Confirmation of a chapter 11 plan providing for the reorganization or liquidation of a debtor is the culmination of the chapter 11 process. To promote the fundamental policy of finality in that process, the general rule is that a final confirmation order is inviolable. The absence of certainty that the transactions effectuated under a plan are valid and permanent would undermine chapter 11’s fundamental purpose as a vehicle for rehabilitating ailing enterprises and providing debtors with a fresh start.
The importance of finality in this context was the subject of a ruling handed down by the U.S. Bankruptcy Court for the District of Delaware. In In re Virgin Orbit, L.L.C., 659 B.R. 36 (Bankr. D. Del. 2024), the court denied a request by certain equity holders to revoke an order confirming a chapter 11 plan that canceled their equity interests while allocating nearly all of the proceeds generated from a bankruptcy auction sale of the debtors’ assets to an insider prepetition and postpetition secured lender as part of a global settlement. According to the court, absent any evidence that the debtors made materially false statements or otherwise procured the confirmation order by fraud, the equity holders failed to satisfy the high bar for revocation.
Revocation of an Order Confirming a Chapter 11 Plan
A limited exception to the rule of finality of the confirmation of a chapter 11 plan can be found in section 1144 of the Bankruptcy Code. Section 1144 provides that, on the request of a party-in-interest made any time before 180 days after the entry of an order of confirmation, the bankruptcy court “may revoke such order if and only if such order was procured by fraud.” If the court exercises its discretion to revoke a confirmation order, the statute further provides that the revocation order “shall—(1) contain such provisions as are necessary to protect any entity acquiring rights in good faith reliance on the order of confirmation; and (2) revoke the discharge of the debtor.”
Section 1144 is designed to restore the parties to their pre-confirmation positions, as long as the rights of third parties who relied on the plan in good faith are protected. The extreme difficulty of doing so in most cases means that revocation is generally regarded as a drastic remedy for the bankruptcy court to employ. See generally Collier on Bankruptcy (“Collier”) ¶ 1144.04[2] (16th ed. 2024) (“Many courts have stressed the need for parties to be able to rely on the finality of plans in conducting business and in dealing with the reorganized debtor…. If plans could be overturned or rescinded except in the most extreme of circumstances, the reliability of the plan process would be undermined.”) (footnote omitted).
Section 1144 is the sole mechanism for revoking a chapter 11 plan confirmation order. See Acquisition Co. of Am. V, LLC v. Leonard (In re Asset Resolution, LLC), 542 Fed. Appx. 578, 579 (9th Cir. 2013) (“Section 1144 of the Bankruptcy Code is the only avenue for revoking a confirmed Chapter 11 plan…. Creditors may not collaterally attack a confirmed plan, even where the plan contains illegal provisions.”); SC SJ Holdings, LLC v. Pillsbury Winthrop Shaw Pittman LLP (In re SC SJ Holdings, LLC), 2023 WL 2598842, at *7 (D. Del. 2023) (section 1144 is the “only means by which a confirmation order may be … revoked.”); In re Saberioon, 2024 WL 1134579, at *9 & n.106 (Bankr. S.D. Tex. Mar. 15, 2024) (“This Court agrees that a consensual individual Chapter 11 plan is binding, with section 1144 being the exclusive avenue for revoking confirmation of a Chapter 11 plan.”); In re Logan Place Props., Ltd., 327 B.R. 811, 815 (Bankr. S.D. Tex. 2005) (The language “if and only if was added to § 1144 in 1984 to emphasize fraud as the exclusive means for revocation”); In re Clev. Imaging & Surgical Hosp., L.L.C., 2022 WL 677459, *3 (Bankr. S.D. Tex. 2022) (under Fed. R. Bankr. P. 9024, Fed. R. Civ. P. Rule 60 may only be used to “revoke an order confirming a plan … within the time allowed by § 1144”).
The court must specifically find that the order was procured by fraud before revoking a confirmation order, but neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure define “fraud.” Some courts have concluded that the term has its ordinary meaning under common law, whereas other have construed the term to mean “fraud on the court.” For example, in In re Tenn-Fla Partners, 226 F.3d 746 (6th Cir. 2000), the U.S. Court of Appeals for the Sixth Circuit ruled that fraud exists to revoke a chapter 11 plan confirmation order if the court finds:
- that the debtor made a representation regarding … compliance with Code § [1129] which was materially false;
- that the representation was either known by the debtor to be false, or was made without belief in its truth, or was made with reckless disregard for the truth;
- that the representation was made to induce the court to rely upon it;
- [that] the court did rely upon it; and
- that as a consequence of such reliance, the court entered the confirmation order.
Id. at 750; accord In re Celsius Network LLC, 2024 WL 2952943, at *5 (Bankr. S.D.N.Y. June 12, 2024); In re Melinta Therapeutics, Inc., 623 B.R. 257, 263 (Bankr. D. Del. 2020); In re Cuzco Dev. U.S.A., LLC, 585 B.R. 870, 876 (Bankr. D. Haw. 2018); see also In re Michelson, 141 B.R. 715, 725 (Bankr. E.D. Cal. 1992) (“Regardless of whether section 1144 sweeps broad or narrow with respect to other species of fraud, fraud on the court is one species that unquestionably is a basis for revoking the order confirming a plan of reorganization.”).
The fraud need not have been committed by the debtor or any other proponent of the plan. Fraud committed during a chapter 11 case that is unrelated to plan confirmation is not a basis for revocation—the bankruptcy court can implement other remedies designed to punish the malefactor or remedy any resulting harm, such as the entry of a judgment against the perpetrator. Collier at ¶ 1144.03.
On its face, section 1144, unlike its predecessor provision under the former Bankruptcy Act, does not require the party seeking revocation to have been unaware of the fraud at the time the plan was confirmed. Id. at ¶ 1144.LH (“Section 1144 was derived from section 386 of the Bankruptcy Act and Chapter XI Rule 11-41.1 Those provisions also provided that an order of confirmation could only be revoked if the confirmation order was procured by fraud. Under Section 386 of the Act, the fraud must have been perpetrated by the debtor or perpetrated by a third party with the knowledge of the debtor. In contrast, section 1144 contains no such explicit requirement.”).
The 180-day period specified in section 1144 is absolute. Unlike certain other deadlines contained in the Bankruptcy Code, it may not be extended by the court, even if fraud in procuring a confirmation order is not discovered until after the 180-day period expires. See Anti-Lothian Bankr. Fraud Comm. v. Lothian Oil, Inc. (In re Lothian Oil, Inc.), 508 F. App’x 352, 357 (5th Cir. 2013); In re Beyha, 637 B.R. 430, 440 (Bankr. E.D. Pa. 2022); see also In re Calpine Corp., 389 B.R. 323, 324 (S.D.N.Y. 2008) (the time limit for filing an adversary proceeding seeking revocation of chapter 11 plan confirmation order was not equitably tolled, where the movant failed to show that he had pursued his rights diligently, and that extraordinary circumstances prevented him from filing a timely adversary proceeding in the bankruptcy court); see generally Collier at ¶ 1144.04[2].
Many court orders tainted by fraud can also be set aside under Rule 9024 of the Federal Rules of Bankruptcy Procedure. With certain exceptions, that rule makes Fed. R. Civ. P. 60 applicable in bankruptcy cases. Civil Rule 60 provides that the court may relieve a party from an order or judgment due to, among other things, “mistake, inadvertence, surprise, or excusable neglect,” “newly discovered evidence,” fraud, or “any other reason that justifies relief.” A request for relief under Rule 9024 and Civil Rule 60 must be made no later than one year following entry of the challenged order or judgment. However, Rule 9024(3) makes an exception to the application of Civil Rule 60, providing that “a complaint to revoke an order confirming a plan may be filed only within the time allowed by § 1144 [of the Bankruptcy Code].”
Fed. R. Bankr. P. 7001(5) provides that “a proceeding to revoke an order of confirmation of a chapter 11, chapter 12, or chapter 13 plan” is an “adversary proceeding,” which must be commenced by the filing of a complaint.
Virgin Orbit
Virgin Orbit Holdings, Inc. and two affiliates (collectively, the “debtors”) provided satellite launch systems to domestic and international commercial and government customers. After unsuccessful efforts to sell the company in 2022, a liquidity crisis prompted the debtors to seek chapter 11 protection in April 2023 with the intention of selling the business under section 363 of the Bankruptcy Code.
After approving bidding and notice procedures, the bankruptcy court authorized the debtors to designate a non-insider stalking horse purchaser for certain key assets. The selection was made after the debtors’ aggressively marketed the companies to approximately 200 potential bidders, more than 30 of which expressed interest in acquiring the debtors as a going concern. In consultation with the official unsecured creditors’ committee (the “committee”), the debtors later declared four non-insider winning bidders for four separate assets groups.
Based on evidence of the marketing efforts, competitive bidding process, terms of the auction, sale prices, and good faith, non-collusive conduct of the debtors and the purchasers, the bankruptcy court approved the four asset sales. It later made similar findings in approving a sale of the debtors remaining assets to a fifth non-insider buyer.
The debtors did not receive enough from the sales to repay approximately $28 million in debtor-in-possession financing provided by Virgin Investments Limited (“VIL”), the debtors’ indirect parent and prepetition lender. They accordingly reached a global settlement with VIL and the committee whereby VIL agreed to take a substantial haircut on its secured claim and waived its unsecured deficiency claim in exchange for a cash payment, an interest in a post-confirmation litigation trust, and the debtors’ remaining intellectual property (pertaining to rocket engine and avionics systems). The settlement allowed the debtors to satisfy all administrative expenses and other priority claims under a plan that would make a small distribution to general unsecured creditors (approximately 1%–5%). The plan canceled the debtors’ equity interests.
The debtors’ equity holders did not object to the plan (or withdrew objections before confirmation) but were deemed to reject it due to the cancellation of their interests (see 11 U.S.C. § 1126(g)). The bankruptcy court confirmed the debtors’ chapter 11 plan on July 31, 2023, and the plan became effective two days later. The confirmation order was not appealed.
Approximately five months after confirmation, a group of equity holders (the “equity group”) filed a motion that the court deemed to request revocation of the confirmation order. The equity group argued that: (i) the debtors’ assets were worth approximately $3.7 billion as a going concern but were improperly marketed and sold in piecemeal fire sales; and (ii) this unfair sales process allowed the debtors to misrepresent the value of their remaining intellectual property assets, which were then distributed to VIL to the detriment of other creditors and equity holders. According to the equity group, this intentional lack of honesty and transparency amounted to fraud and the illegal cancellation of their equity interests, and warranted revocation of the confirmation order.
The Bankruptcy Court’s Ruling
The bankruptcy court denied the equity group’s request to revoke the confirmation order.
Initially, U.S. Bankruptcy Judge Karen B. Owens noted that the equity group’s challenge to the integrity of the sale process was barred by the doctrine of res judicata because the equity group had an opportunity to object and be heard at the bidding procedures and sale hearings as parties in interest but did not object or participate when the court approved the sales. Virgin Orbit, 659 B.R. at 42.
In addition, Judge Owens explained, the pre-confirmation sale transactions were not relevant to the inquiry under section 1144 in accordance with the five elements articulated in Melinta Therapeutics (and Tenn-Fla Partners, discussed previously), which establish a high standard to protect the finality of confirmation orders. She concluded that the equity group failed to satisfy the “high bar set for revocation.” Id.
In particular, Judge Owens noted, the equity group did “not identify with precision any alleged false representations regarding the requirements of section 1129 that the Debtors made to obtain confirmation of the Plan,” but merely “minimally challenge[d]” representations made by the debtors to support a finding that the chapter 11 plan was proposed in good faith, as required by section 1129(a)(3), that the plan satisfied the “best interests” of creditors test in section 1129(a)(7), and that the plan was both “fair and equitable” and did not “discriminate unfairly” with respect to the class of equity, as required under section 1129(b)(1). Id. According to Judge Owens, the lack of any evidence of materially false statements by the debtors or any evidence proving that the debtors’ remaining intellectual property assets were undervalued was fatal to the equity group’s revocation bid.
Judge Owens emphasized that the value of the debtors’ assets “was determined by the marketplace after an open and fair sale process overseen by the Court”—the “gold standard” valuation method.” It was unfortunate that the sale proceeds were less than stakeholders anticipated—”a typical result in bankruptcy cases”—but not a basis for revocation of the confirmation order. Id.
Outlook
Virgin Orbit reinforces the importance of the concept of finality with respect to orders confirming chapter 11 plans. The limited 180-day time frame for a request to revoke such an order procured by fraud gives stakeholders a reasonable period of time to root out fraud, yet cuts off challenges filed outside of that period to preserve the reasonable expectations of all stakeholders that the terms of a confirmed chapter 11 plan will be binding.
Virgin Orbit also illustrates that the standard for revoking a chapter 11 plan confirmation order is a high one that can be satisfied only with concrete evidence of conduct that amounts to fraud on the court. The equity group’s failure to produce such evidence proved fatal to their request for revocation.