June 26, 2022

Volume XII, Number 177

Advertisement
Advertisement

June 24, 2022

Subscribe to Latest Legal News and Analysis

June 23, 2022

Subscribe to Latest Legal News and Analysis

What Do You Do If a Debtor Defaults on Its Confirmed Bankruptcy Plan?

A recent opinion from the Michigan Court of Appeals explained that when a debtor defaults under a confirmed chapter 11 bankruptcy plan, a creditor can enforce its rights in state court, and perhaps also in the bankruptcy court.

In City of Southfield v Shefa, LLC,[1] a debtor that owned a hotel filed for bankruptcy under chapter 11 of the Bankruptcy Code in 2015. The bankruptcy court confirmed the debtor’s plan in 2016. The plan imposed a number of obligations on the debtor. Among these was a requirement that the debtor execute a mortgage in favor of the City of Southfield to secure the debtor’s obligation to make certain physical improvements to its property. The mortgage also required the debtor to stay current on taxes and allowed for the appointment of a receiver on default.

In 2019, the City sued the debtor in Oakland County Circuit Court, asserting that the debtor had violated the terms of the mortgage. The City sought appointment of a receiver and foreclosure of the mortgage. The Circuit Court dismissed the case, holding that only the bankruptcy court could hear the dispute (i.e., had jurisdiction over the matter).

In a well-reasoned opinion, the Michigan Court of Appeals reversed, explaining that, although the bankruptcy court had exclusive jurisdiction over certain aspects of the bankruptcy proceeding, and may well have had jurisdiction over the City’s lawsuit, its jurisdiction over the City’s lawsuit was not exclusive. The Circuit Court had concurrent jurisdiction with the bankruptcy court over the City’s lawsuit, meaning that it could also hear that dispute and thus should not have dismissed the suit.

The Shefa case is a reminder that a confirmed bankruptcy plan often imposes obligations on debtors as well as creditors.  If a debtor defaults on its plan, a state court often has the ability to enforce the plan’s obligations, especially those based in state law. This may be good news for creditors uncomfortable litigating in bankruptcy court, a venue which may feel unfamiliar to them.

[1] No. 350885, 2022 WL 413923 (Mich. Ct. App. Feb. 10, 2022).

© 2022 Miller, Canfield, Paddock and Stone PLC National Law Review, Volume XII, Number 46
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Ronald Spinner Bankruptcy Lawyer Miller Canfield
Principal

Ron Spinner brings extensive business experience to his bankruptcy practice, developing results-oriented strategies and breaking new legal ground where necessary to do so.

Indeed, Ron's ability to deal with novel situations helped tremendously in the City of Detroit bankruptcy case, where questions of first impression arose regularly. His ability to navigate the unique aspects of chapter 9 aided (and continues to aid) the City in its recovery.

As another example, Ron represented a creditor who "factored" the debtors' invoices. Courts typically characterize factoring as a "...

313.496.7829
Steven A. Roach Litigation Attorney Miller Canfield
Principal

Steven A. Roach brings more than 30 years of commercial transaction and litigation experience in restructuring lending relationships and enforcing loan transactions. He applies this experience to provide a unique perspective as both a trial and transactional lawyer when representing and counselling the firm's financial institution clients. 

Steve has represented lenders in a variety of lending structures, including syndications, financing leases, structured debt and equity financings, multi-jurisdictional and international transactions. He has...

313.496.7933
Jonathan S. Green Attorney Bankruptcy Law Miller Canfield Detroit
Principal

Widely regarded as one of the leading bankruptcy lawyers in Michigan, Jonathan represents clients in debtor-in-possession financings, supply protection negotiations and Chapter 11 restructurings and asset acquisitions.

He has extensive experience in automotive and troubled-supplier restructurings inside and outside of bankruptcy, including the negotiation and documentation of supply protection and lender support agreements. He also has industry expertise in automotive and commercial lending.

313-496-7997
Advertisement
Advertisement
Advertisement