) On June 5, 2009, such notice was filed, extending the Trust’s term through June 9, 2011.
(Id. ¶ 14.) Therefore, the Trust is set to expire before the Malpractice Claim can be resolved.
To date, only one post-confirmation disbursement has been made by Garnett to M&T
Bank (“M&T”), a creditor of the estate, in the amount of $3,433.00. (Garnett Decl. ¶ 21.)
DISCUSSION
A. Section 1127(b) Generally
Section 1127(b) of the Bankruptcy Code governs modifications to chapter 11 plans which
have already been confirmed by a court. In its entirety, the section provides:
The proponent of a plan or the reorganized debtor may modify such plan at
any time after confirmation of such plan and before substantial
consummation of such plan, but may not modify such plan so that such plan
as modified fails to meet the requirements of sections 1122 and 1123 of this
title. Such plan as modified under this subsection becomes the plan only if
compensatory damages; the breach of fiduciary duty claim seeks $3.7 million in compensatory damages. (ECF Doc.
# 158, Ex. 3.)
2 	The defendant’s motion to dismiss the original complaint was granted on December 1, 2009 with leave to
amend. An amended complaint was filed on December 23, 2009, and on April 11, 2010, the trial court granted the
motion to dismiss the amended complaint. Plaintiff appealed the dismissals, and on March 3, 2011, the Appellate
Division, First Department reversed the dismissal in a reported decision. See Garnett v. Fox, Horan & Camperini,
LLP, 82 A.D.3d 435 (1st Dept. 2011).
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circumstances warrant such modification and the court, after notice and a
hearing, confirms such plan as modified, under section 1129 of this title.
11 U.S.C. § 1127(b).
The term “modification” is not defined in the Bankruptcy Code and courts determine
what constitutes a “modification” on a case-by-case basis. 7 COLLIER ON BANKRUPTCY ¶
1127.03 (16th ed. rev. 2011). In In re Doral Ctr., Inc. v. Ionosphere Clubs, Inc. (In re
Ionosphere Clubs, Inc.), 208 B.R. 812, 815 (S.D.N.Y. 1997), the court found that a
“modification” occurred when there was an alteration of “the legal relationships among the
debtor and its creditors and other parties in interest” or when the change to the plan affected the
legal relationships among them. See In re Joint Eastern & Southern District Asbestos Litig., 982
F.2d 721, 747–48 (2d Cir. 1992) (finding that a “modification” occurred under section 1127(b)
when the change to the plan “effectively alter[ed]” a creditor’s payment right); see also 7
COLLIER ON BANKRUPTCY ¶ 1127.03. In this case, the proposed time extension is a
“modification” for purposes of section 1127(b) because creditors will not benefit from the
payment of proceeds for a further extended period of time.
In support of the requested relief, Garnett argues that the Court should grant the proposed
extension because (a) unforeseen, unforced delays in the estate’s malpractice action warrant
modification of the confirmed Plan; (b) de minimis plan distributions so far mean that substantial
consummation of the Plan has not yet occurred; and (c) the proposed plan modification does not
alter the rights of any constituent of the Plan and consequently meets the requirements of
sections 1122 and 1123. (Motion ¶ 16.)
To determine whether modification is warranted, the Court must determine: (i) whether
Garnett has standing to request this relief, (ii) whether the Plan was “substantially consummated”
within the meaning of section 1101(2), (iii) whether the circumstances warrant Plan
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modification, (iv) whether the Plan, as modified, complies with sections 1122, 1123 and 1129 of
the Code, and (v) whether additional disclosure and voting is necessary under section 1127(c).
See 11 U.S.C. § 1127(b).
B. Compliance With Section 1127(b)
1. 	Standing
As an initial matter, Garnett must have standing to bring the Motion. Pursuant to section
1127(b), only the proponent of a plan or the reorganized debtor may modify a confirmed plan.
See 11 U.S.C. § 1127(b). The bankruptcy court cannot on its own modify a confirmed plan. In
re Planet Hollywood Int’l., 274 B.R. 391, 400 (Bankr. D. Del. 2001). Modification must be
sought by a proper party under section 1127(b). Id. Here, Garnett is certainly a plan proponent.
Under the terms of the Plan, Garnett serves as the Liquidating Trustee, who is vested with the
authority to, inter alia, prosecute the Malpractice Claim and distribute proceeds to creditors.
(Plan § 6.5.) Garnett is also a secured creditor of the Debtor because she was the Debtor’s
debtor-in-possession lender and has not recovered the value of her loan. (Id. §§ 2.22, 4.5.) If the
Malpractice Claim is not pursued by the Debtor, Garnett will receive little, if any, return on her
secured claim in this bankruptcy case.
2. 	Substantial Consummation
Section 1101(2) of the Code provides a definition for the term “substantial
consummation.” It is defined as follows:
(A) transfer of all or substantially all of the property proposed by the plan
to be transferred;
(B) assumption by the debtor or by the successor to the debtor under the
plan of the business or of the management of all or substantially all of the
property dealt with by the plan; and
(C) commencement of distribution under the plan.
11 U.S.C. § 1101(2).
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A determination whether substantial consummation has occurred depends on the facts
and circumstances of each case. 7 COLLIER ON BANKRUPTCY ¶ 1127.03[2]. The burden of proof
is on the proponent of the modification. Id. After a plan has been substantially consummated,
modification is no longer an option except to the extent permitted by section 1127(e), which only
applies to individual debtors. Id. at ¶ 1101.02[1][a].
According to Collier, there is a split in authority regarding the meaning of section
1101(2)(A). Under one line of cases, courts have held that “a plan is not substantially
consummated until a significant majority of the property to be distributed and the payments to be
made under the plan have been distributed and disbursed.” Id. at ¶ 1101.02[3][a] (emphasis
added). Courts justify this position by finding that the word “substantial” in section 1101(2)(A)
“suggests that nearly all distributions are to have been made before a plan is substantially
consummated.” Id.; see In re Heatron, Inc., 34 B.R. 526, 529 (Bankr. W.D. Mo. 1983) (finding
that since payments to creditors was “property” under section 1101(2)(A), then “all or
substantially all” of payments to creditors must be made for substantial consummation of a plan
to occur). Other cases disagree:
They point out that interpreting paragraph (A) to require distribution of
substantially all property and disbursement of substantially all funds renders
paragraph (C) a nullity. If substantially all funds must be disbursed prior to
paragraph (A)’s being satisfied, what is the purpose of the requirement in
paragraph (C) that there have been ‘commencement of distribution under
the Plan?’ These cases conclude that paragraph (A) was not intended to
apply to payments to be made under the plan over a period of time.
7 COLLIER ON BANKRUPTCY ¶ 1101.03[b].
The latter approach is consistent with the view taken by most courts. In re Bullion
Hollow Enterprises, Inc., 185 B.R. 726, 728 (W.D. Va. 1995) (“[A]lmost all of the courts that
have dealt with [substantial consummation] since the rendering of the Heatron decision have
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refused to follow the Heatron analysis [on whether payments to creditors should be construed
under subsections (A) or (C) of section 1101(2)].”) (collecting cases). Collier also concludes that
the majority view is the better interpretation of the definition of substantial consummation
because “it harmonizes all of the provisions of section 1102(2) [sic] and because it better
preserves the expectations of parties to a confirmed plan.” 7 C OLLIER ON BANKRUPTCY ¶
1101.03[b].
Although the Second Circuit has yet to analyze the application of substantial
consummation with respect to section 1127(b) modifications, district and bankruptcy courts in
the Second Circuit have adopted the majority view. See In re Fansal Shoe Corp., 119 B.R. 28,
30-31 (Bankr. S.D.N.Y. 1990) (“It is now well-settled that substantial consummation may occur
though the debtor has not distributed to the creditors substantially all of the amounts called for by
the plan because substantial consummation requires only that there was a ‘commencement of
distribution under the plan.’”) (citations omitted); see also WHBA Real Estate Ltd. P’ship v.
Lafayette Hotel P’ship (In re Lafayette Hotel P’ship), 96-Civ-7476, 1997 WL 599386, at *3
(S.D.N.Y. Sept. 29, 1997). Under subsection (C) of section 1101(2), “[t]here is no percentage or
specific number of payments needed to have been paid in order to qualify as ‘commenced.’”
Bullion Hollow, 185 B.R. at 729 (citation omitted); see also Fansal Shoe Corp., 119 B.R. at 31.
In this case, the payment to M&T does not make the Plan substantially consummated. In
Cadle Co. II, Inc. v. PC Liquidation Corp. (In re PC Liquidation Corp.), 383 B.R. 856, 863-864
(E.D.N.Y. 2008), the court found that the debtor’s liquidation plan was substantially
consummated under section 1101(2), because, under the plan’s procedures, “(1) the Liquidation
Trust was funded by the transfer of the Debtor’s money to the Trustee; (2) the Trustee assumed
management and control over the Debtor’s assets in the Liquidation Trust; and (3) the Trustee
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began to distribute funds from the Liquidation Trust.” Id. The same is true in this case since the
Trust became funded by the Debtor’s transfer of its property,3 see Plan § 6.12, and Garnett, as
Trustee, assumed management and control of the Debtor’s assets in the Trust. Id. But, the one
payment to M&T does not meet the requirements of section 1101(2)(C) because the payment to
M&T was not made under the Plan; rather, the disbursement was made “pursuant to a pre-
confirmation agreement whereby M&T Bank agreed to withdraw its plan ballot.” (Garnett Decl.
¶ 21) (emphasis added). The payment to M&T also significantly differs from the facts of Fansal
Shoe Corp. where the court held that the debtor substantially consummated its chapter 11 plan.
119 B.R. at 31. The Fansal Shoe Corp. court supported its ruling by noting that “the debtor . . .
commenced distribution under the plan and has fully paid the class of administrative claims as
well as the priority tax claimants.” Id. (emphasis added).
3. 	The Circumstances Warrant Plan Modification But the Duration of the
Proposed Extension Must Be Reduced
After confirmation, a plan may not be modified under section 1127(b) unless the plan
proponent can demonstrate that the circumstances warrant modification. See 11 U.S.C. §
1127(b). Collier notes that “if unforeseen circumstances render the confirmed plan unworkable,
modification may be warranted.” 7 C OLLIER ON BANKRUPTCY ¶ 1127.03[4]. For example, in In
re Temple Zion, 125 B.R. 910, 913 (Bankr. E.D. Pa. 1991), the court permitted the debtor to
modify its plan pursuant to section 1127(b) because unforeseen delays in obtaining zoning
approval delayed the sale of the debtor’s unimproved real estate. Id. The sale of this property
was considered to be the “centerpiece” of the debtor’s plan. Id. at 912. See also In re Gene
Dunavant & Son Dairy, 75 B.R. 328 (M.D. Tenn. 1987) (finding that modification was
3 	The Debtor’s property would presumably consist of cash and other fixed assets such as equipment. (ECF
Doc. # 113.)
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permissible because, through no fault of the debtor’s, circumstances since the plan was originally
formulated had changed). On the other hand, if a modification would “upset the expectations of
creditors,” the court should prohibit such modification. 7 COLLIER ON BANKRUPTCY ¶
1127.03[4]; see also Resolution Trust Corp. v. Best Prods. Co. (In re Best Prods. Co.), 177 B.R.
791, 802 (S.D.N.Y. 1995) (“The court cannot adopt any modification that materially alters the
plan and adversely affects a claimant’s treatment.”).
The circumstances of this case support modification. The delay in prosecuting the
Malpractice Claim was unforeseeable because of protracted trial and appellate litigation. Garnett
was appointed Trustee on June 9, 2008 and retained counsel to prosecute the malpractice claim
in October 2008. (Garnett Decl. ¶¶ 2-4.) After approximately two and a half years, the
proceeding has finally passed the motion to dismiss stage after the Appellate Division recently
reversed the trial court dismissal of the complaint (Id. ¶¶ 5-16.) The defendant filed its answer
on April 21, 2011. (Id. ¶ 17.) The Court concludes that these circumstances were sufficiently
unforeseeable when the Plan was confirmed. Furthermore, no creditors opposed the Motion.
The time extension will permit the litigation to go forward giving Garnett an opportunity to
achieve value from the Trust’s most important asset. In addition, creditors are not prejudiced as
counsel prosecuting the Malpractice Claim has been retained on a contingency basis. (Id. ¶ 4.)
While the Court will grant the Motion to extend the Trust life for two years, the Court
declines to grant Garnett the unilateral right to extend the Trust life for an additional two years
thereafter. She will have to return to this Court for any further extension and explain why more
time is required.
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4. 	The Plan, as Modified, Complies with Sections 1122, 1123 and 1129
Section 1122 governs the classification of claims in plans. Section 1122 states:
(a) 	Except as provided in subsection (b) of this section, a plan may place a
claim or an interest in a particular class only if such claim or interest is
substantially similar to the other claims or interests of such class.
(b) A plan may designate a separate class of claims consisting only of
every unsecured claim that is less than or reduced to an amount that the
court approves as reasonable and necessary for administrative convenience.
11 U.S.C. § 1122.
A plan must also fulfill eight requirements to satisfy section 1123(a). It must:
(i) 	designate classes of claims and interests;
(ii) 	specify unimpaired classes of claims and interests;
(iii) 	specify treatment of impaired classes of claims and interests;
(iv) 	provide for equality of treatment within each class;
(v) 	provide adequate means for the plan’s implementation;
(vi) 	provide for the prohibition of non-voting equity securities and provide an
appropriate distribution of voting power among the classes of securities;
(vii) contain only provisions that are consistent with the interests of the creditors and
equity security holders and with public policy with respect to the manner of
selection of the reorganized company’s officers and directors.; and
(viii) in a case in which the debtor is an individual, provide for the payment to creditors
under the plan of all or such portion of earnings from personal services performed
by the debtor after the commencement of the case or other future income of the
debtor as is necessary for the execution of the plan.
See 11 U.S.C. § 1123(a).
In this case, the Court previously confirmed the Plan, finding that it met the requirements
of sections 1122 and 1123 of the Code. (ECF Doc. # 127.) The extension of the Trust’s life
does not alter the Plan’s compliance with respect to these confirmation requirements. For these
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same reasons, the Court also finds that the Plan, as modified, has not been changed in a manner
that would preclude confirmation under section 1129(a).4
5. 	The Plan, as Modified, Does Not Require Additional Disclosure or Voting
Section 1127(c) states that “[t]he proponent of a modification shall comply with section
1125 of this title with respect to the plan as modified.” 11 U.S.C. § 1127(c). Section 1125, in
turn, mandates particular postpetition disclosure and solicitation requirements by the plan
proponent. See 11 U.S.C. § 1125. The House Report on section 1127(c) notes that if plan
modifications are minor, “the court might determine that additional disclosure was not required
under the circumstances.” H. Rep. No. 95-595, 95th Cong., 1st Sess. 411 (1977). The filing of
additional disclosure and re-solicitation is necessary if the plan is materially modified. See In re
Young Broad., Inc., 430 B.R. 99, 120 (Bankr. S.D.N.Y. 2010). “A modification which is not
‘material’ is by definition one which will not affect an investor’s voting decision. Additional
disclosure would serve no purpose and would therefore not be required.” In re Am. Solar King
Corp., 90 B.R. 808, 824 n.28 (Bankr. W.D. Tex. 1988). Courts have also held that additional
disclosure is unnecessary where a modification did not adversely affect the plan treatment of any
creditor. See 7 COLLIER ON BANKRUPTCY ¶ 1127.03[3] (collecting cases). In Temple Zion, the
court found that further disclosure under section 1125 was unnecessary because a plan
modification only affected the interests of one creditor. 125 B.R. at 915. The rights of all other
impaired classes remained unaltered. Id.
4 Under Section 1129(a)(2) the plan must comply “with the applicable provisions” of the Bankruptcy Code.
11 U.S.C. § 1129(a)(2). Courts have interpreted the 1129(a)(2) requirement to include satisfaction of the disclosure
and solicitation requirements of section 1125 of the Bankruptcy Code, as well as section 1126, concerning plan
acceptance. In re WorldCom, Inc., No. 02-13533(ALG), 2003 WL 23861928, at **25–26 (Bankr. S.D.N.Y. 2003);
In re Johns-Manville Corp., 68 B.R. 618, 630 (Bankr. S.D.N.Y. 1986). Section 1125 will be discussed below.
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Here, the Court is satisfied that additional disclosure and re-solicitation is not necessary.
Garnett is seeking an extension of the Trust term to prosecute the Malpractice Claim. The
Debtor disclosed the fact that it has “no significant tangible assets to liquidate” and that the Plan
“will yield the greatest possible recovery for creditors in that unsecured creditors will receive any
recoveries from pursuit of the Litigation Claims.” (Plan § 1.11(ii).) Since the Malpractice Claim is
considered to be the Trust’s central asset, an investor would presumably want to extend the
Trust’s life to continue the malpractice action in the hopes of receiving a greater recovery.
Extending the Trust’s life will not adversely affect creditor distributions, since counsel litigating the
Malpractice Claim is doing so on a contingency basis.
CONCLUSION
For the reasons explained above, the Court grants Garnett’s Motion to modify the Plan,
but the requested extension is limited to two years from June 9, 2011. Garnett will have to seek
any further extension by motion and once again satisfy the requirements for a modification as
explained above. Additionally, during the two year extension, the Debtor must remain current
on its reporting requirements and payments to the UST.
IT IS SO ORDERED.
Dated: May 18, 2011
New York, New York
_____/s/Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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